20 Golden Rules for Traders

Want to trade successfully? Just choose the good positions and

avoid the bad ones. Poor trade selection takes a heavy toll as it bleeds
your confidence and wallet. You face many crossroads during each
market day. Without a system of discipline for your decision-making,
impulse and emotion will undermine skills as you chase the wrong
stocks at the worst times.
Many short-term players view trading as a form of gambling.
Without planning or discipline, they throw money at the market. The
occasional big score reinforces this easy money attitude but sets them
up for ultimate failure. Without defensive rules, insiders easily feed off
these losers and send them off to other hobbies.
Technical Analysis teaches traders to execute positions based on
numbers, time and volume. This discipline forces traders to distance
themselves from reckless gambling behavior. Through detached
execution and solid risk management, short-term trading finally "works".
Markets echo similar patterns over and over again. The science of
trend allows you to build systematic rules to play these repeating
formations and avoid the chase:
1. Forget the news, remember the chart. You're not smart enough to
know how news will affect price. The chart already knows the news is
coming.
2. Buy the first pullback from a new high. Sell the first pullback
from a new low. There's always a crowd that missed the first boat.
3. Buy at support, sell at resistance. Everyone sees the same thing
and they're all just waiting to jump in the pool.
4. Short rallies not selloffs. When markets drop, shorts finally turn a
profit and get ready to cover.
5. Don't buy up into a major moving average or sell down into one.
See #3.

6. Don't chase momentum if you can't find the exit. Assume the
market will reverse the minute you get in. If it's a long way to the door,
you're in big trouble.
7. Exhaustion gaps get filled. Breakaway and continuation gaps
don't. The old traders' wisdom is a lie. Trade in the direction of gap
support whenever you can.
8. Trends test the point of last support/resistance. Enter here even if
it hurts.
9. Trade with the TICK not against it. Don't be a hero. Go with the
money flow.
10. If you have to look, it isn't there. Forget your college degree and
trust your instincts.
11. Sell the second high, buy the second low. After sharp pullsbacks,
the first test of any high or low always runs into resistance. Look for the
break on the third or fourth try.
12. The trend is your friend in the last hour. As volume cranks up at
3:00pm don't expect anyone to change the channel.
13. Avoid the open. They see YOU coming sucker
14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two
lower highs and a double bottom.
15. Bulls live above the 200 day, bears live below. Sellers eat up
rallies below this key moving average line and buyers to come to the
rescue above it.
16. Price has memory. What did price do the last time it hit a certain
level? Chances are it will do it again.
17. Big volume kills moves. Climax blow-offs take both buyers and
sellers out of the market and lead to sideways action.
18. Trends never turn on a dime. Reversals build slowly. The first
sharp dip always finds buyers and the first sharp rise always finds
sellers.

19. Bottoms take longer to form than tops. Greed acts more quickly
than fear and causes stocks to drop from their own weight.
20. Beat the crowd in and out the door. You have to take their money
before they take yours, period.

20 Rules For Effective Trade Execution

Execution can be the weakest link in an otherwise great market strategy.
After all, it's a lot easier to find good stocks than to trade them for a
profit. So how do we enter the market at just the right time and capture
the big moves we see on our charts?
Here are 20 rules for effective trade execution. Try these out the next
time you're getting ready to pull the trigger.
1. Seek favorable conditions for trade entry, or stay out of the market
until they appear. Bad execution ruins a perfect setup.
2. Watch the tape before you trade. Look for evidence to confirm your
opinion. Time, crowd and trend must support the reversal, breakout or
fade you're expecting to happen.
3. Choose to execute or to stand aside. Staying out of the market is an
aggressive way to trade. All opportunities carry risk, and even perfect
setups lead to very bad positions.
4. Filter the trade through your personal plan. Ditch it if it doesn't meet
your risk tolerance.
5. Stay on the sidelines and wait for the opportunity to develop. There's
a perfect moment you're trying to trade.
6. Decide how long you want to be in the market before you execute.
Don't daytrade an investment or invest in a swing trade.
7. Take positions with the market flow, not against it. It's more fun to surf
the waves than to get eaten by the sharks.
8. Avoid the open. They see you coming, sucker.

9. Stand apart from the crowd. Its emotions often signal opportunity in
the opposite direction. Profit rarely follows the herd.
10. Maintain an open mind and let the market show its hand before you
trade it.
11. Keep your hands off the keyboard until you're ready to act. Don't
trust your fingers until they move faster than your brain, but still hit the
right notes.
12. Stand aside when confusion reigns and the crowd lacks direction.
13. Take overnight positions before trading the intraday markets. Longer
holding periods reduce the risk of a bad execution.
14. Lower your position size until you show a track record. Work
methodically through each analysis, and never be in a hurry.
15. Trade a swing strategy in range-bound markets and a momentum
strategy in trending markets.
16. An excellent entry on a mediocre position makes more money than
a bad entry on a good position.
17. Step in front of the crowd on pullbacks and stand behind them on
breakouts. Be ready to move against them when conditions favor a
reversal.
18. Find the breaking point where the crowd will lose control, give up or
show exuberance. Then execute the trade just before they do.
19. Use market orders to get in fast when you can watch the market.
Place limit orders when you have a life outside of the markets.
20. Focus on execution, not technology. Fast terminals make a good
trader better, but they won't help a loser.

20 Rules To Stop Losing Money

1. Don't trust others opinions It's your money at stake, not theirs. Do your own analysis, regardless of
the information source.
2. Don't believe in a company Trading is not investment. Remember the numbers and forget the press
releases. Leave the American Dream to Peter Lynch.
3. Don't break your rules You made them for tough situations, just like the one you're probably in
right now.
4. Don't try to get even Trading is never a game of catch-up. Every position must stand on its
merits. Take your loss with composure, and take the next trade with
absolute discipline.
5. Don't trade over your head If your last name isn't Buffett or Cramer, don't trade like them.
Concentrate on playing the game well, and don't worry about making
money.
6. Don't seek the Holy Grail There is no secret trading formula, other than solid risk management.
So stop looking for it.
7. Don't forget your discipline Learning the basics is easy. Most traders fail due to a lack of discipline,
not a lack of knowledge.
8. Don't chase the crowd Listen to the beat of your own drummer. By the time the crowd acts,
you're probably too lateor too early.
9. Don't trade the obvious The prettiest patterns set up the most painful losses. If it looks too good
to be true, it probably is.
10. Don't ignore the warning signs Big losses rarely come without warning. Don't wait for a lifeboat to
abandon a sinking ship.

11. Don't count your chickens Profits aren't booked until the trade is closed. The market gives and the
market takes away with great fury.
12. Don't forget the plan Remember the reasons you took the trade in the first place, and don't
get blinded by volatility.
13. Don't have a paycheck mentality You don't deserve anything for all of your hard work. The market only
pays off when you're right, and your timing is really, really good.
14. Don't join a group Trading is not a team sport. Avoid stock boards, chatrooms and financial
TV. You want the truth, not blind support from others with your point of
view.
15. Don't ignore your intuition Respect the little voice that tells you what to do, and what to avoid.
That's the voice of the winner trying to get into your thick head.
16. Don't hate losing Expect to win and lose with great regularity. Expect the losing to teach
you more about winning, than the winning itself.
17. Don't fall into the complexity trap A well-trained eye is more effective than a stack of indicators. Common
sense is more valuable than a backtested system.
18. Don't confuse execution with opportunity Overpriced software won't help you trade like a pro. Pretty colors and
flashing lights make you a faster trader, not a better one.
19. Don't project your personal life Trading gives you the perfect opportunity to discover just how screwed
up your life really is. Get your own house in order before playing the
markets.
20. Don't think its entertainment -

Trading should be boring most of the time, just like the real job you have
right now.
The Profitable Trader
Let's look at the differences between profitable and unprofitable traders.
Is it a question of experience, or are some folks just born with the talent
to play the markets successfully? How does risk tie in with profitability?
Are profitable traders more willing to make riskier trades?
Author Mark Douglas talks about three stages in becoming a profitable
trader. First you learn how to find promising trade setups. Second, you
learn how to enter and exit those positions at the right time. Third, get to
a point where you build equity on a consistent basis. The secret to this
third step is really no secret at all. You master the discipline required to
follow your methodology, plan or system.
Traders need to make an important choice early in their careers. They
can decide to follow a specific method that forces them out of the
market during unfavorable conditions. Or they can master a broad range
of skills, and then apply the right one at the right time. Neither approach
is right or wrong, but both require paying close attention to the profitand-loss feedback.
Most unprofitable traders rely on a poorly matched execution style, or a
good one they haven't mastered yet. Very often they fail to recognize
critical errors in their methodology because it was learned in a book, or
through inappropriate conditioning, i.e., making money on bad
decisions. Realize that profitable traders know all the weak points in
their strategies and exercise damage control at all times.
You can't understand your methodology until you analyze your profits
and losses. Identify its weaknesses quickly, and then decide if it really
works at all. You may discover that your whole approach to the market
isn't right for your lifestyle, emotional nature or long-term goals. For
example, you could be a scalper with the disposition of an investor, or a
daytrader who hates risk. Bad things will happen when your system
doesn't match your personality.
Traders hate to think about discipline. After all, it's not as sexy as just
becoming a market gunslinger. But the bottom line is that most of us

don't follow our own rules. This is ironic, because the folks who ignore
the reasons they lose money are the same ones who spend thousands
of dollars attending trading seminars. Personal discipline is the one
thing you can't learn sitting in an audience.
Discipline and money management go a long way toward becoming a
profitable trader. But let's be realistic. However you trade, you must be
confident in the positive expectancy of your style or methodology. This
poorly understood concept refers to how much profit you can
reasonably expect to make vs. each dollar risked on a trade. Gamblers
know this equation as the player's edge in a casino. The problem is that
most of us don't understand our strategy well enough to determine
whether or not it has a positive expectancy.
System traders use backtesting to gauge the positive expectancy of
their systems. Retail traders choose entry and exit without this
methodology, so they need to compensate through extensive recordkeeping and analysis of each trade result. Even so, they could be
fooling themselves into believing they have an edge in their pursuit of
profitability.
The sell side of the positive expectancy equation is more important than
where you buy. Research suggests that a very profitable system can be
built using random trade entry. Yes, you heard that right. It's possible to
make money in the same way as a chimp who throws darts at a
dartboard. But the hairy primate still has the same problem as the losing
trader: He doesn't know when to take money off the table.
Positive expectancy requires a robust exit strategy. But you already
knew that, didn't you? Volumes have been written about money
management techniques, such as cutting your losses, riding your
winners and trading adequate reward/risk. But somehow, losing traders
continue to outnumber profitable ones by a very wide margin.
One aspect of positive expectancy is more difficult to manage than any
pure numbers game. All trading styles experience drawdowns, and
profitable ones are no exception. Traders routinely abandon profitable
methods because they hate to lose money. They stop following perfectly
good rules because they aren't getting the instant gratification they want
from the markets.

If this all sounds like a big loop from the top of our discussion, it's meant
to be that way. Losing traders get stuck in a vicious cycle. They want to
profit from the market so they come up with a strategy to make money.
They trade the strategy until it frustrates them to the point they abandon
it and go looking for another strategy. In the process, they never take
the time to find out whether or not it had positive expectancy in the first
place. In other words, they don't let their methodology mature enough to
watch its real potency bear fruit.
Which brings us back to discipline. Sure, it's boring to plan the trade and
trade the plan. But it's the only way to break this losing cycle and get on
the road to consistent profitability.