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Thursday, January 8, 2015

3 Unbreakable Trading Rules

Regular readers of my posts already know that I have a strong bias towards long-term investing. It is important for young investors to understand that short-term trading in stocks may seem fun and exciting – but those are precisely the feelings that lead to losses.

Those who enter the market for the first time often have very little capital to spare. Short-term trading seems like a quick way to make some money. Or, as a short-cut to acquire the latest object of desire – may be an iPad, or an iPhone. They soon find out that the stock market is not a place for making easy money.

Short-term trading is serious business. Most successful traders have spent many years in the stock market. They have gained experience by making mistakes – and have learned the hard way (by losing money) that trading is not fun and games. It requires a particular mindset and strict discipline.

In a recent article, Greg Guenthner (The Rude Awakening) wrote:

The stock market doesn't care about you. It doesn't care what kind of fancy degree you have. It doesn't care how many years of trading experience you have -- or how many complex techniques you use to pick your investments.

Got it? Ok, good. Because if you want to succeed in the market, you need to adopt that same spirit of indifference. You need to forget about your beliefs, emotions and hunches. In other words, you need a "trader's mindset"...

Greg also wrote about his ‘3 Unbreakable Trading Rules’:

1) Price is King – price action shows all you need to know about the market; don’t be guided by emotions, hunches or astrology. If the price action seems illogical and goes against your analysis – obey it anyway. Not losing money is more important than being ‘right’.

2) Don’t chase overheated stocks – particularly if you have been following a stock for some time, hoping to buy it on a correction and it suddenly flies away. Have the discipline to control your urge to buy. Wait for the next correction, or look for another stock.

3) Don’t let a trade turn into an investment – despite your best efforts, some trades will go against you. If you hold on, hoping to get back your cost – your short-term trade may turn into a long-term losing investment. Be ruthless about getting out as soon as your stop-loss is hit. That will prevent a small, short-term loss from turning into a large long-term disaster.

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