My 7 Rules Of Trading
How many of you have your trading rules written down? How many follow some rules when you trade?
I want to share my 7 rules of trading
#1 Know Your Trading Time Frame Before You Enter A Trade
I find this is one of the most important thing you need to decide BEFORE you place a trade. Ask yourself these questions:
Is the set-up a swing trade (1-5days) or is it a position trade(more than 2 weeks)?
If it is a swing trade, what is the set up?
Are you trading on a breakout or are you buying on retracement?
Different trade setup will have different ETET( Entry price, Target price, Exit Price, Time frame). Their risk – reward ratio will also different too.
#2 Know What You Are Willing To Lose Before Counting Your Gains
This will help to determine the size of your trade.
Eg. I am looking to long a stock at $2.00 and my stop loss is $1.90.
The maximum I’m willing to lose for this trade is $500. The number of share to buy will be $500 / (2.00-1.90) = 5000 shares.
#3 Don’t Place A Trade Before Market Opens
Wait for the market to trade for about 30mins before taking a trade.
This is help to give you a feel of the market.
In fact, more than 50% of my trades are placed after 3:30pm. This is because most of the time the candlestick for that day would have been formed already.
#4 Don’t Anticipate A Trade
Unless a stock hit above my trigger price, I will not anticipate and get in early.
I have to honest about this; there are times when I DO anticipate and try to get in earlier. But most of time the trade will turn out to be a loser. 🙁
#5 Do Your Homework Before Market Open
This will include things like the overall market analysis, stock scanning, writing down ETET and knowing your trading size.
If I am going long , I will prefer the overall market to be bullish. Always buy the strongest stock and short the weakest stock.
#6 Never Average Down But Can Consider Average Up
If the trade move against you, make the move to cut your losses or reduce your position.
If I am right within a short period of time (less than day) and already in the money, I may consider adding my position near close of the day.
#7 Always Look Out For Increasing Volume
This is especially true if going long. If I am buying a stock, I want others to join me in buying the stock.
It will be even better if the stock in in the top volume list. If you buy a stock and the volume does not pick up, consider reducing your position at closing.
These are the seven rules that I follow. You may consider them to make them your rules too. My belief is that to be profitable in trading, you need to always sell the loser and add position on a winning stock.
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Below is the first page of my small unique book “The small stock trader”:
Successful stock trading requires almost the same traits as most other creative and competitive endeavors. Stock trading is not about having a high IQ, an MBA, numerical or software skills, macroeconomics knowledge, or some magic technical indicators. It is more about managing your stock trading plan, mind, and capital with an efficient use of your little time, money, and abilities/skills. Even 300 Spartans cannot beat you if you have the following:
• Passion
• Understanding of psychology
• Focus
• Hard work
• Unique stock trading plan
• Independent thinking
• Zen-like simplicity
• Open-minded flexibility
• Patience and timing
• Discipline
• Risk management
• A little luck
If you look carefully at these items, you will also notice that a successful small stock trader is more of a personality and practice than just some technical knowledge. However, even if you have all of the above traits, humility is also important. Do not allow your ego get overconfident, as anything can happen in the stock market. As in poker, in relationships, or in life, you may follow all the rules and do all the right things but still lose some battles. Nevertheless, you can still win the war if you have the above-mentioned traits. Furthermore, there are also a few more items that we could add to the above list, such as having a super self-knowledge and selfesteem, knowing and respecting the other players, secrecy, knowing what you want and never giving up as you strive to achieve it, focus on a single activity/market without multitasking, creativity, an analytical mind to calculate the risks and probabilities, taking a few parts of the best strategies, learning from your mistakes and from a few best players, honesty, good observational skills and intuition to act quickly, confident courage to take well-calculated risks, Zen-like inner peace and continuous self-improvement, being a unique individual, and eventually efficiently using your little time, money and abilities/skills.
I hope the above page of my small book was a little helpful!
Mika (author of “The small stock trader”)