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TRADING RULES

  
  Education
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rules-mind

The hardest lesson I have had to learn is to “Act in my own best interest”. And to overcome and correct things like:
1) trading without a stop
2) refusing to admit I am wrong and to get out of a losing position
3) trading for the sake of trading
4) chasing entries (going long on the top tick, shorting on the bottom tick)
5) revenge trading (after a series of losses)
6) trading while sick or tired
7) trading without a plan (entry, exit, money management rules)
8) …
Anytime that I am in a position and either don’t know why I am, or what my profit target is, or what my stop loss is, etc. – I am not acting in my own best interest and have always struggled to close out the position immediately.
The times I have without any further hesitation, it turned out to be a wise choice and saved my butt from significant losses (more so than I already incurred).
The bottom line is that you will do much better in this profession if you can answer YES to the question – “Am I acting in my own best interest”?

Overcoming the top 10 Pains of Trading.

  
  Education
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PAIN-ASE

Here are 7 painful aspects of trading and what to do about them.

  1. The pain of losing money. (Trade smaller so it is not painful, it is just an outcome)
  2. The pain of being wrong about a trade you were sure about. (You lost simply because the market didn’t match your trade, trend followers lose money in choppy markets, swing traders lose money in trending markets, it’s the market not you.)
  3. The pain of a draw down in capital.(Even the world’s best money managers do not continually hit all time equity highs. Your path may look like this $10,000 to $20,000 to $15,000 to $25,000 to $20,000 to $30,000.  Mine was rockier than most, and after blood, sweat and tears I am now able to trade with $250,000.)
  4. Consecutive trading losses hurt. They make you doubt yourself, your method, and your system. (You need to remember your winning trades, your winning years, or your back-testing, or paper trading of the method.)
  5. The embarrassment of public losses. You told everyone who would listen about a great trade, and you were wrong. (Never be overconfident in any trade, but always be sure of your stop loss.)
  6. The pain of of admitting you were wrong. (Cut your loss and move on to the next trade, trade reality not your ego.)
  7. Losing paper profits, you are up 20% on a trade then a massive whip saw takes back those profits in one move. (Take your trailing stop and move on to the next trade, there is truly no reason to cry over spilled milk.)
  8. You are following a guru and come to realize he truly is a salesman not a trader. (You stop following gurus and look to learn how to trade you yourself.)
  9. You buy a super hot stock that you have researched for many weeks then it goes down due to a bear market. (Only trade stocks long in up-trending markets)
  10. You start trading a system that did amazing in back-testing and promptly lose 10% of your account. (You have to stick with it so it can win in the long term, you may need to make slight adjustments in position sizing or stops to account for volatility that you may have missed.)

Whatever the pain, just don’t quit, there is gold to be found in trading right over the long term.

Risk Management For Traders

  
  Education
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One of Sun Tzu’s most famous quotes is: “Every battle is won before it is fought.” The phrase implies that it is planning and strategy that wins wars and not the battles themselves. Similarly, successful traders commonly quote the phrase: “Plan the trade and trade the plan.” Just like in war, planning ahead can often mean the difference between success and failure.

Stop-loss (S/L) and take-profit (T/P) points represent two key ways in which traders can plan ahead when trading. Successful traders know what price they are willing to pay and at what price they are willing to sell, and they measure the resulting returns against the probability of the stock hitting their goals. If the adjusted return is high enough, then they execute the trade.

Conversely, unsuccessful traders often enter a trade without having any idea of at what points they will sell at a profit or a loss. Like gamblers on a lucky or unlucky streak, emotions begin to take over and dictate their trades. Losses often provoke people to hold on and hope to make their money back, while profits often entice traders to imprudently hold on for even more gains.

 Take-Profit Points, trading greed, trading fear, trading emotions, financial behavior 


A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. Often times, this happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the “it will come back” mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.

On the other side of the table, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. Often times, this is when there is limited additional upside given the risks. For example, if a stock is approaching a key resistance level after a large move upwards, traders may want to sell before a period of consolidation takes place. (more…)

SAVE YOURSELF!!

  
  Education
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Many of us will sit at our screens, cursing, praying, begging, but the best thing to do is to save yourself, by cutting bad trades quickly. DON’T DEPEND ON THE MERCY OF THE BANKS TO DO IT!!!!!! THEY ARE OUT TO EAT YOUR LUNCH ALWAYS ! THEY ARE YOUR ENEMY, AND THEY ARE RUTHLESS WITHOUT MERCY!!!!!

#1. DON’T LEAVE OPEN POSITIONS! Trade what You can see. When You are not in the market take your money out with You. That way You can save on all of those foul words to Your broker when he tries to explain the price slippage that caused price to go beyond Your stop loss.

#2. If You must leave trades opened, put in a physical stop losses..

#GRANDDADDY OF THEM ALL!!!!!!!!!

NEVER LET LOSSES RUN !!!!!!

NEVER LET LOSSES RUN !!!!!!

NEVER LET LOSSES RUN !!!!!!

CUT THE LEGS FROM UNDER THAT BEAST AS SOON AS POSSIBLE!!!!!!!!!!

Two things are essential if You are going to enjoy a very successful and lucrative trading career.

#1 Wait for a proper trade set-up

#2 Learn to save yourself. CUT BAD TRADES QUICKLY!!!!!! So what if it comes back in your favor, many times it will, but it only takes one good shakeout to leave your lifestyle in jeopardy.

Cut bad trades to leave the most capital possible for a more profitable trade set-up. THE MARKET IS VERY VERY GENEROUS, IT WILL ALWAYS GIVE YOU ANOTHER OPPORTUNITY TO MAKE SOME PAPER, BUT YOU HAVE TO CUT YOUR LOSSES QUICKLY SO THAT YOU HAVE THE MAXIMUM CAPITAL TO TAKE ADVANTAGE OF THE RIGHT OPPORTUNITY WHEN IT PRESENTS ITSELF!!!

The market is swim, float or sink. Don’t let them sink You. SAVE YOURSELF!

Lose your money,but keep your discipline.

  
  Education
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Trading is about following a method, system, or rules that give you an advantage over other market participants in the long run. There are good bets and bad bets. There are traders who follow a trading plan with discipline and others that start trading out of fear and greed after strings of losses or wins. Just because you lost money does not mean you made a mistake. Just because you made money does not mean you did not make a mistake. The goal of trading is to make money over the long term not be right every time. Losses are a part of trading. There is a big difference between a loss after following your plan versus a loss after a loss of discipline.

Losses are simply getting out of a trade with less capital than you entered it. The question is was the loss due to your method or your lack of discipline?
A mistake however can be many things, and mistakes can be profitable which is dangerous to the long term health of your trading account.

  1. Trading a position size so big that your risk of ruin is inevitable is a big mistake whether your individual trades are a win or a loss.
  2. Abandoning your method to start trading a different time frame or style than you have researched is a mistake because your edge is gone.
  3. Adding to a losing position is a big mistake because eventually you will be in the trade that does not revert to the mean and you lose your whole account.
  4. Believing that you are above your own trading plan and can start just trading as you wish is a death wish for your account.
  5. Trading based on beliefs instead of reality is a dangerous place to trade and is a mistake.
  6. Taking your entries a little sooner than they are triggered or an exit a little later than your stop loss is a mistake.
  7. Diversifying traded markets or stocks before doing the proper research is a mistake.
  8. Trading so big that your emotions interfere with your trading plan is a mistake.
  9. Trading when you are very sick or going through emotional personal problems is a mistake.
  10. Making trading decisions based solely on ego, fear, or greed is always a mistake whether you win or lose.

4 Steps

  
  Education
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The steps below are based on the developmental maturity of any trader. Each of us are at different levels in this process. This process can be applied to our overall progress as traders or in the learning of a new strategy. It is important for us to be realistic about where we are personally to become the best trader possible.

HEAR

To HEAR you have to listen and listen intentionally. You will not HEAR properly if you are focused on other things. This situation is especially true on a webinar or during the trading day when the markets are open. It is essential to set distractions aside and HEAR what is being stated.

RECEIVE

To RECEIVE something you have to HEAR it and come into agreement with it.  To RECEIVE is to take it unto yourself and personally grab hold of what you have heard and make it your own.

BELIEVE

To be successful you have to believe that what you HEAR and RECEIVE can add value to your current situation. You have to BELIEVE that a specific strategy repeated and correctly  executed, regards of any specific outcome, will provide successful results over time. You will act on what you believe In all areas of life.  Please make sure you really do BELIEVE it and are not allowing any contradictory mindset to compete with your belief because it is possible to hold two opposing beliefs at once. This is being double minded and leads to instability.  Being firm and unswayed in what you BELIEVE can lead to becoming a successful trader.

APPLY

APPLY Is taking action on what you BELIEVE. You will not fully apply something until you fully believe it. Application requires action. You must be willing to pull the trigger on a trade when all of your rules are meet or when all the T’s have been crossed.  You must also without reservation pull the trigger to exit at your predetermined stop loss. Regardless of what we think or BELIEVE we will also act out of core or dominant belief. To properly apply ourselves we have to revise our core beliefs.  If I APPLY all of my predefined rules for entry and exit even when the trades go against me, my core belief will keep me confident that I did the right thing in making this trade and over time I will accomplish my goals. In addition my loss will not stress me because based on following my predefined rules it was a small loss based on a predetermined, well thought out process.

As we move forward we should focus on hearing , receiving, believing and applying.

Rules for Shorting

  
  Education
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Basic Rules for Shorting Stocks

1. Shorting Momentum names is dangerous: Unless you are Superman, never step in front of a speeding locomotive

2. Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can get cheaper, dear stocks can get more expensive

3. ALWAYS work with a pre-determined loss – either a physical or mental stop loss — Never leave yourself open to infinite losses

4. Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation. (We use Money Flow, Short Term Trend lines, Institutional Ownership, Analyst Ratings).

5. It is tough to be a contrarian: During Bull and Bear cycles, the Crowd IS the market.

You have to figure out two things:
…a) When the crowd is wrong — Doug Kass calls it “Variant Perception”
…b) When the crowd starts to get an inkling they are wrong

At the turns — not the major trends — is where contrarians clean up.

6. Look for Over-owned, Over-loved stocks: 95% Institutional ownership, All buys or Strong Buys (no sells), and 700% gains over the past few years are reasons to put names on your short selling wish list.  (That is how my partner Kevin Lane found and shorted Enron and Tyco back in the 1990s).

7. Beware the “Crowded Short“– they tend to become targets of the squeeze!

8. You can use Options to either juice your short returns, or pre-define your risk capital (options)

Traders: When to be Flexible & when to be Rigid

  
  Education
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  1. raders should have a very flexible mindset about which way a trade can go when they enter it, but be very rigid about taking their stop loss when it is hit.
  2. Traders should be very flexible on profit expectations during each market cycle but very rigid about following their robust method during each cycle.
  3. Traders must be very flexible about allowing a winner to run but very rigid on cutting losses short.
  4. Traders must be flexible about their opinions and change them when proven wrong but they must be rigid about their risk management and never risk more than planned.
  5. Traders should be flexible about their watch list but rigid about their trading plan.
  6. Traders should be flexible about what will happen next in the market but rigid about their rules.
  7. Traders should be flexible about the direction of the trend when it changes but rigid about positions sizing.
  8. Traders should be flexible about profit targets but rigid about entering with a minimum risk/reward plan.
  9. Trades should be flexible about entries and exits as the market action develops but rigid about managing the risk of ruin at all times.
  10. Traders should be flexible about expectations on when they will have a huge winning streak that will change their financial lives but rigidly pursue success in the markets until it does happen.

Top 8 Ways To Lose All The Money In Trading

  
  Education
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 tradingloss8 – Put all of your efforts into finding the perfect technical indicator. Once you find this magical indicator, it will be like turning on a water faucet. Go all in. The money will just flow into your account!

7 – Make sure to visit a lot of stock trading forums and ask them for hot stock tips. Also, ask all your friends and family for stock tips. They are usually right, and acting on these tips can make you very rich.
6 – Watch what other traders do and be sure to follow the crowd. After all, they have been trading a lot longer than you so naturally they are smarter.
5 – Pay very close attention to the fundamentals of a company. You MUST know the P/E ratio, book value, profit margins, etc. Once you find a “good company”, consider going on margin to pay for shares in their stock. (more…)

Amos Hostetter :Invaluable Trading Principles

  
  Education
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  1. Try to find a long term trend and ride it up. Stay with the trend and don’t be tempted to grab a quick profit. Patience is one of the most important traits of a trend follower.
  2. Be careful not to be shaken out by market fluctuations. Instead try to sit tight as long as there are no warnings showing up. Prices that come back so that your initial gain halves are not necessarily a reason to sell.
  3. Big wins can only be achieved with major trends. Find them and don’t hesitate to buy at high prices when you may think it is too late. A market is never too high to buy or too low to sell.
  4. Necessary is of course a stop loss near the entry point. A stop is the easiest way to put your capital at work on a trend, because otherwise you are too often and too long stuck in a trading market which goes nowhere or worse in a falling market.
  5. Absolutely forbidden is averaging down or fighting the market trend.
  6. To think that a market is cheaper now after prices came down and therefore must offer a better chance than it did when prices were higher, will put you in the wrong stocks at the wrong times.
  7. Never try to sell at the top. The trend may continue. Sell after a reaction if there is no rally.
  8. On the other hand don’t expect the market to end in a blaze of glory. Look out for warnings.
  9. Tape reading can tell you only that something is wrong. Don’t try to analyze the flow of transactions as the tape shows them in too much detail.
  10. Don’t look for breaks. Look out for warnings.
  11. Pyramid stocks only if the initial investment shows a gain.
  12. Look out for normal market behavior. If a market doesn’t act right, don’t touch it.
  13. If in a bear market a complete demoralization develops suddenly it may be a sign for a starting bull market.
  14. Observation of the market gives the best tips of all. Follow your experience to exploit them, while sticking to facts only.
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