Trading Rules
Every trader needs a set of rules to guide them in their trading. The following list of rules is an example that we use.
1. Plan the trade before entering. Set a realistic price target where you’ll sell some or all of the position. If the stock looks as if it’s going to move strongly through your target, you can set a second target. Set the stop at a price level where you know the trade will have failed. Stops should never be more than 5% from the buy price, and much less for shorter term trades. Planning the trade ahead of time keeps emotions out of the trade, which has been the destruction of many traders.
2. Always use a hard stop. Stops should be set immediately after entering a position. Stops should only be moved up to lock in gains, never down.
3. Don’t let a winning trade turn into a loser. This means adjusting your stop to break even once it has moved significantly in your favor and/or taking partial profits as the stock moves up.
4. Don’t look back. Don’t get discouraged if a stock continues moving higher after you sell it. If your price target was reached, then it was a successful trade. Be happy with your gains and move on. Also, don’t get discouraged by losing trades. This is a normal part of trading. Just keep the amount lost as low as possible.
5. Never average down. There is no reason to add to a losing position. If you’re wrong about the trade you entered, your stops will take you out. If you lost money in a stock, make it back in some other stock, don’t try to dollar-cost-average a trade to get out at break even.
6. Hold your best performing stocks the longest; sell poor performers quickly.
7. Only trade the best stocks in the best sectors. Don’t trade penny stocks.
8. Don’t chase stocks. If you miss a buying opportunity, move on. The market offers new opportunities everyday.
9. A turn in the market can wipe out gains quickly. Be prepared to sell immediately. You can always reenter the market at another time, as long as you have capital.
10. Review each trade when it’s complete. Record what went right, what went wrong.
Other Recommended Trading Rules
