3 Unbreakable Trading Rules
The stock market is unforgiving.
It doesn’t care what you think. It doesn’t care how smart you are. No matter how many years of experience you have — or how many complex techniques you employ — you will lose money if you refuse to approach the market with a trader’s mind-set.
That’s why I’ve compiled three unbreakable trading rules for you today. When you begin to understand these simple rules, you’ll have the opportunity to drastically improve your returns — and protect your portfolio from crippling losses.
These rules are especially important in this market…
I’m seeing a lot of whipsaw action in stocks these days. The overall trend continues to point higher, but finding ideal entries for trades is proving difficult. You’ve probably noticed that the market is continuing its sluggish action this week as investors come down from their initial high from the QE3 announcement. Now — more than ever — don’t let the market fool you into making a bad trade!
Here’s how you can avoid getting burned:
1. Obey Price Action — No Matter What
For traders, price is king. Price action will tell you everything you need to know about the state of the markets. Everything else is just noise.
The minute you allow your analysis to drift away from price, you are vulnerable to bad decisions that will cost you money. Let’s say you believe the markets will move higher during the fourth quarter, thanks to the Fed’s money printing. I’m sure some of you will agree with this theory and some of you will not. That’s fine. There’s nothing wrong with having an opinion.
However, it would be a mistake to take this analysis to heart if the market began to move against you. That’s where you’d run into trouble. Instead of obeying price action and selling when the market proved you wrong, you’d instead insist that your analysis is correct and the market will soon “wake up” and prove you correct.
Nine times out of 10, the need to be “right” will end up costing you money. Price is your judge and jury. If you are wrong, allow your trade to stop out and move on to your next opportunity.
2. Don’t Chase Breakouts
My trading colleague Jonas and I have been discussing with our premium readers the lack of follow-through that we’re seeing from a lot of breakouts right now. We just haven’t seen much action after a stock’s initial push higher.
This type of action can lead to slightly longer holding periods than you might prefer for any given trade. We’ve had to adapt to the market that we’re in right now. Hopefully, we’ll see more confident buying out there, sooner, rather than later.
This is why you must be selective and stick to your trading plan. Don’t ever go “all in” and buy more shares than you should just because you saw a choice setup trigger. If you’re looking to hold a trade for a few weeks to a few months, you might want to consider waiting for additional confirmation before entering a trade. Intraday breaks aren’t holding up right now — and you shouldn’t rely on intraday action unless you are approaching the market with a very short time frame (day trading to overnight holds).
In summary, chasing breakouts will lead to more stopped-out and unsuccessful trades. That will lower your winning percentage and saps away your hard-earned gains. Be selective and patient to stay alive in this whipsaw market.
3. Identify Your Quick Trades vs. Core Holdings
You should never buy a stock without first defining your trading goals. I recommend placing your potential trades into two categories: quick trades and core holdings.
A quick trade is just that — a stock you plan to hold for a few days to a few weeks. On the other hand, a core holding can be a play on a much larger trend, such as the housing market recovery or the rising popularity of firearms. Trades in each of these categories should come with their own set of rules that work for you, along with the appropriate stop loss levels.
If you have set goals for all of your trades, you’re less likely to let a quick trade turn into a long-term hold — or take gains off the table too quickly in the case of a potential longer-term play.
If you look back on the last “bad trade” you executed, I can all but guarantee it went wrong because you bought out of excitement without considering all of the possible outcomes. The bottom line is a little planning can go a long way. Before you make your next trade, consult these simple rules to make sure you’re jumping into the market with the proper expectations and an open mind.
Greg Guenthner, CMT
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