The 10 Rules of Stock Trading are designed to help you make the most of your investments. If you don't follow a set of rules to maintain a disciplined and non-emotional approach to buying and selling stocks or options, there are no guides to keep you on track for steady investment gains.
Trading stocks can be exciting and rewarding, but without rules, the results will be chaotic and vary greatly. If no boundaries are set, anything can happen and the losses can be devastating. Don't take any chances when it comes to the money you worked hard for. Give yourself (and those dollars) some rules to trade by so you don't risk losing it all.
Here are some VERY IMPORTANT rules that should be followed when trading stocks or options. Below are 10 Rules of Stock Trading. Read them, understand them, and by all means don’t ignore them.
Rule #1: If you don’t understand how to trade stocks or options, don’t do it without learning how first. With computers and the Internet, it’s very easy to watch a few videos or read a few books on how to trade stocks and options. If you don’t understand margin trading, learn about margin trading before opening up a margin account. If you don’t know what a call option is, educate yourself on what a call option is before establishing a live money option trade.
Education is one of the key rules of stock trading. If at any time you have any questions about information or terms you see on this site or other sites, don’t hesitate to contact me or search for more information about them.
Rule #2: Don’t invest all of your money on any one trade! Only invest about 10% of your available trading capital at a time. Some people still think they see a BIG win and put all of their money into it anyway. This is called “Emotional” investing and is a sure way to lose a significant portion of your money. It’s just not worth it at this stage in the game. Using a set process for all of your trades will help you not become emotionally connected to your trades.
Rule #3: Reinvest 2/3rds of your winning profits back into your trading capital. Always set aside 1/3rd of your profits in a money market for year-end taxes on your gains. The other 2/3rds of the profits will help build up your trading capital, increasing the amount of money you can trade each time (compounding). This and with Rules of Stock Trading #4, the result is exponential growth.
Rule #4: You should add to your trading capital every month just like you are paying a bill. Have you ever heard ‘Rich Dad, Poor Dad’s Robert Kiyosaki say, “Pay yourself first?” What he means is that you must set an amount to pay to yourself every month (just like you pay a bill you owe on every month). Otherwise, what’s the point of making any money at all, right?
Well, instead of just spending that money on things you probably don’t need right now anyway, pay it religiously into your trading account every month. It can be a set amount or a percentage of your gross income. Either way, Rules of Stock Trading #4 will also help grow your account exponentially over time on top of reinvesting your profits.
Rule #5: If you have to spend more than one minute deciding on whether it is a good trade or not, don’t make the trade. I'm not saying to look at a stock for a couple of seconds, then trade. Rule #6 still applies. But on a chart, a trade should be seen immediately, without question. Don’t waste time trying to make a trade work. If it’s that difficult or if there are any questions at all, just move on.
Rule #6: Always do your do diligence research on every company you find to trade. After you find a stock that looks like a good trade, you MUST do your own research of that company. Check the sector for the stock, check for news on the stock, review the company’s financials, and look at what it has been doing on the charts. Make sure there isn’t a seriously negative reason driving a stock price low. If an entire sector is moving down, it’s not a good idea to buy a stock in that sector until the entire sector starts to shift back up. This also goes for what is happening in the overall market.
Rule #7: Always assemble your trade before taking action. You must determine everything about your trade before you make it (such as the risk, the exit point, and the size of investment you should make). Never buy until you know the risks involved (the maximum amount of money you will lose if the trade goes the wrong way). The best part is, you can control that risk and minimize your losses if it does go the wrong way by following Rules of Stock Trading #8.
Rule #8: Pick an exit point based on the stock's potential range or average true range and stick to it. Average True Range on a stock chart is how much, on average, the stock price changes over a period of time. An exit point is a hard stop placed immediately after a trade where you will sell your shares or exercise your option if the stock price goes the wrong direction. This minimizes losses on the trade.
Never, ever change your exit point unless your trade is in profit, then you can move to improve your exit position (more your stop up). Never ever move your exit point down any further than it is initially set. If it’s not a winning trade, take the loss at your exit point and move on, otherwise you will probably lose even more.
Rule #9: Find a proven system that works for you and stick with it. If you write everything down and do exactly what the system says, the system will work. If you change anything from what it tells you (stops, position sizing, etc…) you chance losing more than you are willing to accept. A system is designed to keep emotions out of a trade, maintain discipline, and give you the best chance at stock and option trading success.
Rule #10: If there is any doubt whatsoever, DO NOT EXECUTE THE TRADE. That means if the market is choppy and shows signs of a major correction or decline, you shouldn’t be in the market or should be looking for downward moves, not upward ones (this works with options). If you can’t find any information on a company you found with some potential, do not trade. It’s just not worth it. There are plenty of other stocks to make money with that carry a lot less risk.
With these 10 Rules of Stock Trading in place, stock and option trading can be very profitable and fun. The rules help reduce your overall investing risk, increase trading success, and make your entire experience with investing a good one.
Once you learn these rules of stock trading, here are the 4 Basic Rules of the Stock Market to help you understand the stock market and when to get in and out of stocks more efficiently.