Your Trading Success Relies on Rules
It’s not about your winning percentage. Or your education. Or even the time you put into developing a trading system.
The only thing standing between you and consistent success is your list of trading rules (and your willingness and ability to follow them on every single trade you place).
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 a few select rules of some of the most famous investors of all time — and I’ll even give you a short template you can use to build a list of rules that fits your personality and trading style.
First, let’s take a look at some great examples of trading rules. If you like bits of investing wisdom, anecdotes and interesting rule lists, I recommend checking 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 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 has been active in the markets for decades. Now, I’m not going to go 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 thorough. These are the most important rules you can add to your own list. They are the ones that shape your mindset as a trader and help you avoid mistakes that can occur when you succumb to unprofitable emotions.
Now that you have an idea how these lists of trading rules can evolve, I want to give you three important rule templates to add to your own list. Of course, every trader is different. Some can tolerate higher risk, and some traders have more time on their hands — and are more active in the markets. So it’s only natural that different traders have different sets of rules.
Still, I believe these three guidelines should work their way into your 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 of your own list of trading rules.
Category No. 1: The Negatives
Every trader needs to know his limits. So you need to ask yourself — what stocks should I avoid at all costs?
Maybe you think buying stocks that trade for less than $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 get your negatives out of the way. It’s essential to know what you won’t trade and to put it in writing. That way, 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 stocks to trade?
This is the category that will make up the majority of your practical rules. It will also evolve along with your market experience. Now, there will be probably be some negatives in this group — such as “Never trade in front of earnings” or “Never let a winning trade turn into a loser.”
However, a majority of your rules in the nuts and bolts section will be geared toward helping you pick the very best potential trades. You can add rules about gaps, volume confirmation or even what chart patterns work best for your particular trading style. The possibilities are many.
This part of the list will take a while to build — maybe as long as several years. But as it evolves, you should see the rules helping you improve your winning percentage and overall gains.
Category No. 3: The Personal and Anecdotal
The final category is for the off-the-wall rules that are part common sense, part emotion — and all personal. 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 are the ones that keep you in the zone — and help protect you from making common emotional mistakes.
Start Writing Today
Now that you know how you should lay out your trading rules, you need to begin right away. It helps to write out potential 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.
Every successful trader I have ever studied had his or her own personal trading rules. If you want to succeed in the markets, you need to emulate the pros and develop your own list today.
Greg Guenthner, CMT
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