Trading can be and has been equated with gambling. I have first hand experience to confirm that. When you’re shooting in the dark and without much clue it is worse than gambling, actually. The reason is, with gambling you expect to lose. You hope to win, but your expectation is to lose. You are mentally prepared to lose that money. With trading, you’re repeating the same behavior, the same pattern, but you’re expecting to win. You’re hoping to win big! But you still expect to win a little. This makes it worse than gambling.
That means we must have some rules to help us determine what to do next and how to approach each scenario. Ideally, one should have rules for 1) entering a trade, 2) position sizing, 3) risk tolerance, 4) profit taking, and 5) exiting a trade. These are specific to a trade. However, there must be additional rules relating to the trading in general. These rules should dictate how much stress level you’re willing to take. How many simultaneous trades to open, etc.
So, I have decided to make a list of all the rules and post them here on this page. As times goes on, I will try to ensure that these rules are often consulted and never broken.
Trading Rules
1. Never open more than two trades at any given time
There will be times when the market conditions will make it very appealing to get in further trades. This will divert attention from current trades and will cause lack of focus. It is not difficult for a professional trader to trade many different trades, but for a beginner it is better to focus all the attention on one trade (preferrably) and just monitors the charts and learn to interpret intraday action.
2. Always monitor the market in general
The DOW, the NASDAQ Composite Index, and the S&P 500 to see the general direction of the market. Then look at your actual security to determine it’s direction as best as possible. Never enter a trade because it is the best price in the entire time you have been monitoring that security. Market conditions may have changed and may indeed warrant the new price as the proper price in which case, you’ll be stuck at or around breakeven. However, if the market continues to correct the price, you might find yourself in a bigger loss.
3. Entering a Trade
To enter a trade, we must first try to determine the overall market sentiment in general. Is it trending up, trending down, moving sideways, or just erratic and indecisive? Then we must look at the security in question and determine its overall trend. At this point, does the momentum look strong and warrant openning a position right away? Or is it trending up normally with pullbacks. If so, we must enter the trade at a pullback if possible. Or alternatively, we can average down at a pullback.
To determine a good entry, consult the chart for 1, 5, 15, and 30 min intervals. 5 is better if actively daytrading.
We will use any of the following strategies listed on this page to determine if the stock warrants opening a position.
4. Position Sizing
Only 40% of the portfolio can be put on one trade. For really strong move this can be increased to 50%. What is strong move? This will have to depend on reading the charts and the market analysis in general. I will try to sum it up as best and put it in a post entry.
5. Risk Tolerance
Risk tolerance is 50% of the invested amount. I know that sounds big, but using options, especially front month options, it is going to have quite some moves. Once down 50%, the position must be liquidated.
If there is a strong reason, such as a big move coming or a confirm news coming out, and there is a fairly strong chance it will move upwards then the position may be held to exit at a smaller loss. Or possibly profit. However, the digressing from the hard and fast rules is what causes confusion and loss in most cases and so this is not recommended. If I find myself doing this often, this rule will be changed to not allow any exemptions but to always exit once at a 50% loss.
6. Profit Taking
So if I am taking a loss of possibly 50% in some trades, it only makes sense to profit at a bigger level. The main goal is to exit at 30-50% profit. If the chart indicates the security will continue its upward move, then I will try to make mental trailing stops and keep going up. Once the trade is at 50% profit, I will try to guard the profit carefully and not let it dwindle. 100% profits? No problem. If that happens, great. If not, I’m not holding my breath.
7. Exiting a Trade
This maybe hard to determine. However, if the chart along with the volume show a trend reversal is possible (such as forming bearish candlestick patterns) then I will exit the trade. Otherwise, there is not reason to exit.
Having put all these rules in place, the main thing to remember is that with more trading comes more experience. Only after a time spent trading in the market can one refine these rules. These rules are made from watching others set their own rules. Each person has their own way of thinking and trading. These rules are my rules and I’m a new trader. Without any experience. So over time these rules will get refined and revised and updated.