10 Trading Rules You Should Follow (for crazy annual returns)

Before I jump into my 10 trading rules, first a little background.

I started trading stock options just after the 2001 Dot Com bubble crash.  But it wasn’t until 2008 that I got serious. 

I saw trouble in the US economy brewing and asked my financial advisor to take all my positions to cash.  He tried to talk me out of such a move stating I was in the Market for the long haul.  He had used this same phrase over the years with each downturn and I would lose a large percentage of my portfolio that had taken years to build up. Enough.

I knew it was time to go our separate ways.  But I was confused about how to move forward.

I started educating myself attending workshop after workshop.  I went to lectures on trading, read books and finally dipped my toes into the trading world.  The smartest practice I started doing was asking each lecturer and every good trader I met, just one question.

“What one thing would you tell me to do to become a great trader like you?”

I got all sorts of answers and ideas.  It didn’t take long to realize I was hearing those same ideas over and over.  I started a list calling them My Personal Trading Rules.  I still use this same list today.  They work!

1) Trade with trend – Market/Sector/Stock.

The stock Market is huge -there are over 15,000 stocks you can trade plus over derivatives such as electronic traded funds (ETF) and Mutual Funds.  You would think that all these stocks would each have a trading pattern based on the strength of the company.  Not true.  The Market tends to trade together in the same cycles.  In other words, when the Market is going up most stocks are going up.  This is even more true when the Market goes down.  Most stocks are pulled down right along with the Market.

2) Match the right strategy with current market environment.

Sometimes the Market moves up gradually.  Other times prices are shooting up like a rocket taking off.  Then are times when there is no clear direction and the Prices are choppy up and down.  The trick to trading all these different looks is to first be able to quickly identify the look and secondly to choose the right trading strategy that will give you the greatest returns.

3) Never risk more than 2% on any one trade.

I learned a long time ago that the Market is a fickle mistress.  Learning how to control your risk exposure for each position you are in is critical for long term success.

4) Enter trades at support or resistance.  If you miss a trade, don’t enter.  It is OK.

There is no worse feeling than seeing a great trade two or three days late.  The worse thing you can do is start chasing a trade.  The ideal time to enter has passed.  Except it and move on.  There are a lot of great trades still to be uncovered.

5) Always know exits (target price, target time and stop loss) before entering a trade.

Would you ever plan a trip without knowing how to get to your destination?  Of course not.  Even if you are just driving around looking at the sights, you would have a general idea of the direction you’re going and what time you want to be home.  The same is true of trading.  Having a map or a plan is a good thing and is one of the most important of the 10 trading rules.

6) Never trade a tip.  Do my own research.

The very first trade I ever did was because my Aunt Bertha recommended the trade.  She was family and I trusted her.  The trade was a nightmare and when I asked her later why she recommended the trade she told me her insurance man told her about it.  One of life’s great lessons.  Before you trade understand why the trade is a good one – a bad one.

7) Be aware of earnings announcements.  Don’t trade around earnings.

All companies listed on the Market exchanges are required to publish the Earnings every calendar quarter.  These documents are certified by a Certified Public Accountant and included not only the financial statements but also the forward projections of how the company will do in the future.  There is usually a very strong reaction either a buy in or sell off based on the information revealed in the Announcement. Because we have no idea what the reaction will be or why, it is best not to trade around the announcement.

8) Review my positions nightly.

Trading does not have to take a lot of time.  But you do need to know daily how your trades are doing so you can enter or exit a trade timely.

9) Always take responsibility for my trading actions.

This is not only true of trading but of life in general.  You are responsible for all the decisions you make along the way.  There are times when your judgement will be off.  Blaming those decision on someone else is not productive.  When you make a bad decision, stop and learn.  I have found it is valuable to recreate how you should have traded a position so that information is front and center for the next similar trade.  Your thinking is then imprinted with the new information.

10) Make money, have fun.

If trade is not fun for you or causes undo stress find another why to make money.  Personally, I love numbers; I love the drama of trading; I love making money at trading.  I tell all my friends trading is better than any video game I could ever imagine. 

If you can follow these 10 trading rules, you will be set up for success and making returns like 100%, 200% or even 500% annually.

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