Trading rules

http://www.quicktradesblog.com/2010/01/trading-rules.html

What rules/conditions do you trade by? They may not be written down or recited but chances are there are some things one tends to follow when trading.

Although I have not been trading for long I try to strictly adhere to guidelines I have either established from my own mistakes, saw happen to others, or in some cases read about. For those individuals who learn by doing things (kinesthetic learners) sometimes you have to lose money to learn from it. A select number of traders were lucky to meet someone who could teach and guide them. From my experience these people still make mistakes but typically fewer unless they also picked up bad habits. Lastly people that learn by seeing or hearing may have picked up things from reading or some other combination of things. There are many ways we develop these rules we trade by and for many reasons.

Now some of you may wonder why I writing such a post. Well, today was a day where I failed to follow my guidelines. Therefore I think recalling what I can and sharing them with you, the reader would not only benefit you but myself as well.

1)Plan the trade before you initiate it. These things could include: where to enter, stop loss, when to take profit, how many shares, any other elements of the technical picture, and many others things. This is critical because once one enters a trade it can cloud your judgement. Paper trading is one thing but when your actually in a trade things may become altered: maybe you'll be too greedy, or use a set a generic set of parameter which may not be appropriate for the stock, or take money off too soon. Being impulsive is a dangerous thing so make sure you know what you're getting into. The same goes with anticipating a trend and entering early. Don't go in until your sure from your review everything is in place.

2)Don't jump on the bandwagon. Just because someone is entering a trade and they have a really good record doesn't mean it can't go bad, everyone makes mistakes. Do your analysis first and then decide if its applicable to you.

3)Once your stop(s)/exit plan is in place do not change it. This was one I learned the hard way back about 5-6 months. The stock (SCLN) started heading down and the trend was breaking down (I didn't see this at the time) and I cancelled my stop. A few days later the stock plummeted and I took the biggest loss of my life.

4)Do not add to a losing position. If the cost of a security is less than what you payed do not increase the size of your position wait till the stocks is moving in your favor then you may consider adding. This again another I learned from first hand experience.

5)Do not play earnings. There are too many factors that could cause the price of something to differ from its earnings results. If anything play the hype and sell before earnings.

6)Anything can happen. Just because your analysis points to a uptrend/downtrend/etc there is always the possibility for failed signals. Nothing is certain remember it is called an edge for a reason. This point is out of a book I finished last week. Trading in the Zone by Mark Douglas. In his book he mentions the five fundamental truths:

Anything can happen
You don't need to know what's going to happen next to make money
There is a random distribution between wins and losses for any given set of variables that define an edge
An edge is nothing more than a n indication of a higher probability of one thing happening over another
Every moment in the market is unique
Douglas's book is about the psychology of trading and I would recommend it to anyone.


At this time I can't think of anymore guidelines I use but these are the ones that most frequently come up.