The following contents are my own trading rules that had helped me in massive ways. I can share with you but it is really up to you to remember these trading rules that allow me to avoid costly mistakes and make more profits.
1. 3 stages of Trading Life Cycle
Survival – Learn to survive in the market. Trading is never easy, if you have to pay for your mistakes, make sure it is an affordable mistake and that it will not wipe you out of the game. Trading is a lifelong game. Money is your oxygen, if you lose it; you are out of the game.
Profits – Once you can survive in the market, you will notice you have the ability to make small profits from time to time. Reinvest and see how your account grows in this stage.
Massive Profits – This final stage comes when you can take bigger positions in the market. As your trading account grew in the “Profits” stage, you will be able to take position of bigger size and hence your profits will be more. Also, this is when you will be able to spot and sit on big runners consistently.
Passing through each stage requires patience. If you are too hurried, just like speeding, it will kill you.
2. Money management , Trading System , Manage your emotions
Every trader must know these 3 critical success factors in trading.
Money Management
Money to us is what oxygen is to a diver. He must know how to use it wisely in order to last a diving trip. Just like in the stock market. You must pace yourself and manage your losses wisely. Always know how much you can afford to lose. A sound money management rule is to enable you to trade even if you suffer multiple trading losses.
Trading System
No matter what technical indicator you use, make sure you have a cut loss and a profit taking target. A sound system will also include a sensible risk and reward factor. Reward should always be more than the risk you are taking. Also, the trading system that you use should be personalized to your lifestyle and personality.
Manage Your Emotions
There will always be hope, greed and fear. Many hope that their stocks will move further north or rebound from a decline even though the charts tell a different story. When a sell signal occurs, they are greedy for more profits and choose to ignore the signal. After many losses, they are fearful to buy when their trading system tells them there is a strong buy signal and thus they miss a stock! After the stock moves, they got greedy and jumped in. Stock declines and they hope it will rebound for them to get out. This is what we always call emotional trading. Learn to keep them under control and do not base any of your trading decisions on them.
3. Disciplined Cut Loss
While we dare to buy when there is a buy signal, not many people are willing to take losses when there is a sell signal. This is human nature, when it comes to pocketing profits, everyone did it very fast! When it comes to losing something, everyone will be hesitant. It is high time you start to think differently.
4. Exercising patience
There are times to buy, time to hold and not do anything and there is time to sell. These are the 3 things that we can do in the stock market. It is when the time where we shouldn’t do anything that requires us to practice patience. When I miss a trading chance, I tell myself, patience, if I chase after the stock, the risk is not worth the reward. There will always be another opportunity. Stock market will still be around even after I die! Stock market is a marathon and is not a short sprint (quick buck). Those who tried to go for quick bucks without giving themselves enough time to understand trading often gets killed.
5. Always consider Risk/Reward in every trade
Before you put in a trade, make sure you have a sensible risk/reward factor working for you. This risk/reward is defined as a small loss when I’m wrong and a big profit when I’m right.
6. Have a plan, Stick to your plan
When you put on a trade, make sure you have defined a cut loss price and a profit target. Just like a flight path, there is a take off and a destination. Trade without a plan is like flying towards the Ocean hoping to see land. You will crash if you run out of fuel (money) or you met a storm (Sudden sell down due to crisis).
7. Look at both weekly and daily charts
Weekly chart shows the longer term trend and daily chart shows the “noise” or volatility. While we may find entries on daily chart, it is often important to look at the weekly chart for an idea of the “real” trend. It’s like looking at the bigger picture.
8. The longer time frame for the support or resistance the better
A support not broken for a few weeks or months is stronger than the support of a few days. This is especially true if the support of the longer term is tested and not broken. The same goes for resistance.
9. Never make decision during intra day unless unusual volume or news
I will never make decision during intraday. As mentioned earlier, a plan has to be formularized before putting on a trade. It is advisable to follow the plan and not be affected by the “noise” during intraday. Unless there is a sudden spike in volume which usually means something is brewing. Or there is some news about the stock.
10. Focus on market leader stocks and the sector in play.
Very often, the biggest gains are the stocks that are in play or from the sector in play. Pay attention to the top volume everyday and watch what group of stocks keeps hogging the list. You should be able to smell the play of the day or week. After that, look at the top stocks in this sector.
11. Livermore’s probing method
When a stock breakout at 0.300, I will buy 50% of what I intend to buy at 0.300. After that if it continues to 0.305, I will buy the remainder 50%. This helps to minimize loss if the breakout is false alarm.
12. Symptom of a Stock Market Crash
If everyone is talking about stocks especially people you know who were never in the stock market, it will mean everyone has invested and there will be no new buying to sustain a bull market. The same goes for bear market, if everyone has sold and got out of the market, there are no more selling to sustain the downward momentum.
13. Know what you want, trading or investing
This is the same as rule 6. Many a time, I see people who got into a position with the intention for a quick buck end up becoming a forced investor. Their stocks declined instead of incline as anticipated and they sat on paper losses telling themselves it is a great company and soon the price will rebound. If you want to trade, make sure you follow your plan. Same for investing, if you are an investor, do not be bothered about the daily volatility. Business fundamentals do not change as sudden as the chart changes. But it will be a shame on you if you refuse to cut loss if the fundamentals have changed.
14. Understand relationship between price actions and volume
When looking at charts, be sure to count the number of up days on heavy volume and vice versa for down days. It is helpful to read at past price and volume relationship to form an anticipation of what will happen next. Price and volume tells consolidation and distribution.
15. Beware of 1 day volume spike of more than 50% forming the shooting star
If the stock price touches a high during intra day but closes near or at its low of the day with high volume of more than 50% of average volume, time to get that parachute in your hands.
16. Buying at break out from resistance or buying near support
You should only buy at 2 locations on the chart. Firstly you can buy if the stock breaks out from the resistance. Lastly you can buy very near to support. If you buy between support and resistance, you will be squeezed.
17. Chart formation cup & handle, double bottom, triangles, box range
Chart formations show the consolidation and distribution of a stock. Always look for the shapes and pattern on the chart when analyzing.
18. Psychology of stocks breaking new highs (A reason why blueline theory works!)
Holders missed the chance to sell high. Price retraced and they hold on to it waiting for the next high. When price reached the high, these holders sell. It flushed out all these stale holders thus creating a clear road for more upside.
19. Go through past trades to review mistakes
Looking at past trades enable you to know your mistakes. It is highly important that you should avoid the same costly mistakes from happening. It also gives you the ability to spot the danger signs on a chart quickly as you get familiar with them. The same goes for remembering what you did right hence you will be very familiar with charts that are gold mine!
This list will certainly grow longer as I continue my trading journey. But it is by far the most useful rules that enable me to crawl back to the black from a negative trading account. Remember, rules are simple to create but not many people have the discipline to follow. To be successful, you must have that discipline.
You can join me at my blog at http://growmoney.blogspot.com/ daily to understand how I apply these rules to my trading. See you there!
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Yours truly,
Decipher
Author of http://growmoney.blogspot.com
http://growmoney.blospot.com where my trading journey never ends
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