In a raging bull market, it is easy to forget that markets make us pay for our mistakes. In a bull market, the rules are loose, the fools are many, and money seems inexhaustible. In a bull market, traders from Main Street apparently make money as easily as traders from Wall Street.
NOVICE TRADER
Some Rules To Trade By
by Daryl Guppy
A good trader will have a trading plan. Here are some guidelines for setting up your own trading rules.Eventually, however, the novice trader must reach deep into his pocket to pay for his or her losses. This should be cause for reflection, but more often than not, it turns out to be an excuse for blaming someone or something else. For the trading survivors, it is a time to refresh their understanding of the basic rules of trading.
The trading rules you'll see here come from personal experience and market insights. I use these observations as personal trading rules. Like all my trading rules, they are developed from experience to suit my specific trading style and personality and to compensate for my weaknesses.
Novice traders initially need to rely on the perceptions of others in building their own trading rules. The specific rules you finally adopt will be different. Take what is appropriate for you from these 15 rules, adding to them and modifying them to suit your trading style.
RULE 1 - UNDERSTANDING TRADING DISCIPLINE: TRADE DEVELOPMENT.
The novice trader believes that trade development is the discipline to follow our trading approach. Better traders, however, understand it also includes meeting the challenge of cutting losses and taking profits cleanly.
Initially, the novice concentrates on formulating entry conditions and developing the discipline to wait until all the entry conditions are satisfied. The novice is better equipped for position trading based on end-of-day data, where decisions are made without the interference of intraday market activity.
Position trading techniques are the basis of many trading strategies, but this rule applies to all. "Patience is an important trait many people don't have," famed trader Tom Baldwin remarked in Jack Schwager's Market Wizards. "They end up forcing the trade, rather than waiting patiently. They forget that the reason they made money in their early trades was because they waited a long time."
The novice must master the discipline to act on his entry signals, even if it means being out of the market for a long time. Just because this is the first skill learned does not mean it is the least important. Without it, a trader cannot grow. With it, however, a trader can grow very large.
Better traders understand that trading discipline is also the ability to exit a trade under either one of two conditions -- to realize a loss or to take a profit.
Excerpted from an article originally published in the April 1999 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 1999, Technical Analysis, Inc.