5 Trading Rules You Should ALWAYS Follow
Dear Penny Stock Millionaire,
Within the last week, I told you I was going to cover my number one rule, cut losses quickly in detail over the next few days. With so many supernovas, and the stock market volatility sky high this is an especially important lesson.
I’ll share some tips — or even better, some universal rules of trading stocks — that you should always follow when entering a position.
#1 Control Your Emotions
Keeping your emotions in check is probably the hardest part of trading. This is a mental game.
And controlling your emotions applies not only when you’re executing a specific trade, but all the time — especially when you have to deal with a losing streak and need to turn your losses around.
You must develop a mindset where you assume that losses are a part of your journey, and you learn from them to get stronger.
The best traders I know master their emotions first, so they can come to the market every time with the right mindset.
The first step toward keeping your emotions under control is to come to every trade well prepared with a solid plan, knowing full well that a loss could happen. It’s something expected.
Heck, I only win roughly 70% of the time, so I learn from the 30% of my losing trades.
Remember that this is a marathon, not a sprint — and during the course of the marathon, there WILL be setbacks. There will be failures, and you have to learn to deal with them to overcome them.
But guess what? They’ll help you in the long run. They’ll mold you. They’ll play a big role in developing your character as a successful trader.
#2 Don’t Trade Too Big
Another important rule: Never invest more than you can afford to lose.
You need to protect your capital. So only trade with amounts that you truly feel comfortable with.
If you can’t afford to take a loss on your trade, don’t make it in the first place! This is one of the 10 most important trading rules every stock trader must live by.
When a trade goes wrong and hits you more than you can afford, it slams your confidence, and you won’t be able to take advantage of the next truly hot stock that comes your way — so play it safe.
Your goal is to continue trading over the long term, so protect your account.
#3 Don’t Chase Your Losses
I plan my trades ahead of time, considering each risk/reward ratio and keeping every single trade on a very tight leash. I insist on limiting my risk in every trade.
But what do you do when the trade goes against you and can go beyond your risk?
My answer probably won’t shock you: You must be ready to cut your losses immediately.
I’m always prepared for things going wrong. No exceptions. You must always consider the possibility of being wrong; that’s part of the game.
Don’t get all ‘deer in headlights’ if the trade goes against you — just have a plan and stick to it.
Yes, it’s really that simple!
Sometimes, trades will run against you a bit and that doesn’t mean you have to cut them immediately. You might want to give it a bit more time, but that’s only if the trade is within the range of your plan.
But if the stock goes out of your planned risk zone, that means it has hit your stop (mental or otherwise), and it’s time to kick it to the curb immediately.
Don’t chase losses, OK? Don’t be in a position where you have to chase your losses while simultaneously being completely baffled about what to do. It’s a horrible position to be in and I don’t want it to happen to you. Just cut losses quickly. Boom. Done.
Have I mentioned “cut losses quickly” enough? Just checking.
#4 Don’t Let a Small Mistake Turning Into a Big Disaster
When you don’t follow your plan, what could have been a small and expected trading loss can become a large loss. Don’t fall into this pit!
I know waaaay too many traders that lose much more money than they expected because they don’t cut losses quickly and instead they say “Oh, I’m down just a little bit. Let me double up my position and reduce my average cost …”
That way they can get back in the game, right? Sometimes they double up, triple up, and even quadruple their position size if the stock is going against them — just because they’re trying to get back to smaller losses!
That might work a few times to escape breakeven… but more often than not, they have to take a much bigger loss.
Sometimes they even say “Tim, I told you I couldn’t cut losses quickly and I still came back.”
But guess what? They learned the wrong lesson. Yet they still keep doing it over and over and over again. And eventually, they get burned. It always happens.
Don’t be stubborn like that. It won’t help you!
Successful traders aren’t stubborn — we stick to our plans and risk levels we laid out ahead of time.
That is so, so, so KEY.
#5 Adjust Your Position Size
You can modulate your position size in every trade. Sometimes you can be more aggressive. Other times you need to be more conservative.
This isn’t just like going to the casino, where you’re betting on black or red and you double your money or lose all your money. You can modulate based on the situation.
For example, maybe a pattern has been working so well lately that you say “Why don’t I take a 50% larger position this time? Maybe I’ll double down.”
Or perhaps you’re buying an earnings winner, which in years past has been fantastic, but now, after a roughly a decade-long bull market, the earnings winners aren’t doing so well. You could enter the trade but take a half-size position.
See what I mean? You can adapt depending on the situation.
Sometimes, for example, you simply enter a trade with your regular position size and the stock is doing exactly what you want, but you have a meeting or a class or whatever. You might have to take profits earlier because of your own personal schedule.
See? You can adjust your position and manage your risk based on every unique situation.
The Bottom Line
Tomorrow I’ll finish my explanation on why cutting losses quickly is so crucial to being a successful trader. I’ll also share the Sykes Sliding scale, and a few patterns you need to be watching for in the current market environment.
Editor, Penny Stock Millionaires