It’s been a long time since I’ve written about trading rules, mainly because the rules I typically read aren’t very useful. I have reviewed all my prior posts on this subject, and probed my own experiences, and I’ve come up with this list of ten rules that I’ve made a permanent part of the site.
Incidentally, I wasn’t the least bit tempted to pull the old “Thou Shalt Not…….” in front of each of these, since I’ve always considered that one of the most annoying, hackneyed, cornball, and distracting cutesy elements of any such “ten commandments” type list. Anyhoo, here we go……….
I. TAKE THIRTY – After a given “event“, be it a major economic report, an announcement from the Federal Reserve or – – and you can certainly take it this far – – the opening bell of a new trading day – – do nothing for 30 minutes. The market isn’t going anywhere, and on the heels of any specific event, it’s best to let the market thrash about on its own, whipsaw the energy out of its system, and then calm down into something easier to interpret and navigate. I would add to this that, the bigger the event, the more valuable it is to have this just-wait-and-see time, as hard as it may be to sit on your hands.
II. KNOW YOUR ENEMY – Your enemy isn’t the other side of your position. It isn’t the analysts. It isn’t the Treasury Department or even the Fed. Your enemy is your own psychological foibles and frailties. Understand them, address them, and be the master of yourself. You will know you have succeeded when the market’s behavior no longer influences your own.
III. LOOK FOR THE FLAWS IN THE SETUP – It’s easy to see what’s right with a chart, but what’s wrong with it? Most importantly. what would be required to invalidate the rationale of the setup?
IV. A PREDETERMINED STOP IS SMARTER THAN A REAL-TIME BRAIN -In the evening hours, calmly looking at charts, you will be at your most logical, intelligent, and discerning self. Let that brain be in charge, because that brain decides the numbers. The brain that’s in the midst of battle doesn’t get to change the number. A stop is a stop, and it should be respected instead of treated capriciously.
V. IF YOU SENSE THAT YOUR PROFITS ARE COMING FAST AND EFFORTLESSLY, GET OUT -Making money trading isn’t easy. Far from it. If you’re in a ‘this is too good to be true” moment, you’re probably right, and it’s time to close out those positions and, in all likelihood, take a meaningful break.
VI. THERE IS NO GREATER ACT THAN INACTION -If a position is going your way, great. Keep an eye on it. Update your stops. Pay particular attention if it’s approaching your target. But……….leave it alone.
VII. AVOID THINLY TRADED INSTRUMENTS – This seems obvious, but it’s important. A financial instrument that is thinly traded is nothing but trouble: the bid/ask spreads are obscene, it’s difficult to get in and, much more important, get out. Know also that it’s much more likely that weird events are going to happen with something tiny than with something substantive. Tempting as a given chart may be, if there isn’t a highly efficient market to trade it, just move on.
VIII. EMOTIONAL AWARENESS IS YOUR GREATEST ASSET – Feeling super-confident and giddy? You should probably be in all cash. Feeling demoralized, frustrated, and out of synch? You’re probably close to a great entry point.
IX. EXITS – The only acceptable exit is either being either stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes.
X. SELL THE GREATEST WEAKNESS AND BUY THE GREATEST STRENGTH -It runs counter to human instinct, but it makes much more sense to pay top dollar for an expensive, overperforming stock than it does to buy something on the cheap just because it seems like it’s “on sale“. Likewise, a short sale opportunity is best found with charts that are already quite seriously in big trouble, instead of hoping that something that’s presently strong will suddenly stumble. Strength begets strength, and weakness begets weakness.
