Trading Rules

On the road, the purpose of road rules is to protect our car and its passengers. In options trading, the purposes of Trading Rules are to protect our money.

It is simple. Follow these rules and your portfolio will be happy. Disregard these rules and you will lose money. 

Here are 9 simple trading rules that we never break! These are the invisible pillars that holds our entire practice in place!

source: Stan Weinstein's Secrets for Profiting in Bull and Bear Markets

You may want to click here for softcopy of Trading Plan 

Trading Rule #1: Cut Your Losses

In the market, the market makes the rules. The market does not negotiate with us.

When the market tells us that we are wrong, we keep our losses as small as possible by cutting our losses as fast a possible. The reality is there is no perfect trading system. Sometimes we are right, sometimes we are wrong. The market will quickly tell us that!

Trading Rule #2: Let Your Profits Run

Once our position is making money, we want to let it make as much money as possible. As such, we not cap to it’s profit potential. We just trail the money as far as we can go. This is important. In the trading game, these higher profits will cover any losses encountered.

Trading Rule #3: Follow the Trend

In trading options, we will be using Swing Trading. This method follows the trend. We follow the trend because that gives us the highest probability of making money.

Trading Rule #4: Don’t Overtrade

Here, we set money management rules and our financial road maps in order to risk as little as possible in the market ... to get as much out from the market as possible.

With options, it is possible to risk 2% to get returns of 15% within a 4 week period. This is because each option has the potential to give us 100% to 150% return on investment for every trade. This helps us to get as much out from the market as possible.

We set up money management rules to minimize our risks. For example, we will only have 4 open positions at any one time. If each position consist of 10% of our total capital, this means only 40% of our total capital is at work at any one time. This limits our risk. 

Remember, the market can turn against you anytime, so be prepared. Don’t overtrade.

Trading Rule #5: Don’t Listen to Tips

Using swing analysis, we get our buy and sell signals straight from the stock price itself. There is no need to listen to tips. Isn't that great? How many tips have worked in our favor anyway, really?

Trading Rule #6: Always Trade Liquid Securities

Liquid Securities are securities where there are a lot of buyers and seller who trade these stock options. If there are not many buyers and sellers trading these stocks, avoid these stocks options.

Think about it. If you buy them, you will have nobody to sell it to later on. If you sell them, you will have nobody to buy it from you later on. Either way, we lose.

Trading Rule #7: Keep Positions Small

We keep our positions small. For example, if there is a chance to invest in either:
(1) 10 contracts of AAPL options (following money management rule #1) or
(2) 23 contracts of AAPL options (following money management rule #3)

Following this trading rule, we elect to invest in Item (1), ie. 10 AAPL option contracts. We do this because Trading Rule #7 prompts us to keep positions small.

Trading Rule #8: Don’t Buy Something Because It Looks Cheap

As Options Traders who follow the trend, we do not do bottom fishing.

Case in point: Lehman Brothers (LEH). In September 2008, a lot of people invested in Lehman Brother when it was around an all-time low of $10, an unbelievable price for such an established bank! Four short days later, it crashed to zero. A lot of them were wiped out!

Trading Rule #9: Keep It Simple

Finally, we should keep our trading as simple as possible. In workable Swing Trading Systems, we only need 3 indicators to create your trading system. It is not necessary to get up to 8 indicators to create their trading system (yes, I’ve seen that before!). Simplify! Keeping it simple works!

Now, if you are a beginner in options trading, there will be a lot of information to soak up. That’s fine. Soak it all up first. But once you have soaked it up, it should become simpler. Yes, simpler.

The next step is to generate our Goals... what do we want to achieve in our trading efforts ...

Next: Goals ...