RULE #1 - BE DISCIPLINED
This is to me the hardest rule to follow so I place it at number one - DISCIPLINE. This is the most important rule and without having a good discipline we will be forced to frequently react to the vagary of the market, rather than being someone be in control and respond in an appropriate manner.
Having the discipline to see through our trading plan is very important no matter how difficult things get for the trades we take. If we can follow the trading plan for each and every trades regardless of the outcome, it is a job well done and we have give ourselves a pat on the back because by doing so we have what it takes to become a winning trader - DISCIPLINE and CONSISTENCY.
Be disciplined - be someone who can follow their plan and thus with consistent set of actions this will yield a consistent set of winning results.
RULE #2 - TAKE FREQUENT BREAKS
If we trade each and every market day, it will not be long before our judgement becomes blur and overwhelmed by all the the actions we take. Eventually we will start losing money from the trades if we can't focus and feel fatigued due to lack of rest. Also taking a break from trading may help especially after taking a huge loss from trading and perhaps that will be the best time to re-evaluate the trading plan and strategy (I did that after suffering heavy losses in Selling Put Option trade for Coke during the March 2020 Covid meltdown).
Just stay out of the markets for a few days, or go for some other non-trading activities (hiking, overseas trip,etc), just do something that is unrelated to trading. For me after taking the long break from trading, I came back fresh and started to realize my Options trading plan had to change as it wasn't working out.
RULE #3 - DON'T HAVE TO BE RIGHT TIMING THE MARKET
No one, not even the best traders will able to time the market 100%. We don't have to be good at picking the precise point when the market starts to do a reversal. We can try to guess by looking at the support and resistance levels, but if the move starts to lose momentum, it may be best to get out of the trade.
RULE #4 - PATIENCE
I can't count how many times I have jumped the gun and just opened a trade without waiting for the entry signal. I just did that with my PEPSI Bull Put option trade and now I regret doing that. I should have waited for the right entry signal according to my trading plan and should not have ignored the technical indicators for the reversal using the Stochastic or RSI. Anyway lesson learnt and I will be more patient in the future.
Follow the trading plan and wait patiently until we have spotted the right signals, then enter the market with confidence. By doing so, we will be well positioned to enter the market during times of the highest potential of success.
RULE #5 - BACK OFF WHEN UNSURE
If we trade based on price movement or news that occur during the trading day, it may influence us to make poor decisions. Doing so and making decisions based on news will often hit you back badly. So before making decisions based on a piece of news will move the markets, try to back away from our position and take a fresh look before re-entering.
RULE #6 - NEVER ADD TO A LOSING TRADE
There will definitely be losing trades since we can't win all the time. Some of these losses could be a sign for us to get out. The worst mistake traders could make is instead of getting out, they decide to add on the a losing trade believing they make make back the losses. Markets are never wrong but opinions often are. That doesn't mean the market won't eventually turn around, but it usually means it's time to exercise extreme caution and begin applying proven money management techniques to conserve our remaining equity.
Some may argue that adding to a losing position is nothing more than cost averaging. This may work if we are investing for the long term (only for good stocks) but not so for trading.
I had a losing trade with my Sell Put Vertical Spread on ALIBABA (Ticker symbol : BABA) back in December 2020 which happened to be Christmas Eve. After I lost money on this trade, I wanted to win back what lost and so I opened a second trade but instead of the usual 1 contract I went with 5 contracts (5 times the risk!). I was lucky as it worked out finely eventually but if I had lost this trade, I would have suffered a HUGE LOSS and my margin account would have blown up. I let my emotion ruled by my desire to win back my money (a term called REVENGE TRADE comes into mind). I swore that I will not repeat this same mistake again and decided to tweak my trading plan to be a better Options trader.
RULE #7 - FOCUS, DONT TRADE TOO MANY MARKETS
It is definitely not easy to focus and concentrate if we trade in too many markets. For a trader to be successful, it is imperative to be on top of our game and try to trade only a few (or just one) so that we can focus on these better. Trading in too many markets may lead to paralysis from information overload, something even experienced traders can suffer from. On the other hand, top traders stay focused on a select few markets and completely master them.
RULE #8 - SILENCE YOUR EMOTION
Sometimes we apply Hope Analysis that the trade will eventually go our way. Emotion may get to us and we pray for such move. Don't hope for a move so much as this may cloud our vision and judgement. Hope is a wonderful virtue in many areas of life but it's often a destructive enemy when it comes to trading.
Don't exit a trade based on emotion (eg: caused by high volatility of the stock's price movement) as it might be at the maximum low/high - with the market being the most pessimistic or maximum (if you are shorting). Just follow your trading plan when you initially took this trade - whether your make or lose money - stick with your original exit strategy.
RULE #9 - NEVER GO ALL-IN
Trading can be very risky, especially so for in options since it is a margin account. So make sure to only use expendable money to fund your account - money which you are willing to lose and make back if lost. If we go all in this will be extremely stressful and may affect our trading mindset since we can't afford to fail. This may even lead us to into bankruptcy. Instead, fund your account with money to be used only for investing.
RULE #10 - LET YOUR PROFITS RUN, CUT LOSSES EARLY
A mistake that newbie traders often make is take small profit early and letting losing trades run into bigger losses. One of the most dangerous mistakes is failure to admit when they're wrong (I have seen this many times in myself and also other traders).
Successful traders let profits run until they see some indication technical, fundamental or both that it's time to exit. One method I discovered is that we can protect our profit and let our profits run by using Trailing Stop Orders. Currently this order is also part of my Gameplan for a couple of my Options strategies. Placing a Trailing Stop is useful if you are already in the green and this can help to protect your profit.
Don't dig a deeper hole for yourself in you are in a losing trade. Manage your losses early and automatically your upside will be taken care of . It is always best to take losses while they're still small, then wait for a better day.
Here is a chart showing how much you have to gain back vs the loss you made per trade- so make sure the cut your losses early before it becomes an almost impossible task to gain back the money lost.
RULE #11 - CAREFUL WITH STOP LOSS
One of the tools we can use is a "stop loss" order as it can help us cut losses if a market turns goes against the trade. But we need to be smart when placing such "stop loss" orders and be careful using this type of order. Don't place the "stop" too close to the current price, or the trade will get "stopped out" before we have the chance to make profit.
Recently I placed such order when I was trading JMIA. My mistake was I didn't quite understand the movement of this stock and I got stopped out easily. I placed the Stop Loss too close to the support level and the movement for this stock was very volatile - triggering the order a few minutes after placing the Stop order.
RULE #12 - HAVE BUFFER IN YOUR TRADING ACCOUNT
Try to keep at least three times as much money in the margin account as required for any single position. This means we shouldn't commit more than 1/3 of the account balance on any single position. We need to have some buffer in our account to cover our own "ass" in the event of any catastrophe that may occur.
For my options trade, I usually make sure I make I can only trade not more than 50% of my active position . So let's say my max loss combined for all 3 trades I am in is USD5K, I will make sure I have USD10K in my trading account and not risk more than half of it.
RULE #13 - HAVE A TRADING PLAN AND FOLLOW IT CLOSELY
Profits go to those who take actions and not those who merely react. With that being said, it's wise to decide a Gameplan early with all the entry and exit points and criteria decided well before placing a trade.
Dictate the exit and entry points for your trades based on your plan and nothing else. Not the news, not your opinion and not the noise of the market. Watch out for that INNER THOUGHTS in your head that may manifest into the feeling of fear and doubt - which could derail your original trading plan.
RULE #14 - STUDY YOUR TRADES
Making money isn't easy and the same goes for trading. We have to do our homework and study the trades before, during and after we have made them.
Before placing a single trade, we should understand the underlying direction and trend,(of the market and underlying asset), what triggered it, the current trading range, what signals you should be looking for, and your trading objective (eg: swing trading - see support and resistance, swing highs/low; trend following, etc).
RULE #15 - DO BACKTEST & BEGIN WITH PAPER TRADING
When I started out with Options trading, I didn't do any back testing and immediately went straight into real trading. I lost money back then when I bought a call option on Skechers (ticker SKX). When this trade didn't go my way, I felt paralyzed and became uncertain what to do next. I wasn't sure of my plan, didn't even follow my Gameplan properly and let my negative emotion took full control of me. Eventually after many years later I came to realize the importance of back testing a Strategy and doing paper trade before playing with real money.
Recently I spend almost 2 weeks doing backtesting and paper trading on the SELL PUT STRATEGY on SPY Index ETF to generate monthly income (wrote an article about it - link here). It was not easy and a huge pain doing the back tests (Thinkorswim's OnDemand was buggy and slow!) but it proved to me this Strategy was right for me - it being mechanical and Low risk.
So don't jump into the markets before testing your abilities. First, try trading on paper, with no real money involved. Then start trading in small lot contract (start with lower priced stocks and with 1 contract) and then increase the size slowly. No matter which markets you start with, it's wise to become thoroughly familiar with the mechanics of trading before graduating to larger contracts and/or more volatile markets.
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