- Never have more than 10 positions open at any one time.
Trying to track more than 10 equities at any one time is quite demanding. It generally leads to the trader neglecting to undertake the proper analysis needed on an equity that the trader has money in.
For example; in early 2007 I had 25 positions opened at a particular time. Each open position needed proper end of day analysis to ascertain where the trailing stop was going to be placed. The placement of this trailing stop depends on a myriad of factors such as the trading levels, volume on each trading day, equity volatility, equity historical movements .I encompass many of these factors into my stop loss placement.
Unfortunately on this occasion, many of my stops were not moved up with the equities as they gained in value and essentially the stops were triggered when the equities retreated back to their original price levels after a significant period of time. The net result across the board was a minimal gain, whereas if I had fewer equities and was able to commit the correct amount of time to the analysis of each equity then my gains would have been greater.
- Never commit more than 10% of your entire capital to any one trade.
This goes hand in hand with point 1. If your capital represents 100% and you only ever have a maximum of 10 trades going at once then this is only possible if you keep the maximum capital exposure of each position to 10%. Diversification across equities from different sectors is essential for successful trade and capital management.
- Always have a planned stop loss order.
I don’t think I need to elaborate on the importance of this point. We hope for the best but prepare for the worst.
- Always have a trading plan when entering a trade.
This goes without saying. I have a spread sheet that lists all of my open positions at any one time.
The spread sheet has 6 columns which require completing on every trade that I place;
Column 1 – The 3 letter code of the stock.
Column 2 – Whether I am long or short on the stock.
Column 3 – The price where I bought or sold the stock.
Column 4 – Where my current stop loss order is placed.
Column 5 – My planned exit position.
Column 6 – My Risk Reward Ratio for the stock at its current price.
When I review my open positions I update my spreadsheet with the new prices of the stocks and any changes that I make to the position of my stop loss order.
- Have at least two buy indications from different technical indicators.
The technical indicators that I am referring to here can vary from the trading levels, volume, a cross over of a moving average, strong market depth .
- Never trade on your gut feeling.
If I ever get a gut feeling about an equity I make sure I stick to my rules so I don’t make any foolhardy decisions.
I have a friend who always seems to find the need to tell me that this equity is “going to move, I just have that feeling”. Now, I have to concede sometimes his equities do move, but quite often they don’t. The big question is, what do I do when it doesn’t go the way I want??
By having a set of rules in place your position is protected before you even enter a trade.
I will share an example of where I made this mistake. It is quite embarrassing for me but it clearly illustrates this point.
After the big correction in August last year I entered a properly planned position on PDN after it traded into an ascending triangle from around the $6 mark. I planned my entry at $6.60 as $6.50 was acting as resistance and it was my analysis that a break of $6.50 was my indicator to enter. My exit position was $7.80.
The stock broke $6.5, I entered at $6.60. It moved swiftly to $7 and in turn started creeping up to my exit position. At this stage I had made quite a bit on this stock and as it approached my planned exit at $7.80 I started to get the jitter bugs in my stomach that can only be described as greed. I subsequently cancelled my OCO order based on my gut feeling that the stock was going to keep going to $10. Why I thought that, who knows? Anyway the stock retreated back to below $6.50 and I ended up exiting the trade at a loss.
If I followed my original plan, based on my initial analysis I would have exited at $7.80 in turn pocketing a nice profit. My energy then would have been diverted elsewhere for other stocks that were moving in to play.
- Never place a trade when you are heavily affected by medication and/or alcohol.
This rule is a no brainer. You are probably rolling your eyes listening to this but you would be surprised at the amount of people I know who have placed trades because the price of particular equity was “all set to go” when they are viewing an equity through their beer goggles.
By all means, market analysis can be conducted over a glass of wine, I do it all the time. But proper equity analysis requires intense concentration, clarity and depth of thought.
Given the equities market closes at 4pm in the afternoon this point is generally not a problem.
- Review each open position at least twice a week.
Reviewing your positions is crucial for solid trade management.
- Never get emotionally attached to a particular equity.
This goes hand in hand with point 6. By all means have your favourite stocks that you understand better than others. Some of mine are BPT, MRE, MGX, AOE, AAX and LGL. I understand their wave patterns better than I do on other stocks and I use their historical patterns to help me predict their future movements. I like to call this the “heart beat of the stock”.
However I still apply my rules when entering a trade on any of these equities. No matter how much I like an equity, if it doesn’t comply with my rules then I don’t trade it.
- Don’t forget and ensure you stick to rules 1-10.
Whilst most of these rules are common sense, you need to ask yourself “Do I have a set of rules for trading?”
In my experience the implementation of a set of rules and a stead fast policy of sticking to them will give your trading experience longevity and this will be reflected in the returns within your trading account.
I have formulated the following ten trading rules based on my trading experiences, lessons learnt from trading successes and mistakes. I will endeavor to provide insights and examples of the experiences and lessons that have lead me to formulate these trading rules. Since the implementation of these rules, my ability to be comfortable with my trading and my overall trade management has excelled. Thankfully, no more sleepless nights because of over extending myself on one position and no more margin calls because I have chased an equity too hard.