Below are the Rules and Checklist I Use Before Entering a Trade.
This is Part Two of the “Freedom Traders” Series – How I Learned to Get Over the Wall and What May Help You.
There is a link at the bottom of this post to Part 1 : My Personal Stock Trading Story. How I Blew up Two Accounts and Then Learned How to Trade.
This is about the freedom achieved when one learns how to trade stocks with consistent profit.
Learning to trade is tough, but there is a significant reward for the effort.
I have observed, in working with newer traders, that many randomly trade “what they like” without a system or rules. As such, I created a checklist that trader’s could use prior to executing trades..
To win consistently requires a proven system that provides more winning than losing over a series of trades. This is a trader’s edge.
To win consistently, a trader has to have a plan (a system) – that contains rules, controls losses (risk) and keeps emotions checked in at the door.
You, meet You:
If you are struggling to trade for consistent profit this post and your effort to follow a rules based methodology will cause you to look in the mirror.
Trading for consistent profit is a war against oneself. It is a war against our inner need to be free from rules and discipline. Successful trading is boring, it is disciplined and it isn’t remotely like a Friday night at the roulette table. Successful trading requires confidence in a system that is proven to return consistent results.
Successful trading requires a disciplined, devoted and tireless commitment to study and personal betterment. If you are not prepared to study, and I mean really study, you won’t make it. You will blow-up your account.
Personal Reflection – Recent Interactions:
I talk to literally hundreds of learning traders every month in one form or another (social media, email, private messages, coaching etc). I recently asked learning traders to send me their trading plans in advance of market open on a Monday morning.
Here are a few things I noticed in many responses;
Lack of study. Lack of implementation or Consideration Toward Standard Charting Indicators.
For example, I constantly talk about simple charts, keeping it simple and basic indicators. I do this for two reasons; one – I can get too complicated for my own trading primarily because of the type of work I do in algorithmic modeling. And two – I believe learning trader’s should first keep it simple.
Anyway, my point is that most replied to my call for trading plans with-out even considering the simplest indicators that I preach day in and day out in the trading room, in newsletters on videos and social media. And I thought to myself, my lord, how do I get this across?
Simple indicators like taking a daily chart and considering the moving averages or MACD were not considered in near all replies. Most replies were, “I like this stock and I don’t want to miss out”. Oh boy oh boy oh boy. I was completely floored. I couldn’t care less if I like a stock and I definitely won’t base a trade on possibly missing out.
All of these traders have had access for some time to detailed docs I produce toward the subject, such as our swing trading service newsletters, our premarket and post market reports and the near weekly charts I produce called Keep it Simple Stock Charting (not even considering the algorithmic modeling).
Below is a recent twenty minute video (a snippet taken from our live trading room) of indicators I follow when considering a trade. The video isn’t great (near bad actually) but you’ll get the point. I drive this home (indicators) over and over because they work!
Standard indicators will provide you with a simple edge and a simple process – a place to start. There are many different trading systems used in the markets, this is just one.
If you truly want to develop an edge (a process) that will get you winning more than losing (trading for profit), then learn the simple indicators and use a stop! That’s all that is initially required.
Trust me, if you need it, here it is (at least a start) in 20 minutes or less (we actually have a better video on indicators in charting reviews from last Thursday that I will post when it’s ready and update this article because the video below isn’t ideal as mentioned).
Of course it then (your personal trade process development) goes on for lifetime there forward, but I think you get my point. It isn’t that hard to stop your losses and GET OVER THE WALL to profitability.
So learn your simple chart indicators! Some examples are; moving averages, MACD, daily charts, price action, and maybe some others like the squeeze momentum I use and a Stochastic RSI. (Note: Video was updated)
A Trading Process and Trade Rules are Critical to Successful Trading – the Legends Agree.
Here are a few examples:
Martin S. Schwartz.
“I always laugh at people who say “I’ve never met a rich technician” I love that! Its such an arrogant, nonsensical response. I used fundamentals for 9 years and got rich as a technician.”
It is widely reported that Marty Schwartz lost money as a trader for ten years. And also widely reported that once he developed a more rules based approach he never looked back. Martin turned 5,000.00 in to 140,000.00 in one year and is one of the most well known trading legends to this day.
Jesse Lauriston Livermore.
“Real movements do not end the day they start. It takes time to complete the end of a genuine movement.”
Jesse Livermore used a set of rules, one of which was to identify “real movements”, because there is profit in a real stock move. A real move – not a low float pop and drop.
“Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible”
“I would add that I consider myself and how I do things as a kind of system which, by definition, I always follow.”
“Systems trading is ultimately discretionary. The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change.”
Ed Seykota, a commodities trader, had a conviction in Algorithmic Trading. He utilized the rules of technical analysis and it made him one of the greatest trading legends of all time. One of his trading accomplishments was that he turned $5000.00 in to $15 million over a twelve year period in one client account.
Seykota calls his trading process, the Trading Tribe Process. He describes his ideas and practices in his book The Trading Tribe (2005).
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” Soros on enjoyable investing.
George Soros: Most Influential Quotes | Investopedia http://www.investopedia.com/university/george-soros-biogrpahy/george-soros-most-influential-quotes.asp#ixzz4eIkDeCuQ
Okay, so we know the trading legends agree, you need a system and rules. So I have prepared a checklist for you to review before taking your next trade and before every trade here forward until you consistently win. If you have any that I have missed, do me a favor and send them or tweet them to me so I can update this checklist.
Some Rules in Trading. Checklist Prior to Entering a Trade.
Rule 1 – Take Responsibility for Your Success or Loss.
“A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.”Ed Seykota.
I tell our trading room and newsletter subs, “the shortest distance between you and the door is to blame myself or another trader for your loss”. Our systems, analysis, models or anything we say or publish, or anyone tells you or publishes is not the reason for your loss.
You lost because you lost to yourself or you lost because no trading system is infallible. This is without a doubt my rule number one. If I blame my lack of success on anything or anyone I’m doomed as a trader.
Rule 2 – Cut Losses. Use a Stop. Never Allow Losses to Get Out of Hand.
“The trading rules I live by are: 1. Cut losses. 2. Ride winners. 3. Keep bets small. 4. Follow the rules without question. 5. Know when to break the rules.” Ed Seykota.
“Trade with a stop, and know it before you enter.” Jesse Livermore.
“The most important thing in making money is not letting your losses get out of hand.” Martin S. Schwartz
Live to see another day. One of the most critical ingredients to success as a trader is in how long you are around to learn. You can always re-enter and the cards never stop.
Rule 3 – Ride the Winners.
“Let profits run. Close trades that show a loss (good trades generally show profit right away).” Jesse Livermore.
This is my biggest challenge. Always ride your winners. And once you learn that, you can then “hammer down” on your winning trends. This is where real profit is.
Rule 4 – Keep your Bets Small.
Take an entry that is at very most 5% and preferably closer to 1 – 2% of your trading account, and then when it becomes a winning trend, add as you see fit and the indicators tell you to do so. And yes, I know that I will take much larger trades, but that’s because of a host of more advanced (or refined) rules not included in this post and that trade is not my whole portfolio – it is a large portion of a specific account.
Rule 5 – Learn Trend Trading. Understand Your Charts.
“In order of importance to me are: 1) the long term trend, 2) the current chart pattern, and 3) picking a good spot to buy or sell.”Ed Seykota.
“Trade using the pivotal points. (Learn how to spot the pivot point from which a new movement will emerge; read Find A Trend With The Partial Retrace.” Jesse Livermore.
I call this “chewing around the edges”. If you learn how to spot trends or trend reversals for long term trend plays then you have hit the mother load and this is where serious profit is and accounts get built up fast. Read about pivot points. This happens to be one of the primary methods of our algorithmic chart modeling and why our algorithms have been so successful. Pivot points are powerful indicators.
Here’s a post from Steve Burns on the subject of trend trading.
Here is one Golden Rule trade example of what can separate you from just winning or wealth building. You find this one set-up in the indicators and you will win and win and win and really win. Below is the tweet and if you go to that tweet the chart that shows the set-up.
“When price trends up and Stoch RSI trends down that’s when you HAMMER down! Especially on a daily. #RULE $GDX $GDXJ $NUGT $DUST $JNUG $JDST”
Rule 5. Stay away from Momentum Plays. Pops. Pumps. Chasing.
I play morning momentum stocks for a kick. I play small and I play them smart. This is not a place for new traders. DO NOT join a chat room that plays momentum stocks as a beginner. Learn the predictable fundamentals of trading and become successful at low risk trades first. Do this for at least a few years before you try and learn momentum daytrading market openers and low floats and the like.
Rule 6. Buy in a Bull Market, Short in a Bear Market.
“Trade with the trend. Buy in a bull market, short in a bear market.” Jesse LIvermore.
If the market is red, be careful with your long trades. Now, if you know how to play by the rules and read a chart then red days are the days to study and prepare your shopping list for long trades. Then when the markets turn green or confirm you then have your hit list ready. And do not start your trading career shorting. I know, I know there are GURU’s that will disagree, but I fundamentally believe the best short sellers are those that first have the basics of long swing trading and even daytrading mastered. That is a personal “opinion”.
Rule 7. Trade with an Edge.
“Don’t trade when there aren’t clear opportunities.” Jesse Livermore.
Trading with an edge can be understanding your basic chart set-ups with moving averages, VWAP, MACD and others or can be with methods such as our algorithmic chart modeling work. Or, even with fundamentals or with news events and more. You have to understand what provides an edge.
I often refer to a simple edge traders can follow as PTPTRR. Price, trigger, power, trade, risk, reward. Trader’s that know how to win will automatically understand what I mean by each point in PTPTRR. The question is, do you? If not, study it out – study each part of that equation. Trading price provides what edge? What are triggers? What does he mean by power? What is risk – reward in trading? And so on. In a future post I will cover this simple formula in more detail.
Here is an example on trading price from Investopedia as Jesse Livermore traded price action;
“Price patterns, combined with volume analysis, were also used to determine if the trade would be kept open. Some of the criteria Jesse used to determine if he was in the right position were:
Increased volume on breakout.
The first few days after the break prices should move in the breakout direction
A normal reaction occurs where prices retrace somewhat against the trend, but volume is lower on retracements than it was in the trending direction.
As the normal reaction ends, volume increases once again in the direction of the trend.
Deviations from these patterns were warning signals and, if confirmed by price movements back through pivotal points, indicated that exited or unrealized profits should be taken. (For more read our Greatest Investors Tutorial.)”
Rule 8. Trade Strength.
“Trade the leading stocks in each sector; trade the strongest stocks in a bull market, or the weakest stocks in a bear market.” Jesse Livermore.
I almost always trade strength. Strength in price action, strength in sector, strength in timing, strength in volume, strength in trend, strength in momentum, strength in fundamentals, strength in news, strength in wash-out (fear) and on and on. Trade the strength that comes with inflections.
Rule 9. Trade with Chart Indicators.
Know your simple indicators. A profitable career can be made trading indicators only. We have proven in our work that simple indicators will return 50% or more a year with the instruments we trade (more on this later). But the point is learn your simple indicators.
We are posting You Tube videos more and more on this subject and plan to cover it intensely over the coming weeks in our newsletters and on various other media channels.
Some of the indicators to consider; moving averages, channels or trends, pivot points, chart history, support and resistance, Fibonacci levels, volume, power, risk – reward and more. When you know these you can then even move in to custom indicators (such as I do with trading view charting) and even chart bots and algorithmic models if you choose. But first learn the basics of charting and candles.
Rule 10. Trade Price Action. Price is King (and Queen). Know That The Market is Always Right.
“It can be very expensive to try to convince the markets you are right.” Ed Seykota.
Have a plan and when price action says different cut quick. Never assume the market is going to do what you think it will do. Now, I know in the algorithmic modeling work we do, we do talk about advanced near future charting etc, but even so, it is still harnessed in the realities of trading – that never changes.
Rule 11. Entries. Exits.
Know the zone for entries and exits. There are many rules within this one rule. Some examples are; enter long at support and cut fast if it fails, trail out long positions at resistance and add at support, enter long when the stochastic RSI is at the bottom (one of my favorites), go long when the MACD crosses up and short when it crosses down, know your time-frame, enter long at the bottom of the trending channel… and so many more.
Rule 12. Continuous Improvement. Journal for Success. Be Yourself. Don’t Follow.
Journal your trades. Keep track of your trades daily, take notes, learn from your errors and reproduce your successes. Study, study, study.
Develop your own system. Develop your own style. Be yourself. Don’t follow in anyone’s trades – learn, but don’t follow. Turn off the noise.
Study “Trade Risk Management Psychology” and “Emotional Intelligence”. We don’t have enough time here to go in to it.
Rule 13. Support Other Traders
Support the traders that shout out a win and try and pass on what you have learned to traders struggling. You will be surprised how this simple good will posture will help your trading. I won’t go in to detail and I’ll let you discover how this helps your trading on your own.
Rule 14. Check Your Attitude.
Never blame, never complain, never lack gratitude for the opportunity to learn. Be a good loser, dust off and move on. You will never be a profitable trader any other way.
Message me anytime with your story, questions or additions to this checklist. I will update this list over time.
Peace and best.
Part 1 : My Personal Stock Trading Story. How I Blew up Two Accounts and then Learned How to Trade.
Part 2: Trading Checklist (Rules) I Follow Before Triggering a Stock Trade.
Part 3: Now I’m Inspired. A Struggling Trader That Inspired Change.
Part 4: We Want (Need) You! Apply to Nearest Recruiting Station.
Part 5: Learn How to Trade Stocks (Build a Small Account) Following my Journey.
Part 6 a: Trading Set-ups. How-To Develop a Systematic – Predictable Process.
Part 6 b: Trading Set-ups. Video Explains Predictable Winning Process (companion to part 6 a).
Get up. Dust off. And never give up.
Article Topics; Freedom, Trading, Trader, Learning to trade, Stocks, Rules, Checklist, Profit.