With that in mind, here are some more stock trading rules to help you stay ahead in stock markets:
Stop Loss
- Set protective stop as soon as you enter a position. The stop price should be decided before entering a position.
- Move protective stop to break-even when price moves in your direction (more than the average daily range).
- It might be a good idea to sell a part of your position (for e.g. one third) for a reasonable profit. By doing this, there will be less pressure to sell early since you have already cashed in; and if the trade goes against you, there is at least some profit from the trade.
- Use trailing stops for the rest of the position to ride the move.
Psychology
- Never trade impulsively, stick with your edge/plan.
- Never ever add to a losing position (unless you already have a plan thought out to scale into a position at different entry points); add only to winning positions (progressively smaller amounts).
- Don't be influenced by others; stick with your edge/plan.
- It is important to forgive yourself when you make a trading mistake despite your best efforts.
Technical Analysis
- Reduce or dispose your position if a trend line you are watching is violated, especially with heavy volume. Don't hope that the trend line break is a fake one.
- Never trade based on indicator divergence (with price) alone. Divergences can go on for a while, with price continuing to make higher highs and the indicator continuing to make lower highs (or price making lower lows with indicator making higher lows).
Money Management
- Try not to lose more than 2% of your capital on a single trade. Stop trading to re-examine the situation if you lose more than 6% of your capital within a month or have consecutive losing trades.
Hard Work
- At the end of the day, record your trades and the thought process (including charts if possible) that went into making those trades.
Note: Some expert traders scoff at the idea of placing a stop as soon as a trade is entered (they might have mental stops for their positions). But if you have trouble cutting losses and if there is a chance that you could freeze like a deer in the headlights when you are hit with a huge loss, it is best to set a stop as soon as you enter a position.
Follow these simple stock trading rules and here's to happy trading!
References:
- Trading in the Zone by Mark Douglas
- Technical Analysis of the Financial Markets by John J. Murphy
- Trading for a Living by Alexander Elder
