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Trading Should Never Be
“Sink or Swim”As investors, it can be easy to just jump in the deep end and hope there’s a life preserver around when you need it. But trading
should never be “sink or swim.” That’s why I put together a list of my top five rules for everyday profitable trading.These rules are simple, and more importantly, they are designed to be easy to implement for any investment vehicle.
Don’t get caught making the common, classic trading
mistakes I see so many professional and non-professional traders fall victim to. This guide will help you avoid them and
give you a better understanding of how to make (and hold on to) money.Let’s get started with the most important rule for profitable trading.
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Rule #1: Never trade just to trade.
Having an itchy trigger finger can turn a trader into his own worst enemy. This is a classic mistake. I may even go so far as
to say that this is the most common mistake among professionals AND non-pros. When I’m at bat, I like to wait until I get a pitch
that is directly over the plate. I will never have a strike called on me for not swinging, but we must also assume that I only
get one chance to swing. It’s either an out or a hit, so I’d better make it count.Savvy traders know that there are times when the best action is to take no action. I never wake up one day and say, "OK,
I need to find a good play. I’m going to pour over a list of good stocks and pick my favorite one.” I know that it is best to
first get a good feel for exactly the way the stock trades before considering it a profit opportunity.We don’t think that a trader who does such a thing can have a good enough feel for the stock’s price action or for the other
major players who are controlling the stock’s price movement. The savviest players on Wall Street know several great companies
for months or years before buying the stock.
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Rule #2: Only buy when both the fundamentals and the technicals tell you to buy.
There are two stars that must be aligned: Technical and fundamental. If I purchase a stock, it is because the situation is such
that a smart technical analyst and a smart fundamental analyst would both agree that the time to buy is NOW.Generally, once I know that the company is well positioned from a financial standpoint, I then make sure that I have a good
understanding of what the charts are telling us.Then I get more detailed by checking who the major buyers, sellers and current shareholders are, evaluating their reputation
and confirming whether new major shareholders are entering the picture. Know your risk and keep it in check.
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Rule #3: Small profits never hurt anybody.
As long as I am profitable, I am happy. Remember, I only swing at the pitches that I love. I only stick with a position because
I think it has strong potential. I never stick with a trade because I have not yet achieved the profit that I want.The market doesn’t owe us anything! If anything, Mr. Market owes me a couple of losses. I never look a gift horse in the mouth.
Waiting for the profit that you feel is owed to you is another classic emotional
mistake and an emotion that makes a trader his own worst enemy.It’s just like holding a stock because you are down 5% and you only want to sell at a profit or at break even. Mr. Market doesn’t
know you and doesn’t care what you paid for the stock.I make moves strictly based on what the indicators are telling me and NEVER based on the price of the stock. If I moved based
on stock price alone, I would never hold a stock for a 500% increase.
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Rule #4: Welcome unsuccessful trades.
What the heck is this guy talking about? Don’t worry, this is not the "go down with the ship" philosophy. The rule
is simple: I might limit my downside to 7%, or I might cut my losses at 20%.Very often, I hedge my stock positions with stock option contracts that limit my downside to a few percentage points. My stock
screening system usually keeps me from buying stocks that get crushed.OK, I know that you can’t guarantee that a stock won’t take a beating here and there. And when I’m trading
options, we take an occasional beating. But if I’m right more than I’m wrong, and I make a lot more than I lose, then I’ve
achieved my goal.Some of the biggest winners that I have had – ones that have traded thousands of percentage points higher – have traded lower
first. If I hadn’t run them through my stock screening system, I would have limited my losses to 7% and, therefore, missed those
winners that mean the world to your overall portfolio.NEXT: Utilize options as a way to generate income in a
flat market.
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Rule #5: Utilize options as a way to generate income in a flat market.
You can take in additional income every month by selling covered
calls. Every month there are ways to have from 1.5%-7% of the value of your stock positions either deposited into your account
or sent to your home in the form of a check. Yet every single month, so many investors leave an absurd amount of money on the
table.It’s simple, really, and all that you have to do is take a few hours to understand it. IT’S WORTH IT!
To learn more about trading strategies and investing in a volatile market, check out:
