Profitable Stock Trading - 5 Rules To Trade By
January 16th, 2008 by admin
This article deals with establishing rules that will provide a disciplined approach to successful stock trading.
Before we start playing the “game” of stock trading, we need to establish some game rules. Without a strict set of rules to follow, we will let our emotions guide us and, especially where money is involved, that will virtually guarantee failure.
Although we may want to occasionally short stocks (sell a stock we do not own, for which we receive immediate cash, in the hopes of buying it back later at a cheaper price, thus pocketing the difference between the sales price and the eventual purchase price), here we will only be concerned with buying stocks in the hopes that the price will rise and we can sell them later for a profit.
Rule 1: only buy stocks (go “long”), not sell stock you do not own (go “short”).
Next we must determine how much money to put at risk, our initial account balance. It needs to be large enough to suffer some (even large) initial losses and not get wiped out. Too many traders have the right strategy, but lose everything before they even get started because they are underfunded. Had they started with enough cash, they could have survived the down draft and eventually made their fortune. Frankly, if you have less than $25,000 to invest, put it in four or five mutual funds or sector ETFs (exchange-traded funds). ETFs can be bought like any other stock, but they are a basket of stocks for a given industry sector and protect you from any one stock going under. Trading individual stocks is very risky in small accounts.
Rule 2: have a starting trading account of at least $25,000.
Stock trading can be a risky business (and it is a business, not a hobby, which is why our business needs operating rules). We should only trade money we are able to lose and not have it change our lifestyle or our relationships with our family and friends.
Rule 3: only trade money you can afford to lose.
Money management is critical, so we will never take an initial trading position with more than 5% of our trading cash. If the trade proves to be successful, we can double up on our position one time. By limiting the amount of cash we put into any one trade, we avoid the possibility of getting wiped out if one stock goes bad.
Rule 4: never put more than 5% of your trading cash into an initial stock position and never double your position more than one time.
We should only buy stocks that are in an up trend or reversing from a down trend to an up trend. We do not want to “catch a falling knife.” Stocks can go much lower (and higher) than we ever think possible, so we need a clear indication of direction (or a pretty sure sign of a reversal) before we make a buy.
Rule 5: only buy stocks that are in an up trend.
In “Profitable Stock Trading - 5 More Rules To Trade By” we will discuss the final five rules that will help propel us to stock market trading success. Stay tuned!
Erv Mrotek is a retired Information Technology consultant. Part-time stock trading allowed him to retire at age 57. Mr. Mrotek has successfully traded stocks, stock options, commodities and futures. He lives in the northern Arizona mountains where he still passionately trades stocks and runs the Stock Trading Techniques blog, which is dedicated to educating investors how to be profitable stock traders. The blog may be viewed at http://www.stocktradingtechniques.com/
Posted in Online-Stock-Trading, Share-Trader |