Stock Trading Rules
At Stock Legends we want our followers to be as profitable as possible so we took the time to put together some basic trading rules for you to follow. We hope that you will use these trading rules to assist you in your trading to become more profitable trader.
Mastering Your Emotions
Mastering your emotions is likely the single most important concept that you will need to develop to be a successful trader. Humans drive markets, and when people rely on their emotions to make trading decisions they usually end up in A disaster situation. Markets are primarily driven by two basic human emotions, fear and greed. Mastering your emotions will be your most difficult task and you will not be successful until you master this rule and these other basic trading rules. There are rules to follow in every successful venture and these trading rules are no different.
Fear and Greed
Warren buffet said be fearful when others are greedy and be greedy only when others are fearful. There is a lot of truth to this statement, and all too often we allow emotions to make our decisions for us. If we operate on that basis of allowing our emotions to rule our trading decisions and ignore the basic trading rules, we will usually end up out with loosing trades most of the time. The key to being successful at mastering your emotions is to develop and write down a trading system that works for you, meaning your own personal strategy, and most important, to follow your system guidelines and these trading rules. If you put emotions aside, and simply focus on your strategy, you will dramatically increase your success. If you find that certain aspects of your system are failing, refine it and make it work for you. Most importantly over everything else is to take a few minutes each day and read these trading rules. They will assist you exponentially.
Make sure you are familiar with both Technical and Fundamental Analysis.
Technical Analysis is using price, volume, support, resistance, moving averages, trends and many other indicators to determine a price forecast.
Fundamental Analysis of a business involves analyzing financial statements and health, its management and competitive advantages, and its competitors and markets.
Make sure you are familiar with both, as the more tools and knowledge a trader has in their disposal, the more successful they will be. If you can find a common ground between both of these forms of analysis you will be a more well-rounded trader. Look for good technicals, good fundamentals, and stick to the trading rules!
Patience is an important rule and can be broken down into 2 scenarios.
Selling too early can be the first mistake. Sometimes we get tired of holding a stock that we feel is climbing too slowly and seek for more profitable opportunities elsewhere and we sell too early. Before selling, look back and consider what risks you took when you originally made the entry. What costs were involved (broker fees). Ask yourself what uncertainty was there in the technicals and fundamentals at the time of your entry compared to now. Sometimes we fail to consider the risks we took of making that entry and overlook the opportunity at maximizing profits. Consider a stock may be slowly building momentum, and may increase over time. Although it is not a bad idea to take profits at any time, sometimes we lose sight of the future. On the opposite side of the coin, holding a dying stock can also become a skeleton in the closet. This is one of the most important trading rules there is. Cut your losses! the first rule to trading stocks is not to lose, a well-timed entry will put you in an immediate green position. Study this rule, if you are sitting red you either hesitated and now you are holding a bag or you missed a crucial piece of the puzzle while you were in your research phase. Remember these trading rules and especially the one just mentioned.
Buying on dips can be a great strategy but we also don't want to end up catching a falling knife meaning a dropping stock. A good example of this would be watching a stock price dramatically decline in value. A typical trader may feel the price may be oversold, and then watch their trading account also collapse after making a entry too soon. In most situations it may be best to wait and use technical indicators to determine if a bottom has been confirmed before taking an entry. Also always remember in most situations you can get out of a stock with liquidity in an instant. Don't allow the stress of a red stock to take control of your trading. This is one of the trading rules mentioned above. These trading rules need to be your bible, read them daily, make them part of your trading personality. Do not get trapped by the hype or emotions of the trade, always remember other traders will seem the most excited about a stock when they are trying to sell. Until you understand the psychology and these trading rules this can be a very confusing time.
Runners are stocks that run up in price. They can last anywhere from a few short minutes to several days, weeks or even years. The problem with trading them is that they are typically noticed by most people when the top is in. This is clearly a problem for those that decide to buy at the top. So what is the best strategy when trying to trade a Runner?
Get in early. When a Runner is first observed, the biggest mistake to make is waiting too long. Too many times we watch them go by, and say 'well I better jump in before it's too late.' By that time it usually is, your order is filled and the stock starts to reverse. If you had gotten in early, you could have been out near the top. It is always better to put in a stop loss and break even then to hold and end up red. If you are trading without a day trading account this is ok! You will be allowed four round trip trades per week. If you get in and out of one and break even give it another try another day. Do not convince yourself that you have to always be in a stock! This one of the major trading rules and will be a samurai death in your trading career.
Selling during a price run can also prove challenging. We all want to see higher prices, but the reality is that good times never last forever and eventually sellers come in and will take the price down. The key is to get out at the opportune time when the upward volume is still high. A trader can utilize various tools such as level 2 stock quotes which will give you an indication of the current supply and demand of the shares. When sellers begin to line up, clearly supply is outweighing demand and you can take your profits then. You can also use a combination of technical indicators or you can set a stop-loss. Whatever method you decide to use, determine it before you make your entry so you know when to take your exit. A professional trader will always buy his shares on the bid and sell them at the ask with smaller more consistent profits. We have all seen big 100% gainers, but would you rather lose 50% on 5 trades in a row in search of one 100% runner? One of the most important trading rules is that steady profit.
A stop-loss will lock in your prices, so when selling begins, you are taken out of your trade with a profit. Make sure the spread in your stop limit is large enough so that your order does not get skipped. This trading rule is important, if your stop limit order is skipped because only a market order is guaranteed you can find yourself in a panic position with no easy button. As one of the general trading rules you should set a stop on all orders immediately after a buy order is filled. Stop-Losses minimize risk, and the stock market is all about managing risks. This will lock in profits and minimize losses. Depending on the exchange you are trading on, you may not be allowed to set a stop-loss or trailing-stop order. For these instances you will need a 'Mental Stop' and is where you need to master your emotions once more and say to your-self. 'If the price falls to this level, I will exit my trade'. What we learned to do in these types of situations is to draw a line on the chart, once it hits that line you sell with no hesitation. No one is watching you; it is just you and the market. Have no fear. This is one of the most important trading rules. All too often we hold a losing trade and hope and pray that it will come back. We will be the first to tell you that we are all very religious, but the stock market is one of the few places God does not take part in. Praying won't help you here. This is rarely the case, and we are best of to follow our initial stop-loss trading rules.
Bounce plays typically occur in 2 ways.
A stock that has just ran up very quickly in price a lot of speculation and buying comes into effect here. Eventually, selling begins to take over driving the price down creating a panic as traders scramble to get out of a falling stock. This occurs as a lot of people are in a panic, and are selling based on the fear emotion and a perfect time to be greedy. The stock will eventually reach a bottom and then bounce some nice gains. One of the most important trading rules is to buy the fear and sell the greed. Sell into the volume and buy on the bid into the fearful selling once you are sure a bounce is coming into effect.
A stock has been trading sideways for a number of days or weeks. Next a negative news release or panic selling/short selling triggers a panic, the stock begins to sell and again, same rules apply as above. Emotions come into play, for fear of losing everything if they don't sell, and the stock at some point is oversold. I personally am not interested in holding a stock trading sideways, one of the best trading rules is that quick consistent ins and outs ensure a green portfolio. This is just my trading strategy though, what it yours? How will you incorporate these trading rules into your own personal trading strategy?
Learn From Your Mistakes
Everyone wants to become a professional trader and make profits to become successful. The day you stop learning from you mistakes is the day you will diminish your profits and ultimate goals. In all likely hood you will make mistakes, don't be afraid to accept this as a reality as this one of the most important trading rules. Do not be afraid to make mistakes, accept them, learn from them, and grow as a trader. Make sure your mistakes do not cost you dearly, minimize your risk while learning these valuable mistakes. One of the best trading rules to be taught is to continue to grow without being taken out of the game and losing your trading account. These trading rules are simply guidelines to assist you in minimizing the costs of your mistakes and to help you ultimately avoid the detrimental ones. Live by these rules, formulate your own personal strategy, and take names!
Become a Legendary Trader!
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