Trading Rules I Couldn't Live Without

 

Nearly 10 years after starting this blog and almost 20 years trading the markets now, let's check in on some of my favorite rules and thoughts. It's crazy how quickly time passes. This one's going to be all over the place, fair warning. But hopefully in a good way and all useful. Yesterday I sat down at my desk with a completely blank slate and clear mind, no idea what direction I was going to go in, and just started rattling off everything I could possibly think of that I've found to be important or helpful over the past 20 years when it comes to all things trading.  None of this should be considered fact, it's just simply what I deem useful. Everyone needs to find their own truth and identity on this journey, but this is mine. Enjoy.   

 

1) Going to kick it off with the golden rule that never ever leaves the back of my mind, and the single most important skill that is crucial to this game: "99% of trading success is simply learning how to stay out of trouble, the other half is easy." Technical analysis is great. Fundamental analysis is great. Indicators are great. Charts are great. However all of it means absolutely nothing if you can't follow this one singular rule above all else. This is your top priority every single second of every single day you sit down to go to war with the markets. Master this, and the sky is the limit.

2) Don't put yourself in a box with your trading. Become diverse. Largecaps, midcaps smallcaps, long, short, red, green, blue, purple, it doesn't matter. Strive to learn about price action at its core, and to embrace contrarian independent thinking. The best time to buy a name is often when it looks weaker than ever. The best time to short a name is often when it look stronger than ever. Price action is a pretty universal language, and although it comes in all shapes and sizes, the underlying mechanism is the same and can be applied to a broad spectrum of names, large or small, long or short.

When I started out and for many years following, I identified my trading style almost entirely with smallcap short selling. It was (and still is) one of my favorite setups, however, it is far from the only thing I trade now, and it grows smaller and smaller every year. There are positives and negatives to everything. By only trading one type of name/setup, the positive is obviously you can become very good at them, anticipating and reading them, and maximizing gains on them. The negative is that this can lead to increased stubborness and where confidence can turn into poison. Also, you severely limit your ability to participate every day with a narrow list. I've found that by omitting a large majority of the market from your possilble trades each day, the lost opportunity cost of that limitation significantly outweighs the benefits of maximizing in a very specific niche. Also don’t confuse broadening your trading horizon with trading more. You should still always remain extremely selective, just do so with a wider lense. Don't limit yourself.

3) Check your ego at the door before stepping in front of any screens. In fact, don't even check it at the door. Take it behind the barn and shoot it. It must be entirely and whole-heartidly nonexistent, otherwise you're going to have a very hard time following the golden rule in point #1. 

4) If you're trading largecaps/macro stuff, understand that markets don't move in any meaningful, sustained direction based on what's happening now. They move on sentiment relating to what's going to happen moving forward. Outside of some very rare other occurances, uncertainty is the one weakness in the markets virtually impenetrable armor, that causes real selling. Literally just about anything else can be digested and will be shrugged off with positive outlooks. Remember, the stock market is the only game in town for the uber wealthy. If there's a huge selloff and they have all this cash now.....where are they going to put it? Under their mattress? Hit a strip club? No. It ends up right back in the market very shortly after usually in the form of rotated exposure, out of high beta/growth/risk names into safer ones short term, until dust settles and speculation rotation begins again. But it always goes right back into the market, nowhere else for it to go. If you were wondering why the S&P 500 chart since the beginning of time is just a 45 degree angle northbound, this is a simple yet effective way to explain why. "Don't Fight the Fed" For Dummies, if you will. 

If you're reading an earnings report, don't focus so much on the past quarter being reported, go read about the guidance and future outlook and the companies future plans, that's what will dictate price moving forward. You can use this to your advantage and be two steps ahead of the large majority of retail by thinking this way, and align yourself much more with institutional players and ride that wave. 

5) If you're short, no, it doesn't have to stop going up. If you're long, no, it doesn't have to stop going down. Act accordingly. 

6) If you're having problems in life, you're going to have problems in trading. Come to the market with a clear head and emotionally net zero, or don't come at all. 

7) Be properly capitalzed. If you're trading with money you can't afford to lose, consider it gone you've already lost it. Putting that level of pressure on yourself will never lead to good, sound deicison making, ever. This game is hard enough as it is with a 90%+ failure rate, don't stack the odds even further against you with avoidable things. Come back when you've got a little disposable income, it will yield far better results. 

8) If you're brand new, start out with a small account. $5000 or less. And blow up a few of them. That's correct, my suggestion is that you lose some money. It will teach you more than you could ever hope to learn in a book or a video or a course. Those things have their place, but not for the mental side. You can not listen to someone warn "Don't do this" to actually recieve the message. It needs to happen to you, then it will mean something. The school of hard knocks is the best teacher of all in trading. And blowing up a few small accounts is the most effective form of tuition. I blew up quite a few of them myself, and I wouldn't change a thing about that. I carry every single one of those lessons with me to this day, and they’re invaluable core memories you can’t acquire anywhere else. 

9) If you find yourself emotionally attached to a trade at all, close it. It will make you do foolish things. 

10) If you find yourself scrolling through Twitter or any other type discussion board, looking for reasons to help you feel better about staying in that trade in your intended direction, close it. That's a loser. 

11) Short term, whatever CNBC says to do, do the opposite. With the exception of "Buy Nvidia" - even they can't be wrong about that. 

Anytime there's a CNBC "Markets in Turmoil" Special, buy everything you possibly can the next trading day. 99% of the time, it works every time. They are not inherently bad people, they're just talking lemming heads paid to read a script and push the narratives of the powers that be. Not their fault, just doing their job. But it can largely be used to your advantage if you understand what's happening. There's a place for CNBC, it's quite useful for gauging general market sentiment, and for breaking news and financial numbers. But it ends there, don't use it as financial advice.  

12) In trading there is no elevator up, only stairs. Pay your dues, work hard, and walk them. There is however, an elevator down. Don't get on that, follow rule #1. 

13) If you read a tweet or idea from someone else, and join the idea immediately without verifying anything for yourself, red flag. You're not ready. Come back when you develop your own thoughts. You can carefully watch how those ideas play out and ask yourself why and be curious, but it should stop there. Your capital is the most precious thing you have, and it doesn't go in the pot unless you know exactly what's in said pot. Otherwise you're just smoking pot. 

14) Being too early is the same exact thing as being wrong. There is zero difference. Don’t talk yourself into thinking “I’m just a little early here”, talk yourself into reality: “I’m wrong.” and act accordingly. 

15) "Confidence is the food of the wise man, and the liquor of the fool."  You need confidence, no doubt. You need conviction, no doubt. However there is a fine line there, where it can go from helpful to harmful. Don't ever for a second believe you know more than the market. You do not. Confidence is fantastic, but don't let it impede on your risk management rules. Nothing trumps those. 

16) Overthinking will kill you. Perfectionism will kill you. Perfection in trading is learning that there is no such thing, and becoming perfectly imperfect and malliable is in and of itself: trading perfection. 

17) Try and be cognizant that when you are at your highest, is when you're most vulnerable. Big winning trades are fantastic, but dangerous if you don't reign it in and reset. Not every day is a home run day. If you're used to making $100 a day, and then you make $1,000 one day, it's very, very easy to convince yourself  "Ok now I'm going to try and do that every day." It feels amazing to have a way bigger than average day. It's very, very easy to become dissatisfied with $100 after seeing $1,000, it's human nature. Fight this with every fiber in your being. The biggest losses often come shortly after the biggest wins if you're not properly managing yourself and your reality. Never get off the stairs on the way up, because the elevator cable can snap at any moment. 

18) If you are unsure about your trading in any way or in a slump, try avoiding the first 30-60 minutes of the day. I do this a lot even if I am in a good place. Letting the crazies trip over eachother out of the gate often reveals some of the best inefficiencies and trade opportunities. Look to capitalize on the impatience and greed of others, not creating your own. 

19) Never set stops at obvious key levels, ever. Market algorithms are literally engineered to send names directly to and/or through key levels and shake inexperienced/emotional traders out. If you're not at a discipline level you're happy with, use hard stops slightly beyond those key levels. Ultimately, you want to get to a point where you're not setting hard stops at all, understanding how price fakeouts behave at those key levels, and making intelligent decisions in real-time in those scenarios.

20) "I am going to trade well today" should be your only goal. Not "I'm going to make money today." Money comes in the fastest when you stop looking so hard for it. The second you try and force the market to pay you, you're going to lose. 

21) Beware of all "Gurus". 99% of them are bullshit. If someone is typing with a lot of exclamation points or caps lock and letting you know 20 times a day "We alerted this to members 50,000% ago BOOM!!!!!!!" They are the biggest donkeys on the planet. Run. Or even better, look to fade their ideas. Not sure if it still works, but there is a very well known chat room with thousands of members where myself and a group of guys would sit in, and literally just wait for them to alert a stock to buy, and immediately short it. And it was gold. Most chatrooms are like this. There are VERY, very few legitimate rooms. I always sat in Investors Underground, it's filled with real guys and real thoughts, and a great source of information. That's where I met almost all of my trading buddies that I still talk to this day. I'm sure there are a select few other rooms out there that are good, but this one I can speak to personally. 

22) It's not for everyone, but try taking unrealized PnL off your screen in trades. This will force you to trade with correct size and correct plans, and free you up to pay attention to the chart and stay in the moment, rather than worrying about what you're up or down and your mental bandwidth being entirely consumed with "avoiding disaster." I very much enjoyed this change, give it a shot and see what you think. 

23) Win rate is irrelevant. Average winning trade vs. average losing trade is the metric you should constantly be striving to improve. If you focus on that, the rest will take care of itself. Absolutely nothing wrong with being wrong. Just do it quickly, and move on. 

24) Practice does not make perfect. Perfect practice makes perfect. Spend minimal, or even better, zero time on a trading simulator. It's not helping you nearly as much as you think. You're trading with zero emotion and zero financial consequence, a complete fairy tale and can honestly only create bad habits by doing this in my opinion if anything. As soon as physically possible, open a small real account, and lose some real money. That's the quickest path to improvment. 

25) Create some sort of additioal income stream in your life to compliment trading. If trading is the only thing you've got, it's quite a bit of stress and pressure. That will weigh on you over time if you've got nothing else. Nothing frees up your mind and abilities more than having insurance to fall back on and pay the bills with. 

26) Study yourself and human psychology, it's more important than anything else. You understand far less about that than you do about charts, analysis and setups, and that's a problem. Master yourself.

27) Learn to be fluid, not rigid. In everything. For trade plans, don't make them down to pennies super exact and precise, the market isn't an exact and precise game. Make them down to specific areas  for risk levels and profit taking exit levels, but never precise. You'll drive yourself mad.  

28) You can't control or force the market to pay you. You can however, force the market to stop taking your money by stopping out. Focus on what you can control, and don't try to force what you can't. 

29) The harder you try to shorten your path to trading success, the longer it will become. 

30) Doing nothing is often infinitely more profitable than doing something sub-par. Every dollar you lose, you need to make back twice as much just to move forward. Think about that next time you enter something you don't feel great about.

31) Don't fill your charts with 500 lines and indicators and bells and whistles. There is a massive rate of diminishing returns there in my opinion, find 2 or 3 things that matter, and learn every possible thing you can about them and how they can influence/predict price action. For me, I have VWAP, the 20 period simple moving average, and a linear regression channel. That's it. Not saying those are the only 3 useful tools out there, they're not, but I find I don't need anything else. Less is more. 

32) Learn how to read an options chain. You don't necessarily have to trade options if you don't want to, but understand how to read it and the implications tied to it. There are extremely useful clues you can spot in a stock's option activity to give a more clear picture of who might "get lucky" (aka know something), and what sentiment there really is. 

33) The amount of size you take in a trade should be directly proportional to the float of the stock. Lower the float, lower the size. Higher the float, higher the size.

34) When it comes to shorting penny stocks, yes, gravity always wins, but they can defy it for MUCH longer than you'd think sometimes. Never forget that's always a possibility. Papercuts, waiting, and re-entries are a sure fire way to slay them consistently. Any other method may work for a while, until it doesn't. 

35) 99% of trading success is simply learning how to stay out of trouble.

36) 99% of trading success is simply learning how to stay out of trouble.

37) 99% of trading success is simply learning how to stay out of trouble.

38) 99% of trading success is simply learning how to stay out of trouble.

39) 99% of trading success is simply learning how to stay out of trouble.

40) 99% of trading success is simply learning how to stay out of trouble.

Alright, that's what I came up with. I'm sure I missed things, but I'm also sure I'll do more of these that was enjoyable to reflect on. Hope it was helpful. 

Trade em well! 

- D