Stock Trading Commandments

By Paul Rubillo, Dividend.com

Everyone has their own habits and strategies when it comes to stock trading. I truly believe that they key to success in the market is developing a concrete set of rules to follow, so that you act on intelligence, not on emotion. I've spent over ten years developing my trading strategy, and the following list is the set of rules I trade by. I call them my Stock Trading Commandments.

In no particular order...

  1. Never Sit in a Position “Hoping”.


    This refers to taking a position and watching it go against you without using stops to automatically take you out of it from a price and emotion standpoint.

  2. Prepare Your Trading Game Plan the Night Before


    Setting up your short ideas and long ideas the night before, based on that day's action. You can always add the pre-open movers to your lists as well.

  3. Examine Your Losses as Much as Your Winners


    Knowing what you did wrong and why is the same as an athlete watching his own highlights to see where he or she may have made mistakes.

  4. Too Much Leverage Can Knock You Out of the Game


    This happens to the best traders and firms from time to time. It is usually after some steady wins that one becomes complacent and ends up giving back all of their profits and then some. This can permanently knock you out of the trading game.

  5. Don't Let Personal Distractions Affect Your Trading


    If you are needing to be at an event, meeting, vacation, etc. , the best thing to do is close out positions or just make sure your stops are set. If you are under the weather and feeling miserable, don't let that influence your emotions when trading. Shut down the computer and get some rest.

  6. Don't Fight the Tape


    This can be the death of a trader. Lots of times the smarter a trader thinks they are, the more the potential for big losses if they believe they are right and the market is wrong. They end up fighting the tape and the market by adding to losing positions and burying themselves in a hole.

  7. This Time It's Different


    As a trader or investor, when you start hearing this about certain hot sectors (Internet stocks-1999, Real Estate-2005) , it usually means the drop is right around the corner. Take proper caution with your positions.

  8. Always Use Stops for Your Stocks


    Whether you are away from the computer or not, stops do something most traders need to remember. They take the emotion out of whether you should be taking a smaller loss or losing your discipline and turning it into a bigger loss.

  9. Discipline, Discipline, Discipline


    Learn to accept losses as part of trading. Eating some humble pie does not taste good, but can be good for your brokerage account in the long run. I would rather have four small losses and two big gains any day of the week.

  10. Trading Stocks is not for Everyone


    The market fluctuations that occur may not be right for one who's nature is to get nervous with every uptick. You are better off in mutual funds. Plain and simple.

  11. Don't Expect to be Successful Day One


    People don't become skilled doctors and lawyers overnight. Same thing applies to trading. It takes time and often some capital loss to ensure that one has the fortitude to make money consistently as a trader.

  1. Trade with Confidence


    Know exactly why you take positions that you do and don't scare yourself out if the first tick goes against you.

  2. Don't Jump in the Market Too Early in the Day


    Some traders feel they can make 1-2 trades in the first half hour and then take the rest of the day off. I have not met too many people that can do that. It's good to get a gauge on the action sometimes waiting out a big economic number or earnings report and react afterwards.

  3. Don't Follow Advice Blindly


    Whether you get some good stock info from a friend, broker, here on Dividend.com or other financial sites, be sure to do your own due diligence. It's your money, so do your homework. Know where a stock has been the last few days, weeks, and months.

  4. Assess Your Risk Tolerance to Determine Your Average Position Size


    This will depend of course on the amount you have to work with of course. But more importantly, you need to know what share size amount you are comfortable with when trading. Some traders can not sleep at night if their positions or exposure is more than let's say 200 shares per company. As you trade your emotions will tell you where you should fit in.

  5. Buy Winning Stocks Near 52-week Highs


    This usually works the best, but of course stops need to be placed. Also, be careful not to chase positions that are way above their 200-day moving average. Some names get too stretched and need to “ back and fill”, before they can proceed higher.

  6. Don't Short Strength if You Can Help it


    Everyone likes to catch the “top” of a stock move when they are shorting. It is usually better to short names that are way off their 52-week highs. Like in the wild, the hunters feast on wounded prey easier than the quick and agile kind.

  7. Avoid Focusing on Stocks Trading Under $5 a Share


    It's a fascination for many to try and catch the next big winner that goes from $1 to $100. It rarely happens, believe me! Many mutual funds are prohibited from buying these cheap shares as well, so they lack any institutional buying (mutual funds).

  8. Scale Into Your Positions


    Avoid buying your positions in one lump sum. This is a common mistake that many traders make. That means you have to be perfect on the buy point and then they will try to be perfect on the exit level as well. Scaling in different times is the best way to go and that usually keeps you in a position for a longe and more lucrative trade.

  9. Don't Catch a Falling Knife


    Avoid timing what you may feel “should” be a bottom. There is a lure to stocks that have quick drops. Lots of times there is a good reason for a fall and not just a correction. If the market is correcting, that's one thing, but when a stock is correcting on it's own, avoid getting your capital “slashed”.

  10. Always remain flexible


    The market is constantly changing. What works one day may not work three months down the line. Don't fall in love with any particular stocks, sectors, or styles of trading (long or short). Take what the market gives you.

  11. Add to your Winners, not your Losers


    When it comes to actively trading stocks, don't fall into a trap of adding to losing positions. Adding to losing positions is not what we refer to as "scaling in." If you are a long-term investor in dividend-paying stocks, however, you can afford to let time grow your investment -- so buying more shares of quality, fundamentally-solid stocks when they are "on sale" is OK.