STOCK MARKET FOR BEGINNER | Stock & Option Guide

If you trade for a while, you will see a lot of rules lists. These are guidelines put together by individuals so they can attempt to, bluntly stated, avoid screwing up like they have in the past.

There is a lot of overlap among rule lists, and most of these lists aren’t worth much, particularly in cases where they comprise dozens of different rules. On reading these, one can conclude the writer of the list has made a glittering variety of errors that he believes he can circumvent if only he has a lengthy-enough document to follow.

I’ve got my own list, but it is short and sweet. Like all rules writers, I ignore some of them from time to time, and virtually every time I do, I regret it.

It has cost me a huge amount of money to formulate these “trading laws”, and I offer them up – as I do everything on this blog – for free, with the hope that it will help some of you. If one day I can follow these rules absolutely consistently, I’ll be a much richer trader for it. Behold:

Opening Bell - no new positions should be initiated in the first 30 minutes of any trading session. There are an astonishing number of pre-opening orders, and in my experience, I have found it better to let all the open bell excitement die away before getting into any new positions.

Advantage - only enter into a position which provides you a significant advantage of reward versus risk.

Sizing - position sizing must be consistent among instrument types irrespective of anticipated opportunity.

Stops - a stop price must be in place at all times for all positions.

Freshness - positions should be regularly updated for the sake of updated stops.

Exits - the only acceptable exit is either being stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes.

Emotional Awareness - use emotional awareness to your advantage, understanding fear often accompanies reversals in your favor and hubris often accompanies reversals against your positions. My state of mind, when trading, will be carefree and fearless, and my total focus will be technical considerations and I will only trade what I see.

Following these rules consistently isn’t easy. But every year I get a little better at it, and every year I do better in my trading. I urge you to consider making these rules an important part of your trading life.