Everyone has their own set of rules. The ones outlined here just happen to apply to me and my penchant for swing trading.
1) Must have a Game Plan. There is a business saying, If you fail to plan, you plan to fail. I will not go into all of the planning theories here, but understand that planning is important. Before entering a single trade, I have to come up with and write down five important numbers for the ticker symbol:
The first number is my i) Targeted Return On Investment (ROI). At minimum, I seek 10% and at most, 30%. Though it depends on the market condition, it is necessary to have a clear goal to drive towards. To get my return, I digest news headlines, study charts, and stare at technical indicators (<add link to post>) to identify suitable ii) Entry Prices and iii) Exit Price Ranges.
Not all trades will be successful. No one wins them all. If they say they do, they’re lying to you, and you should tell them they’re a dumbass. As such, it is important to not only prepare yourself to take some losses but to expect them. What iv) Percentage Loss on Investment can you endure and still sleep at night? Myself, I am comfortable with spending between 5 to 10% for the thrill of the game. To control my losses, I enter Stop Loss orders right after my intial (limit) Buy order. The v) Stop Loss Price is an ugly number, but it is necessary to calculate it when determining your entry price.
2) Must have Discipline to follow through on the Game Plan. Rather than let greed or fear dictate my trading, I focus my energy to exercise discipline and carry out the Game Plan. That means not hoping losers will rebound, but cutting my losses like I planned to. It also means locking in profits and not worrying about leaving money on the table. Normally, the Game Plan would be sound and crafted with thought and careful consideration to everything.
3) Diversify with non-correlating assets. To some, diversifying means having a mixture of stocks, bonds, and cash equivalents. Myself, I gravitate more towards stocks. As such, diversify then means holding stocks from different sectors (i.e. Financials, Energy, Technology, Healthcare, etc.) that are not generally dependent upon each other. Note, this rule does not really apply to day traders who generally close out positions everyday.
4) Trade in the major trends. If a stock is trending up, I go long and later sell. I will not short it. You can watch what happened to Le Chiffre in the movie, Casino Royale, to see what could happen if you do! Conversely, if a stock is trending down, Short orders are due.
5) Research always. In general, fundamental analysis becomes more important the longer one holds a position (think, investors like Warren Buffett). Technical analysis is key for day traders and swing traders (like me) who are in and out of positions many times a week. Nevertheless, it is important to be aware of what is going on in the world and of the general economic environment.
