Trading Rule of the week:
YOU MUST HAVE A SET OF RULES AND YOU MUST
FOLLOW THIS SET OF RULES.
Rule = one of a set of explicit or understood regulations or principles
governing conduct within a particular activity or sphere
Your activity or sphere is trading stocks…
*Seems obvious but most traders don’t have a set of rules that they follow.
*EVERY successful company has a mission statement, business plan, a code of
conduct, rules that employees must follow, etc…
*Why is YOUR TRADING BUSINESS any different? It’s NOT!
*So call them rules, your mission statement, your code of conduct, whatever,
just have it.
*Writing these rules down helps DRILL/ENGRAIN them into your head.
*Rules for IF this happens, THEN WHAT do you do?
*Rules need to become habit.
*Rules need to become 2nd nature.
*Rules need to become automatic
*Rules don’t have EMOTION (A LOT more on this in the upcoming weeks)
*YOUR set of rules needs to come from YOU. Sure you can learn from others.
You should try to learn from EVERYONE – even if it’s what NOT to do.
Ultimately your set of rules needs to work for you. What works for me may not
work for you…
So, how to you start to develop YOUR set of rules?
*Review your trades. Write down everything you did RIGHT and more
importantly what you did WRONG. Even right down things that happened
that effected your trading that you had NO CONTROL OVER.
*Rules developed from what you did RIGHT (habits you want to continue) will
be lower priority (lower on the list)
*Rules developed from what you did WRONG need to be top priority and
need to be AT THE TOP OF THE LIST. What you did wrong and what went
wrong need to be fixed.
Things I did right:
I followed Mike on his DRWI call (gap play) and made $764.
I will trade all of Mike’s gap plays that also meet MY criteria. (More rules to
follow on this one too)
Things I did wrong:
I DIDN’T HONOR MY STOP AND NOW I’M STUCK IN THIS.
RULE: I WILL ALWAYS HONOR MY STOPS.
Note: This was my #1 rule for about 6 months…
Things out of my control:
I tried to get into a LEU. I was a little late hitting the buy button and got a fill
.13 ABOVE the trigger price.
Rule: I will immediately kill the trade anytime I don’t get a fill I was expecting.
You need to have rules for the situations that are out of your control. More
*What do you do if you’re in a trade and you lose internet or your broker
freezes on you. Or worse yet, you lose power?
*What happens if you just bought a gap play on a low float stock with .20
spreads and the doorbell rings and you’re the only one home?
*YOUR set of rules should be prioritized. Mistakes you make the most should
be on the top. Once this rule on the top becomes second nature/habit, you
can move it down the list but it should always stay on the list.
*Highly recommend reading these rules DAILY before you place your first
*LEARN, COPY, STEAL, BORROW from other traders but ultimately YOUR set
of rules need to be your own and work for YOU.
Teaser for next week’s rule: You’re going to be wrong A LOT in this business.
In fact you may be more wrong than you’re right but you can still make a living
doing this. So, GET OVER IT.
YOU’RE GOING TO BE WRONG A LOT. GET OVER IT.
*This is a BIG, EMOTIONAL issue for traders. No one likes to be wrong – It’s
just human nature (study cognitive dissonance for more info). People take
things personally. You can’t take things personally in trading. You’re just not
that important and the market doesn’t care. Neither should you.
*How many people do you know that will easily, honestly and quickly say they
were wrong about something? Are you capable of doing that?
*If you’re going to be successful at trading you will be wrong ALL THE TIME.
Hourly, daily, weekly, monthly, etc.. You HAVE to be WRONG, it’s just simple
math… There’s not a single trader in the world that actually trades that is right
100% of the time. You can easily be profitable and be WRONG more often
that you are right (provided your risk/reward (aka: “R”) is executed correctly).
*This “not wanting to be wrong” manifests itself in different ways:
*NOT HONORING STOPS. Don’t want to admit that the trade isn’t
doing what you though it was going to do.
*NOT PLACING THE TRADE IN THE FIRST PLACE. Don’t want to admit
that you don’t have confidence that the trade is going to work in the first place.
*NOT STICKING WITH A TRADE. Don’t want the trade to come back
down and take you out so you sell it all now for a small profit (only to watch it
run another $1).
-Most of these boil down to confidence. Have the confidence to take the trade.
Have the confidence that if it hits your stop, you were wrong and GET OUT
NOW. You can always get back in. And have the confidence to stick with a
trade if/when it starts working like you thought it would. In short, have the
confidence in YOUR PLAYBOOK.
*Being wrong in trading is merely a cost of doing business. The losses you
incur will just offset your wins on your taxes. You can’t trade without being
TRADE! ONLY YOU CAN PUSH THE BUTTON.
*How many times have you said “Why didn’t I take that trade”
*How many times have you said “Why didn’t I just buy a few hundred?”
*How many times have you said “I’ll never miss a set-up like that again.”
You can’t be AFRAID TO TRADE. Sure, if you don’t trade, you’ll never lose
money. But guess what? You’ll never make money either. And I’ll argue that if
you don’t actively trade, you’ll never make a living.
So, why don’t you trade? What are you afraid of? You’re already over the
fear of being wrong (remember last week).
Why? Because you don’t have the confidence in your playbook and what
You have to build confidence. This comes with time. This comes with
repetition. This comes from learning from your mistakes. And this comes from
You have to find set-ups that work more often than they don’t. You have to
practice actual trading in these set-ups. Looking at charts after the fact can be
helpful but at some point you have to go “live” and actually trade. Paper
trading after the fact will not show your emotions, the spreads, the bad fills,
etc… Practice until it becomes habit. Practice until you don’t hesitate.
Even experienced traders can experience this after a few losing trades or a
bad day or two. You suddenly lose your confidence and you don’t push the
NO FOMO (FEAR OF MISSING OUT)
*FOMO – “a pervasive apprehension that others might be having rewarding
experiences from which one is absent” – thanks Wikipedia
*FOMO – This is the emotional reason behind WHY people chase stocks…
*You’re going to miss trades. In fact, the more active you become and the
more confidence you have in your playbook, the more trades you’ll actually
miss. This is because you’ll start to find more and more set-ups.
*You can’t chase. PERIOD
*If you miss an entry, you missed the entry. Just move on to the next trade.
*Now, if you’re missing EVERY trade you’re doing something wrong (maybe
your just afraid to trade) and you need to analyze that.
*How many time have you seen someone ask: “Is it still OK to buy XYZ
here?” “Here” being well beyond the entry – both in price and in time.
In short: NEVER CHASE.
Trade OR do something else (don’t do both)
*You’re either focused on trading or you’re not.
*Day Trading takes your undivided attention.
*This is even more important during the first couple of hours and critical if you
plan on playing the gapers. You have to be focused and ready with your
*Mute the phone(s) and any distractions that may interrupt.
*My dogs are trained around my trading schedule. Example: They power
nap from 9am to 11:30am.
*Tell your friends and family NOT to call you during your work hours unless
it’s an emergency.
*It’s very easy during the boring times (times you shouldn’t be trading) to drift
off and start doing something else. However, do you really want to put money
at risk if you’re not fully focused on the market and know exactly what’s been
*Do don’t have to stare at the screens from 7am to 7pm, you just need to be
hyper focused when you are trading…