Rule 1. To trade successfully you must develop a system and approach that you feel comfortable with. Without comfort and confidence, you are dead before you start. The best way to start this process is to first learn how others before you thought for themselves successfully. Strive to become educated, informed and aware, and do your best to stay that way.
Rule 2. Always have an exit strategy in mind when you enter the trade. Always have a plan, and always have a maximum dollar amount that you are willing to lose. For example if you are playing a $5,000 position, and are willing to lose no more than $250 on the trade if it goes against you, select a stock that has seen recent buying action (price support) within 5% of your purchase price.
Rule 3. As the price of the stock rises (or falls if you are short) adjust your stops and targets accordingly. This will serve to not only limit your downside risk, but also to allow your winners to run.
Rule 4. Prior to investing in any equity pay particular attention to the risk/reward ratio. The essence of the market is risk, and to be profitable in the long run the risk must make sense in terms of probable and potential return.
Rule 5. Initially your portfolio of potential stocks whether chosen by technical analysis, fundamental analysis, or both, should be comprised of no more than 15-20 equities. Know everything there is to know about your listing, including price history, financials, business strengths, management and earnings dates. When you become experienced at using technical analysis to judge entry and exit points you can modify this focus.
Rule 6. When starting to apply a new trading strategy, paper-trade first as an initial test, but then play for small (relatively speaking, of course) positions for awhile. Paper trading is a great way to theorize, but cannot replicate the emotion and tough decisions that arise when you have your hard earned money on the line. Only when you have proven that your strategy is working in your favor in real life trading situations should you risk more of your capital.
Rule 7. Keep a trading diary or record for analysis and review. You have to know what is working and what isn’t. Have the humility to recognize what you are doing wrong and be willing to take all the necessary steps to changing it.
Rule 8. Be consistent in your approach. Discipline will help you eliminate emotion from the process and allow experience, rationality and technique to prevail over fear, panic and euphoria.
Rule 9. Always know the trend of the market and of the stocks in your portfolio. The trend is your friend. Be aware that in a bull market, price points such as trendlines, envelope channels, and significant moving averages often act as price support, and in a bear market they offer points of resistance.
Rule 10. Be patient and learn to realize that, if no investment prospect presents itself, the best place to be is in cash, since the most important rule of all is: CAPITAL PRESERVATION IS KEY!!!
These are 10 rules that can put you on the fast track to stock trading and investment success. Stay diligent, stay disciplined, and most of all – stay patient… to your trading success!
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