The 10 Commandments Of Trading

I’ve had a number of new traders over the last few months ask me what tips I can give them, so I thought I would take the opportunity here on Easter to both answer them and be blasphemous.  These are by no means the only “commandments” of trading, and if you have some suggestions, please feel free to list them in the comments section.

Know yourself- Understand what style fits your personality.  Can you hold a position for a few days or only a few hours?  Are you okay with larger draw downs or can you only take small ones? Are you more comfortable trading pullbacks or breakouts? Most importantly, don’t try to use a style that doesn’t “fit” your personality.

Educate yourself – But don’t over educate yourself or fall into the trap of reading to many biographical trading books.  They may be entertaining, but you will learn little about the current state of trading.  Stick to my  “Holy Trinity” of books “How To Make Money In Stocks” by O’Neil, “The Disciplined Trader” by Mark Douglas, and “The StockTwits Edge” by Howard Lindzon.  The rest you can learn from online trading communities and blogs.

Find a mentor – It’s never been easier to find a mentor, even if it is a virtual one.  I can’t emphasize how crucial this is because being able to interact with a seasoned trader on a regular basis will shorten your learning curve like nothing else.  And don’t be averse to using a paid mentor via a trading service.  The $50-$100 bucks a month you will pay may save you thousands.

Develop a methodology – Analyzing your trading success by outcome is a dangerous game.  If you go to Las Vegas, put your life saving on “red” and win, it was still a bad move, because over time you will eventually hit “black” which will wipe you out.  You have to develop a risk based methodology that over time is successful and then evaluate your trading by how well you follow that methodology.

Use the right tools – You don’t need four monitors and a quad-core water-cooled processor to trade stocks.  You do need a decent computer, solid broadband connection, and a good broker.  As far as I am concerned, there is no need to look past Interactive Brokers.  A solid data/charting service is a must as well and my choice is Esignal.

Turn off CNBC – There is absolutely nothing you need from CNBC anymore. Quotes, breaking news, whatever, it can all be found through a thousand other more focused outlets.  CNBC is really not for trading news, it is for financial news in general. At least turn the sound down.  And of course everything I say about them is 100% wrong if they would like to have me as a guest.

Remove your emotions – Understand that you will lose on more trades than you will win on; that is just part of the game.  If you are the type that always has to be “right” you are going to have a hard time becoming a successful trader.  The market is perpetual, it continues on no matter what you think about it with no knowledge that you exist.

Cut your losses – It’s pretty simple.  You will not make it in the markets if you can’t cut your losses.  You have to be confident in yourself as a trader to know there are an infinite amount of opportunities in the markets and that you can capitalize on them. That gives you the ability to let the losers go.

Trade less make more – Be picky about your trade setups and only take the best ones.  The goal is to take the least amount  of trades needed as over time even the best traders will lose on more trades than they win on.

Only trade liquidity – Illiquid and low float stocks are death unless you are an experienced trader.  Trading them is a specific type of style that is hard to learn and even harder to master; stick with stocks that trade at least 1 million shares a day on a 30 day average.  Liquidity is not limited to stocks but can apply to markets as a whole. Options expiration, holiday weeks, and lazy summer months often have low liquidity where the mechanics of the markets come into play and make clean trade setups a rarity.

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

32 Responses

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  2. I checked interactive brokers, their rates are too low as compared to others, too good to be true. For a beginner with a small capital, which would you advise, flat rate or cost plus?

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  4. Command #1. Take care of your own health FIRST. As one prepares for financial success and to enjoy its gains in life, one needs to be in good health. If you smoke “stop”. If you are overweight, remember that you are what you eat and “exercise”. Do not wait to get sick to seek medical attention. Get into the zone of “prevention”. Do your annual physicals consistently. In summary, live, love, laugh. Health first, in-spirut second, investing third, and enjoy your riches last.

  5. I like the “Trade less” commandment. But I took it to another level by following to “Trade only the best risk/reward ratio”. If I find 5 of them in one day I will pull the trigger no doubt. If there are none, no need to jump on anything. You should add commandments # 11 “PATIENCE”. Without it, most traders will be scrapping off the barrel off their broker accounts before the noon hour hits.

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  7. “Turn Off CNBC.” Great one! I’ve often heard people refer to CNBC and stations like it as financial pornography.

    I’m a new trader myself. Luckily, a good friend of mine whose a successful trader brought me into the game. Because of that, I feel that I’ve been able to bypass a lot of the bs. Most importantly, I’ve learned that there’s no substitute for knowing your craft. Forget all the magic formulas, push button systems, overnight riches courses that people try to sell aspiring traders. Learn your stuff, get your hands dirty, patch yourself up after a few losses and kick some ass!

  8. For trading I like using RSI to help choose entry and exit points.
    Mostly with 3x ETFs because they have lots of volatility but dont announce accounting irregularities or other Enron type surprises.
    For investing I buy on dips what I know and like.
    For investing in the next big thing…..I ask my daughter for ideas.
    Most important take away from the Lunds Blog is find a system that works for you and repeat it over and over. Mostly buy low sell high.

    • Asking your daughter is a good move…seriously. That next generation is much more plugged into stuff…no matter how hip we try to be :)

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  10. Great post.
    After years investing, I still search for rationale for the market. I have found that humility is often the greatest advice. Avoid thinking that any system that you have developed works better than the market itself.
    For me, I have found that looking long-term is helpful when examining charts. Like in driving, if your goal is the horizon, don’t spend too much time watching the road just past your car hood.
    Hope to read more from you in the future!

  11. I’d add one other commandment, perhaps one above all the others.

    Never invest in anything you don’t understand. Doing so is gambling and investing is not gambling.

    • @tom I think Brian is talking about trading, not investing. The skill sets are pretty different and while you are dead right about investing, I know plenty of successful traders that don’t need any real in depth knowledge about what they are trading.

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  15. Great post Brian, enjoyed it!
    About trading mentors, do you have any pointers on finding one? Do you recomend anyone in particular? Do you mentor people?

    Many thanks in advance.

    • Thanks Oscar. I don’t mentor because often I think I need one myself :)

      Seriously, the best way is just to drop the cash ($50-$100) and subscribe to a good trading service with an interactive chat/audio room. You will learn a ton real quick and find plenty of people willing to help you.

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  17. Nice post. I like the Tagline. The inclusion of the word ‘life’ was the one element I wanted to mesh into the ideas I proposed. I think that is what differentiates your blog from the other ST blogs. Nice job.

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