Here's the One Thing That Will Set You Above 99% of Traders...
The biggest obstacle standing between you and consistent success in the market?
It’s not your stock-picking talents. It’s not your market-timing skills. It’s not your luck or your choice of financial astrologers.
The biggest thing standing between you and consistent success is your set of trading rules and how closely you stick to them…
It’s all about rules– and your willingness and ability to follow them on every single trade you place.
But it does no good to follow your rules if your rules suck. So you need to have the right rules in place first. Then you need to stick to them.
Today I’m going to show you why you need a custom set of rules to guide you along your trading journey. I’ll break down some select rules of the most famous investors of all time and give you a short template you can use to build a list of rules that fits your trading style.
Here’s some reading material to get you started:
If you like investing wisdom, anecdotes and interesting lists, check out The Maxims of Wall Street by Mark Skousen. One of the final chapters highlights a variety of trading rules that can spark ideas for your own set of rules.
One of my favorites lists is Dennis Gartman’s 22 Rules of Trading. In case you aren’t familiar with his work, Gartman is an economist, trader and newsletter editor who’s been active in the markets for decades. I’m not going through each of Gartman’s rules today, but here’s a highlight to get you thinking:
“The objective is not to buy low and sell high, but to buy high and to sell higher. We cannot know what price is low. Nor can we know what price is high. We can, however, have a modest, reasonable chance at knowing what the trend is and acting upon that trend.”
Notice how Gartman’s rule is not only philosophical – it’s also comprehensive. That’s the most important type of rule you can add to your own list. It shapes your trading mindset and helps you avoid boneheaded mistakes that can occur when you succumb to your emotions.
Now, I want to give you three important rule templates you can use to develop your own list. Bear in mind that every trader is different. Some can tolerate higher risk, some are more active in the markets, etc. So it’s only natural that different traders have different sets of rules.
Still, I believe these three guidelines should become part of every trading philosophy. It doesn’t matter if you’re trading options every week or following broad, monthly trends. These tips will help build the foundation for your own trading rules:
Category No. 1: The Negatives
Every trader needs to know his limits. And that means you. So you need to ask yourself — what stocks should I avoid at all costs?
Maybe you think buying stocks below $3 is too risky. Or maybe you have volume requirements so you don’t get stuck in a name that’s too thinly traded. Perhaps you trade only domestic equities. Or you have a particular sector or industry group you prefer to avoid.
Whatever your preferences, you need to eliminate your negatives. It’s essential to know what you won’t trade – then put it in writing. I’m serious. Writing it down forces you to commit to your rules in a way you might not otherwise do. So if the market ever tempts you, you’ll be less likely to throw a bet down on a trade that you know, deep down, is a long shot.
Category No. 2: Nuts and Bolts
Now that you’ve written down your risk-related rules, how are you going to pick your stocks?
A majority of your rules in the nuts and bolts section will be geared toward helping you pick the best trades. Now, there’ll probably be some “negatives” in this group — such as “Never buy a stock right before earnings” or “Never let a winning trade turn into a loser.”
This section will also probably evolve with your market experience. You can even add rules about what kinds of chart patterns or breakouts work best for your particular trading style. For example: “Only buy a stock after it’s broken through a key resistance level.”
This part of the list will take a while to build– maybe years. But as it evolves, you should see the rules improving your winning percentage and overall gains. So start writing, keep the list in a safe place, and keep adding to it as you go. Don’t get lazy and stop doing it. The great ones don’t.
Category No. 3: The Personal and Anecdotal
The final category is for the off-the-wall rules that are part common sense and part emotional.
Here are some examples:
“Don’t trade for a week after you book three losses in a row.”
“Don’t ever buy a stock on Monday.”
“Always take at least partial profits when a stock is two standard deviations above its short-term moving average.”
Some of the rules I just listed might work for you. Others might not. It all depends on your trading style and personality. The main point to remember is these rules are bits of wisdom you might have picked up after making a bad trade or booking 10 winners in a row. They’re the ones that keep you in the zone. They can also keep you from losing your mind (and all of your hard-fought gains) when things aren’t going your way.
Here’s one last tip:
It helps to write out your rules by hand in a notebook. Once you have 10-20 rules you like, type them up in a list and print them out. Keep the rules at your trading station and add to them and make notes regularly.
Then write them out on the insides of your eyelids. No, don’t do that… But you should definitely record them in a notebook.
Every successful trader I’ve ever studied had his own personal trading rules. If you want to succeed in the markets, you need to emulate the pros by developing your own list of winning rules.