Today was another great day in chat. The market has been exceptionally hot lately and we’re killing it! A lot of people reach out to me and ask how we do it.
The answer is simple: we follow rules.
Yes, trading takes a lot of hard work and in no way is it something you can master over night. Trading requires a lot of dedication, studying, and practice. That being said, if you follow a set of trading rules, you can limit your losses and maximize your profit potential. Trading rules give you the structure you need to approach the market with confidence.
Do you ever get stuck in a position and not know what to do?
Do you find yourself rationalizing a trade after you’re already in?
There should be no “hoping” and guesswork in trading. Trading is about creating a plan and having the discipline to follow through with it.
Here are a few of my main trading rules
Everyone will have different trading rules, and what works for some may not work for others. These are the rules I follow that allow me to consistently profit from trading.
When I follow them, I make money. When I ignore them, I pay the price.
Trade the Ticker, Not the Company
This is the foundation for all of the trading we do at Investors Underground. We focus on a stock’s price action – that’s it. We don’t care about the company’s P/E ratio, book value, management team, or future potential. Sure, that information can be useful, but we care about how the stock is trading during the day. This approach is incredibly helpful because it simplifies our trading style. We don’t have to dig through SEC files or research a company for hours. We just look at how it is trading. Price action doesn’t lie.
This approach also helps you avoid rationalization after you enter a trade. If you find yourself on message boards or Yahoo Finance looking for ways to justify your position, you’re probably trying to rationalize a bad trade. Don’t focus on the company, focus on the stock.
If You Don’t Have a Plan, You Don’t Have a Trade
Trading is pretty simple if you break it down to the basics.
- You formulate a hypothesis (what you think the stock will do)
- You enter a trade
- You’re proven right or wrong (you make money or lose money)
- You exit the trade
You clearly have full control over steps 1,2, and 4. You do not have control over how a stock moves so you cannot control step 3 BUT you can plan for it.
What are you going to do if the stock moves in your favor?
What are you going to do if it moves against you?
This is why you need a plan.
A trading plan allows you to control step 3. If you have a plan, there are no surprises. You’re either right or wrong and you react accordingly.
Nail and Bail, Don’t Stay and Pray
This trading rule speaks to the concept of greed and speculation. For example, you enter a position in a stock at $3 and it runs to $4. Your plan (as discussed above) tells you to sell at $4, but then you begin thinking, “Well, what if it goes to $5?”
These “What if’s?” have no place in trading. You make a plan, follow through with it, and don’t look back. We are day traders. I’d rather leave profits on the table than expose myself to unnecessary risk.
Less is More
Such a simple but yet powerul trading rule !! My best days are always when I focus on the prime set ups vs. trying to nail everything #stocktrading #stockmarket #nyse #nasdaq #daytrade #daytrading #stocks #livetrading #tandemtrader #investorsunderground #investorslive #tradingrules
A photo posted by Nathan Michaud (@investorslive) on
I constantly need to remind myself of this rule. Sometimes trading less is more. If you look at many successful day traders, most of their gains come from a few great trades. If you’re placing thousands of trades, they’re not all going to be home runs. It’s similar to the 80/20 rule, where 80% of the effects come from 20% of the efforts. In trading 80% of the gains come from 20% of the trades.
This means that you shouldn’t trade just for the sake of trading. You should focus on putting more of your effort into the best setups and ignoring the lower probability ones. This doesn’t mean you should trade less just for the sake of trading less. It means that you should analyze where you are making the most of your money and focus your efforts there.
What Are Your Trading Rules?
Now you know four of the rules I use to guide myself during trading. The list is much longer, but these are the basics.
So, what rules do you use to guide yourself during trading?
Feel free to post them in the comments section below!