My Seven Trading Rules

Here is a list of my Seven Trading Rules:

  1. IT IS MORE IMPORTANT TO KNOW HOW TO SELL THAN TO KNOW WHAT TO BUY.  YOU SHOULD NOT ENTER A POSITION WITHOUT HAVING YOUR TWO SELL STRATEGIES DEFINED
  2. ALWAYS THINK ABOUT RISK
  3. UNDERSTAND AND CONSIDER THE POSITION-SIZING DYNAMICS
  4. LEARN HOW TO DEVELOP YOUR OWN IDEAS
  5. HAVE A VALID REASON TO TRADE
  6. DON'T BE MARRIED TO AN IDEA
  7. DON'T OVERTHINK

 

  1. The most important trading rule of all time - IT IS MORE IMPORTANT TO KNOW HOW TO SELL THAN TO KNOW WHAT YOU BUY.  YOU SHOULD NOT ENTER A POSITION WITHOUT HAVING YOUR TWO SELL STRATEGIES DEFINED.  You need to know where your stop-out is going to be and you need to know where your sell target is going to be and how you will act if it gets there.
  2. You need to THINK ABOUT RISK if you want to be successful.  When you enter a trade, don't think about how much money you can make.  Think about how much you can lose.  You should have an idea about this based on where your two sell targets are.  Play defense.  
  3. CONSIDER THE POSITION-SIZING DYNAMICS based upon the risk exposure of your positions.  For example, if you put $1,000 into an option that can expire worthless, then it has the same risk exposure as putting $10,000 dollars into a position that is limited to a -10% loss...in each case your loss will the theoretically maxed out at ($1,000).
  4. Don't get your ideas from your friends at the Club or from some moron on CNBC.  If you want to give away money you are much better off giving it to a charity.  LEARN HOW TO DEVELOP YOUR OWN IDEAS.
  5. You should HAVE A VALID REASON TO TRADE.  It shouldn't be just because you're bored.  Your idea should be based on rules that you develop.  You should write down your reason for entering the trade.  If you can't put it into one paragraph then you should 'walk away' because you are probably going to lose money.
  6. Remember that it is more important to make money than to be right.  DON'T BE MARRIED TO AN IDEA.  This is frequently the case when a stock is down big and investors or traders try to catch the exact bottom.  This is driven more by the human instinct to be correct then by logic.  But too many times this leads to investors being run over, or "catching a falling knife."  You won't catch the exact bottom but from a risk reward standpoint it makes much more sense to wait until the trend reverts and enter the position when it is on it's way back up.
  7. DON'T OVERTHINK or waste time by becoming afflicted with 'paralysis by analysis'.  Follow these steps and you will increase your chances of success.