5 Trading Rules That Can Make You Rich

Trading rules can make you rich.

Your rules will keep you from wandering down the wrong path. They’ll maintain your sanity. And if you follow them closely, a solid list of trading rules will lead you to consistent profits.

Of course, you don’t have to take my word for it. Ask any successful trader and they’ll tell you they’ve concocted a set of rules that have helped them succeed.

It’s time to take action if you haven’t started making your own list of trading rules. I’m here to help you get started today by breaking down some of the key rules of one of the most successful traders who has ever lived: Jesse Livermore.

Livermore is famous for making (and losing) several fortunes over his lifetime. The “Boy Plunger” made his first millions betting against the market during the Panic of 1907. He then screwed up and lost 90% of his winnings almost immediately after on a botched cotton trade…

What went wrong?

Livermore admits he mismanaged the cotton trade because he broke several of his key trading rules…

Let’s learn from the Boy Plunger’s mistakes. Here are 5 of the rules that helped him bounce back…

1. Never average losses.

This rule is what caused Livermore the most grief with his failed cotton trade. He was so convinced the market would turn in his favor that he added to the losing trade several times.

I’ve railed against averaging down on losing trades before, calling the practice the biggest lie in investing. That’s because averaging down really means spiraling down.

Averaging down is throwing good money after bad. It’s usually a sucker’s bet. Instead of improving your situation you’re tying up even more money on a losing investment. That’s money that could have been put to use buying another winning trade.

2. The real money made in speculating has been in commitments showing a profit right from the start.

Look back at your most recent successful trade. I can almost guarantee that most (if not all) of them were strong right out of the gate.

A trade that’s green from the get-go can work wonders on your psyche. With gains on the books right away, you’re not worried about a flailing trade trying to fight its way back to breakeven. Instead, you have a position that has immediately confirmed your thesis. You’re then more likely to hold on for the bigger gains if you’re already sitting on profits…

3. Never buy a stock because it has had a big decline from its previous high.

Yes, turnaround plays are some of the most lucrative trades you’ll ever see. But you won’t hit a winner if you’re only buying because the stock is down big.

Downtrends can last a long time—longer than most folks expect. Snatching up shares of an ailing stock just because it’s cheap or has taken a beating recently is a surefire way to get in hot water.

When you’re looking for turnaround plays, make sure the chart is showing signs of life. Sure, you might miss the first leg of a comeback move. But you won’t lose a chunk of change by taking a chance with a stock that’s in free-fall…

4. One should never permit speculative ventures to run into investments.

Traders sometimes get attached to an idea. They like a stock so much that they just can’t sell when the trade hits their stop loss. Instead of admitting their failure, they reason that the trade is still viable for some other reason. Maybe earnings are coming up in a few weeks or the company is about to launch a new product or service.

So the trade becomes and investment. It’s sent to the long-term portfolio, where it will probably languish. Losing speculations should never turn into long-term drags on your bottom line…

5. Nothing new ever occurs in the business of speculating or investing in securities and commodities.

Your worries are the same as the worries folks had 10, 20 and even 100 years ago. Sure, the players change. But the game remains the same. The stock market is simply a pit of human emotion on steroids. Fear and greed will dominate markets whether it’s a group of real traders or dueling high-frequency algorithms.

There is no new paradigm. It’s never different this time. What worked for Jesse Livermore can work for you… if you follow your trading rules.

Sincerely,

Greg Guenthner
for The Daily Reckoning

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