Monday, February 13, 2006

Cardinal Rules For Traders

Trading Wisdom - Knowledge Then Application

Below are about 20 rules I'm sharing to trade successfully in the markets. Of course there are many more, but this is a start especially for the beginner to intermediate trader. Professional traders already know an even more important adhere and act on these rules.

Trading Successfully.

Choose the good positions and avoid the bad ones. Poor trade selection takes a heavy toll as it bleeds confidence and trading equity.

Planning & Discipline.

Without planning or discipline, amateur traders are just throwing money at the market. The occasional big score reinforces this easy money attitude but is a setup for ultimate failure. Without defensive trading rules, insiders easily feed off amateur traders and send them off to other hobbies.

Technical analysis teaches traders to execute positions based on numbers, time, and volume.

This discipline forces traders to distance themselves from reckless gambiling behavior. Through detached execution and solid risk management, short-term trading works for the well informed.

Markets echo similar patterns over and over again.

The science of trend allows you to build systematic rules to play these repeating formations and avoid the chase.

Forget The News - Remember The Chart.

Not all traders are smart enough to know how news will affect price. The chart already knows the news is coming.

Buy The First Pullback From A New High. Sell The First Pullback From A New Low.

There's always a crowd that missed the first boat.

Buy At Support - Sell At Resistance.

Everyone sees the same thing and they're all just waiting to jump in.

Short Rallies Not Selloffs.

When the markets drop, shorts finally turn a profit and get ready to cover.

Don't Buy Up Into A Major Moving Average or Sell Down Into One.

Again, everyone sees the same thing and they're all just waiting to jump in.

Don't Chase Momentum If You Can't Find The Exit.

Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble.

Exhaustion Gaps Get Filled. Breakaway and Continuation Gaps Don't.

The old traders wisdom is a lie. Trade in the directionof gap support whenever you can.

Trends Test The Point of Last Support Resistance.

Enter here even if it hurts.

Trade With The Tick - Not Against It.

Don't be foolish. Go with the money flow. The trend is your friend.

If You Have To Look - It Isn't There.

Forget your college degree and trust your instincts.

Sell The Second High - Buy The Second Low.

After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.

The Trend Is Your Friend In The Last Hour.

As volume cranks up at 3:00 pm don't expect anyone to change the channel.

Avoid The Open.

They see you coming sucker. Amateur investors and traders buy and sell at the opening. Professional traders wait for opening rush of buy and sell orders to calm down before executing a real trade plan.

1-2-3 Drop Up.

Look for downtrends to reverse after a top, two lower highs, and a double bottom.

Bulls Live Above The 200 Period Moving Average - Bears Live Below.

Sellers eat up rallies below this key long-term moving average line and buyers come to the rescue above it.

Price Has A Memory.

What did the price do the last time it hit a certain level? Chances are it will do it again.

Big Volume Kills Moves.

Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.

Trends Never Turn On A Dime.

Reversals build slowly. The first sharp dip always find buyers and the first sharp rise always finds sellers.

Bottoms Take Longer To Form Than Tops.

Fear acts more quickly than greed and causes the stocks to drop from their own weight.

Beat The Crowd In & Out The Door.

You have to take their money before they take yours . . . bottom line.

Knowledge > Goals > Plan > Action > Success

Obtain the right knowledge for the right market your trading. Set investment goals and money management risk parameters. Have a trade plan that includes entry, take profit and stop-loss targets before entering the market. Take action by entering the trade plan for automatic execution into the market or wait for the market to come to your buy and sell price to pull the trigger. Buying or selling at the right price is half the battle. Dumping losers at stop-loss targets before they become huge losers is the next most important rule. Next post I will go into detailed buy sell order strategies that will create more reward and less risk for your trading account. Stay tuned -