I always liked these rules for their simplicity and I think they can benefit some of you, if only in the form of a gentle reminder of what you should be doing…or not doing.
1. Market direction is the most important thing in determining a stock’s
probable direction.
2. Price and Volume action are more important than a jillion indicators and
complex theories, no matter how cool they may be.
3. Don’t miss the forest (broad market) for the trees (individual stocks).
4. Don’t anticipate. Wait for confirmation.
5. Don’t trade contrary to the market’s direction.
6. Don’t try to “outsmart” the market.
7. Things can go much, MUCH further than you think they can, in either
direction.
8. Divergences work best with double tops and double bottoms.
9. Quite often, divergence analysis doesn’t work at all. When that happens, it
means the prevailing trend is very strong.
10. You need to effectively filter or limit the amount of data or charts to look
at; otherwise, you will spread yourself way too thin. You must have the time and
alertness to keep your eye on the ball…..hard to do, when you are juggling
thousands.
11. Don’t focus on every tick of each trade. If you are, you are holding on to
the handlebars too tight.
12. Have a plan. Set stops and targets. Don’t be afraid to take 1/2 profits and
raise (or lower) your stops. If your trade follows your script, great. If it
doesn’t within a reasonable time, consider getting out.
13. That said, it’s OK to give your trade a little time, unless you are clearly
wrong. You are often ahead of the market a little bit.
14. You will lose money sometimes. Every trader does. It’s a business, not a
personal indictment against you. Get over it and move on to the next trade.
15. Political opinion and markets do not mix.
16. Learn from your mistakes, or you will be condemned to repeat them.
How do you feel when your trading position goes against you? Do you react instinctively or do you follow a specific plan of action? Here’s what Richard Dennis has to say about this issue: “When things go bad, traders shouldn’t stick their head in the sand and just hope it gets better. You should always have a worst-case point. The only choice should be to get out quicker. The worst mistake a trader can make is to miss a major profit opportunity. 95 percent of profits come from only 5 percent of the trades.” Ignoring issues will usually carry negative consequences in the future. Have a well-researched plan and execute it with focus!
When we follow a standardized process for trade execution, we help negate the impact that emotions can have on that process. And when we create a set of rules within which is a subset of rules that allow for less mechanical, more intuitive management of our trades, we can potentially realize additional profits from those intangible insights into market direction without over-exposing our account to risk. Here is how it works:
