I have, over many years, tried to create and amend a succinct series of rules to help me be a successful trader. The act of trading can be one of the most eye-opening experiences to one’s personal strengths and weaknesses, and I hope some of these resonate with you:
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 harried 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.
AVOID THINLY TRADED INSTRUMENTS AND OFF-HOURS TRADING – Low-volume symbols and off-hours trading, is nothing but trouble: the bid/ask spreads are obscene, it’s difficult to get in and out, and big moves after hours often get reversed by the time the opening bell rings. Tempting as a given chart or event may be, be patient and wait. Stick to regular business hours with highly liquid symbols.
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. If you’re in ‘this is like printing money” mode, you’re probably right, and it’s time to close out those positions and, agonizing as it feels, take a meaningful and lengthy break.
EXITS – The only acceptable exit is either being stopped out of a position or reaching a predetermined target price with a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes. Reason is your ally, impulse is your enemy, and a sky-high VIX is a sure sign to get out.
I believe in simplicity and minimalism, and as such, I've retired a few of the more verbose and, I think, less important rules to the section below. I didn't want to toss them utterly into the dustbin, however, so if you're interested, here are some of the ideas I had offered before:
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.
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. Can’t manage 30 minutes? At least try for 30 seconds. Impulse is your enemy.
KNOW YOUR OPPONENT – 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.
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?
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.
