These are 37+ years of knowledge and passion:
- DO NOT LOSE YOUR ARSE ON FRIDAYS
Traditionally Friday is a book squaring day. It is by far the most unpredictable, the most difficult trading day of the week. I don’t know why, but if it can go wrong it will go wrong on a Friday. Food for Thought…there are seven days in a week, but the Japanese Tsunami hit on a Friday.
- THE DAY TRADERS 35% to 40% RULE
If you are a day trader, you should have a 35% to 40% rule. For example; by 10am you made your financial target of $1,000, but your EGO tells you today is your day. You can make more. By 1pm you have given back $350 to $400 of your $1000 profit, you need to turn your computer off and keep the rest. To continue to lose more is negligence. You cannot be right all day. This trading game is all about stringing wining days, weeks, and months together.
- NEVER ADD TO A LOSING POSITION
If they are a good buy at 60, they must be a really good buy at 50 and an incredibly good buy at 40. This strategy may work from time-to-time, but over a 34-year trading career I have found that when you add to a loser the only thing you will say a real goodbye to is your money.
- NEVER TRADE OUT OF BOREDOM
Probably the worst trade in the book is the boredom trade. You trade for the sake of trading. You trade because you are a “trade-aholic”. You are bored and you need the “action”. One of the original Turtle traders, Curtis Faith, said, “Trading can certainly be exciting at times, but it is not entertainment. Don’t treat it like it is.” And Jesse Livermore famously said, “The market does not beat them. They beat themselves, because though they have brains, they cannot sit tight.”
- NEVER REVERSE OUT OF A BAD TRADE
You made bad trade. It is time to take your loss. Never flip the position going from long to short all in the same trade. Instead, walk away. Take a small break. In the long run, flipping your position will result in being topped and tailed.
- NEVER TRY TO RECOUP A BAD TRADING DAY ALL IN ONE TRADE
You are a one-lot trader and you lost $1,000 trading all day. There is one hour to go on Wall Street and you decide to become a five-lot trader to get your money back. You are no longer a speculator. You are now a gambler. Increasing your position limits to get your money back is pure negligence. The typical “loser” gambler drops $1,000 betting numerous college and professional football games all weekend. On Monday night he decides to bet the whole $1,000 on the Chicago Bears. Now think about this for a second. A big bear used to be a baby bear. And a baby bear is called a cub. And we all know how good the Chicago Cubs have been the past 107 years. Actually, I feel sorry for Chicago Cub fans. They’ve been waiting all those years to win a World Series in their new ball park.
- NEVER SPREAD OUT OF A LOSS
You made a bad trade. To spread out of it leaves you with two problems instead of one. It is a losing trade. Take your loss and move on. I had a client who paid tens of thousands of dollars to a trading school to learn how to trade. He was taught, if you like a stock he should sell the put. So with Apple Computer trading at $595, he sells the $575 put. Apple immediately falls to $525 and he is losing his arse. So he sends me an email. I send him my number and we talk. He tells me his dilemma. He also tells me he was taught in this school that if the trade goes wrong he should sell covered calls against it. What do I recommend? My first response was, “What are you calling me for? They got you into the trade. Let them get you out of the trade.” My 2nd response was, “You’ve made a bad trade. GET OUT and MOVE ON. If you sell covered calls and Apple rallies back to $550; you have two losing trades instead of one. Do not complicate matters by spreading out of a loss.”
- NO OVERTRADING
Some of my best long-term ideas never made a penny because I had too big of a position on from the start and could not take the heat if it went wrong. I was forever right, just early.
- DO NOT TURN A BAD TRADE INTO A REALLY BAD TRADE
A winning trade will keep you in the game. A scratch trade will set you up for your next trade. A losing trade will affect your thought process. Cut your losses quickly. Do not turn a bad trade into a really bad trade.
- AFTER THREE CONSECUTIVE LOSING TRADING DAYS, TAKE A DAY OFF
After three consecutive losing days, a day off to regain your psychological edge should be mandatory.
- MAKE YOU OWN RULES AND STICK TO THEM
Every trader knows their strengths and weaknesses. These rules above are my rules. Make your own rules and stick to them. You will never be successful in this industry by not having and abiding by a set of rules.