Trading Rules

Here are the trading rules I've learned over the last ten years from my own experience, books and people I know.

  1. Making money from trading is one of the most difficult endeavors on earth
  2. Understand the premises for entering a trade.  If the reasons are no longer valid, get out
  3. If you're using my indicators, please make sure my thoughts line up with what the indicator is saying.  I've been using these for years, and can "sense" when something is right or wrong with them.
  4. Take bad and good news with a grain of salt.  It can only bias you and mess up your decision making
  5. If things aren't going your way recently, take a break to regroup.  Just observe the market until you get a good feel back
  6. Don't play until the odds are heavily in your favor.  The higher the odds are in your favor, the bigger the capital you can put on the trade
  7. Don't get overconfident - you can tell this by how ready you are to prove you're right to everyone
  8. Don't get underconfident - failures doing something so difficult should not undermine your identity
  9. If you start reading "surge" or "collapse" or "plunge" in media outlets, start to look the other way
  10. Identify a trend that is about to exhaust itself, and start looking for signs contrary to it
  11. Take profits when unsure what will happen; nobody goes broke taking profits
  12. When I'm feeling like the smartest trader, start to get worried
  13. It takes tremendous confidence to place the best trades - frequently the majority is running the other way
  14. Capital preservation is more important than return on capital.  Minimize losses.
  15. Be happy with small percentage returns.  Especially as your capital base grows.  5% will always become bigger numbers.
  16. When fear is ripe, pay attention to people you know.  When they start noticing a trend that has persisted for a while, the trend is about to reverse.
  17. Keep your head up.  Most people don't even have enough money to invest.  Be happy with what you've got.  Just don't lose it.
  18. Don't short sell unless the odds are very much on your side.  The math limits returns on short sales.  Whereas a long's return goes exponentially up as the trade moves your direction, a short's return decays the more it goes in your direction.  A 20% return on a short from $10 to $8 actually requires a 50% further loss to get to $4 when you would only be up 60%.
  19. Pay attention to economic indicators to add confidence to your trades.  A recession would mean shorting would become easier, and expansion would mean going long would become easier.
  20. Don't mistake entertainment for investment advice.  A lot of popular sites are more of a venue for entertainment than providing profitable investment advice.  Be aware of what headlines may do to your trading psyche.  Fear is always the most ripe at the bottom.  Euphoria is in the air at the top.