MY 6 GOLDEN RULES FOR TRADING
The short-term trading portion of our portfolio has been somewhat active lately. More active than taking on anything
in our long-term portfolio, for sure. I think it's a good time to go over some short-term trading rules that use to keep
me out of trouble. Next time you wonder why I pass on certain trades and take others, it will more than likely be
rooted in one of these rules. In no particular order of importance...THE RULES:
1. Avoid the first half hour of trading. Trades in the first half hour of trading are few and far between. There are a ton of quant robot traders out there who make a living off of the first half hour alone due to the fact that it is filled with so many fakeouts, whipsaws and generally shitty trading conditions. I keep my distance from the first half hour for this reason.
2. Volume is everything. There are many solid patterns that I will pass on when the volume isn't there. The more volume you have behind a move, the more chance it has of turning into something solid. Truth be told, volume and the ability to understand price patterns is all you need to read the charts successfully. Most everything else is wasted pixels.
3. Gaps make things tough. If I'm looking to go long or short a stock and it gaps over my price trigger, I will generally back off. Sometimes the stock will keep running and I will be kicking myself for days. However, most of the time it ends up working out. Case in point: FTK today. I released FTK as a play on "The Gun" last night. It gapped way over my price trigger this morning and closed the day at its lows, far below the opening gap. For every one gap that ends up running 20%, there will be nine others that do what FTK did today.
4. Avoid crowds. If a lot of traders are looking at the same trade I am, I become skeptical right away. One of the golden rules of investing is that you have to go where others do not tread. If you have a lot of company on a trade, odds are you are going to lose money. Why? It makes the price movement sloppy. It makes a mess of normally neat, tidy patterns. It goes against the very essence of the market, which is best summed up as: I want to kill you. If you have a ton of sheep running along side you, it makes you a very easy target for a blood-thirsty market.
5. Physical stops are for losers. It makes you a walking target. Your stops will get run. Don't let the market makers or specialists know where your "uncle" point lies. This game is already rigged against your favor enough, why give them one more edge?
6. Have a time stop in mind. An example of executing on a time stop came today. I sold N around mid-day. It had been several trading days and the stock was sitting at more or less breakeven for us. If a short-term trade doesn't get off the ground in a few days, I take that as a sign that I may be wrong. I am, after all, trading off of patterns. If a pattern has any relevance, then the stock I am trading should respond to it within a few days by either moving way above the pattern or reversing back into or below the pattern, causing me to stop out of the trade.
That's the first 6. I'm sure I have more, but can't think of them at this moment. As I remember, I will update this segment with more rules.
Generally, I am very anti-rule for a lot of things. I don't like rules. I never have, and probably never will. However, in the markets, you must develop a set for yourself. If you don't, it becomes one of those things where if you don't believe in something, then you'll fall for anything.
Get your rules right and the profits will follow.
