Trading stocks isn’t easy. Let me start off by saying that. There are some traders that make it look easy and then there are others that look like a mad scientist in the lab. Everyone has a different style when it comes to taking profits and mitigating losses. It’s important to find your style in the beginning of your journey. Knowing this up front will help you understand your position in the market.
When it comes to trading stocks a lot of people forget that you are making a transaction with another individual and the broker is acting as a middle man. Buying shares at low prices usually indicates that the person on the other end is losing money. You have to consider, why is someone else willing to take a loss when you are just entering the market. On the other hand perhaps the person is exiting with profit and in this scenario we have to ask ourselves why this individual is exiting when we believe more profit is on the table.
Anytime I’m making a trade these questions are floating around in my mind. There is always doubt and I want you to know that this is a good thing. If you aren’t questioning your trades then you likely haven’t done enough research. Always be cautious because at any point in time the market can turn sour and rip your greedy little heart out.
In this article I’m going to lay out the three golden rules of trading and to be honest if you’ve done enough research these shouldn’t be new to you. Following these three key rules can help you stay in the green and prevent unnecessary losses.
Leave Emotions Out of the Trade
I can’t tell you how many times I had a “feeling” about a stock only to watch it crash and burn. Companies whose product I have been religiously in love with have burned me on the virtual trading floor. Too many traders get attached to stocks for no reason. It’s important to understand that the stock market does not love you. It does not care if you have a roof over your head and food on your table. The market is ruthless and it will take advantage of your puny human mind at any chance it can get.
Before you enter any trade you must go into it emotionless. You cannot care about the stock, the company, product, trials or what the latest cure it’s working up (looking at you biopharma). You have to become an emotionless robot when trading. Remember, you are here to make money so act like it.
Stay Disciplined At All Times
If you want to be successful you have to be disciplined 100% of the time. This second rule goes hand in hand with the first. The best way to be disciplined is to be an emotionless robot. When you are doing your research its important to have an exit strategy and stick to the plan. You need two exits just in case. A “in the green” and a “in the red” exit strategy. Set a strategy you are comfortable with, that means exiting profitable trades at a specific percentage gain, technical level or something you have come up with that works well for you. Same goes for losing trades, you need to be consistent in those scenarios as well, cutting trades at a specific percent loss or technical breakdown or something else you already had in mind prior to entering the trade.
Ignoring the Hype
Trading is different today then it was decades ago. The internet changed everything. Then the smart phone came along and changed everything again. Trading stocks from anywhere in the world on a small screen that fits in your pocket can be incredibly awesome or incredibly dangerous.
One thing I’ve learned is every stock is “goin to the moon”. Be careful reading anything about a stock. One thing for certain is nobody knows what is going to happen to a specific stock. The individuals who do know aren’t going to tell you and have long set themselves up for success before the action really comes in anyways.
I have talked to so many people who have fallen for the trap of Stocktwits. Hell, I’ve been knee deep into threads on there myself. You need to consider this entertainment only and ignore everything you read on there. In my opinion if you are a new trader you shouldn’t even indulge yourself with places like Stocktwits. It will only confuse you. People will say things that you want to believe when you are picking your plays. It will sway your opinion and it will break our first rule. Remember, we want to be an emotionless robot. A robot doesn’t waste time following Joe Blow whose avatar is another person’s Lamborghini.
These three golden rules of trading aren’t going to be easy to follow. You will be tempted and you will deviate. Start small with baby steps and once you are ready you will see that by following these simple processes it will help you become a better trader and a better overall investor.
Don’t just take my advice though. I’m a nobody. Go pick up any book on trading and see how the author describes some of the key ways to be a successful trader. You will find that all of these books have common themes and they all circle back to leaving emotions out of the trade, staying disciplined and ignoring the hype. If you can do this you will be one step closer to success.
Hopefully you found this post helpful. Feel free to share your thoughts in the comments or share any other rules that you like to use when trading.