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.

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