It's Your Money, Take Control!
Taking control in the management of your money in today’s world is perhaps one of the most important financial imperatives facing us all. This checklist should serve you well, and possibly keep you from becoming a victim of the market and false media information.
In my twenty-one years of trading experience I have found these rules to be an invaluable way of keeping me focused on the trade.
Deel’s 16 Rules of Investology:
1. Trade With A Plan
Set objectives before you ever buy. Define all outcomes — not only what you will do when it goes right, but what you will do if you are wrong. Determine the amount of capital you are willing to lose and conversely, define when you will take profits. Letting the market take away your profits by holding on to a losing trade is not a good strategy. Write out a trading plan on paper and follow it. Do not become a causality of emotionally involved buying or selling. Trade with a plan.
2. Screen Your Trades
To select trading vehicles you must have a predefined method. Select a method based on price momentum and trend. Don’t guess what the future is going to be, trade the current trend direction. Your method must consider your individual time frame and risk tolerance. Always address liquidity, sector rotation, and technical factors when screening stocks.
3. Always Look at a Chart
Never buy a stock without looking at a chart of the stock first. Look at the one-year trading range. Ascertain where you currently are in the trend and what that trend is. Also determine if the chart reflects a stock split. Never trade against the trend. Buying and selling decisions are technical in nature. Fundamentals will never tell when to buy or sell a stock. Always look at a chart for entry and exit timing decisions.
4. Stay With a Trend
Your probabilities of success are far greater if you stay with a definable market trend. Statistically, these trends provide better profit potential with a lower amount of risk. A good rule of thumb is to watch a 50-day exponential moving average of the close. This moving average represents the intermediate trend of a stock. A 12-day exponential moving average represents short-term trend. The use of these two moving averages should yield excellent results in keeping you in the trend. If you perceive the trend beginning to change, act accordingly by taking profits or placing stops to protect your capital and locking in a profit.
5. Use Money Management Techniques
Determine the probable dollar losses of your trading plan or investment style based on your trading record for the current year. Then devise a way to generate income through passive sources.
Cutting a loss quickly is the best money management you can have. Too many times traders fall in love with stock, holding on as the stock begins to decline. Never use a hedging strategy, such as options, to justify holding on to a losing position.
The use of money market, bond, and stock dividend income to offset losses in your trading portfolio is an excellent technique.
Covered call options may be an appropriate way to generate income for your portfolio to offset losses. Be careful here because you can write covered calls into oblivion. If the stock is going against you, sell it.
If you are going to hold a trade overnight, never risk more than 3% of your available capital. If you are going to day trade, an excellent rule of thumb is to only risk 1% of your capital in any one trade.
6. Buy and Sell on Confidence
Many times you won’t feel quite right about a buy or sell decision.
If this feeling persists after you have done all your research and you have followed the rules to this point, don’t take the trade. Too many times individuals try to rationalize a decision. Don’t try to find a good reason for making a bad decision. Your decision must be a confident one.
7. Buy only Liquid Stocks and Liquid Markets
Stay with major markets and stocks with millions of shares in the float. Make sure the average trading volume is enough for you to sell all of your position on any given day. By following this rule you should be assured of a reasonably good execution of your trade. Don’t buy stocks trading at the lower end of the price range. Generally speaking, do not buy stocks that don’t have good trend characteristics or predictability. True professional traders avoid them and so should you.
8. Don’t buy or sell on Hot Tips
More money has been lost on hot tips than is in the U.S. Treasury. While this is an exaggeration, it does make the point clear. If someone tells you about an investment or trade, research the recommendation before you put your money into it. Most novice investors and traders fall victim to tips every day. Please don’t fall for the story no matter how good it sounds. Always use technical analysis to make your buy and sell decisions, and buy or sell based on facts.
9. Do not Dollar Cost Average
If your timing decision was wrong on an aggressive stock, don’t make the problem worse by trying to buy a stock that is going lower. The probability is that you will only compound the loss. I call this technique disaster cost averaging. Don’t buy a stock until the trend is evident. Dollar cost averaging is good for your broker, but if you continue this technique, the ‘broker’ you will become.
10. No one wins 100% of the Time
Many people enter the stock market focused only on the profits and do not consider the losses. If you think for one minute you are going to win one hundred percent of the time, you are wrong. Losing is just part of the cost of doing business. Your goal is to make sure you control the risk and not blindly put your money at risk, like a buy and hold investor. You must come to the realization that you will never learn how to win until you first learn how to lose. How you handle loss psychologically is truly the difference between an amateur and a professional. Professional traders don’t react the same way as an amateur to loss. When a professional trader loses, he or she simply says next. They don’t take the loss personally.
11. Always use Stops
The proper use of stops will protect profits and limit your losses. Look at stops as profit and loss insurance. When you enter a trade, you place a stop to limit the loss in case the trade goes against you. When the trade becomes profitable, you use them to lock in a profit.
Anyone who would argue against risk control by discouraging the use of stops is a fool indeed. In effect, they are saying you should put your capital at unlimited risk. Does this make any sense to you? Of course not, but that is exactly what a buy and hold investor does all the time. Most investors do not use stops because they are afraid of being stopped out. This is a psychological problem of not wanting to be wrong, or having to admit to yourself you lost on a trade. It certainly isn’t based on logic or strategy. Remember, always use stops if you are carrying a trade over night.
12. I don’t have Time
Make the time or suffer the consequences. If you are too busy to manage your money, maybe you’re too busy. Take a look at your portfolio and if you lost half of your money without knowing it, you can congratulate yourself on being too busy. Was it worth it? Probably not. It doesn’t make much sense to work yourself to death and have nothing to show for it. You must take time to educate yourself and take control of your future.
13. Be patient and let time be your Friend
Making money safely takes time. The only time to hurry is when you’re in trouble. Remember, “Everyday is not a trading day”. Only trade when the sector, market, and the correlating stocks are in trend. Just because you want to trade doesn’t mean you should. Only trade when the probabilities are in your favor, and let the market come to you.
The market is going to do what it is going to do and what you want is irrelevant. Don’t become addicted to the action. You are not an action junky. You are a high probability trader. Profits are made the old fashioned way, one trade at a time. Be patient and make time your friend instead of your enemy.
14. Learn from your Mistakes
The most successful traders and aggressive investors learn from their mistakes. Many even go as far as writing down what went wrong and analyzing the problem. Mistakes can be costly, so use them as learning experiences and don’t make the same mistake twice.
Unfortunately, a large number of people are doomed to make the same mistakes over and over again. This behavior is usually a sign of emotional reactions to price momentum and the absence of any well thought out strategy. My father once told me that the best education was to learn from the mistakes of others. Most people fail in the market not because of technology or a lack of information, but because of emotional reactions, and never learning from their mistakes and the mistakes of others.
15. Know how to short Stock
Markets do not go up all the time, a painful lesson some have learned over the last three years. From the year 2000 to the present time, we have experienced one of the most agonizing bear markets in the last 70 years. Does this bear market mean that you can’t make money? No. What has the trend been for most of the last three years? The obvious answer is down.
Common sense says you are to follow the trend. So if the trend has been down, why haven’t you been shorting stocks? The reason is sadly fear and ignorance. Only 2 % of the American public ever shorts a stock in their lifetime. This is shocking when you understand that markets and stocks fall 67% to 80% faster than they rise.
In other words shorting stocks tends to compound money faster than buying a stock to go long. Plus, if you can make money when the market is going down and when it goes up, what is it that you have to be afraid of? Professional traders have made millions the last three years. You must learn to short stocks if you are to have any chance of being successful in today’s markets. Fear and ignorance must be overcome because you must know how to short.
16. Follow the Rules
Some people are doomed to make the same mistakes over and over again. Using this set of 16 trading rules, which has been compiled from over 20 years of experience, should keep you from making many common mistakes.
If you follow Deel’s Rules of Investology, you have a much better chance of success than someone who doesn’t. Always remember, there is never any guarantee of success. But if you are properly educated and develop the correct mindset, you have a major advantage. Don’t become one of the sheep led to the slaughter by media nonsense.
You must make your own fortune and control your financial destiny.
Always remember, it’s your money. Take control and follow the rules.
Robert Deel is an internationally recognized trading expert, and has trained groups of traders throughout the U.S., Europe, Asia, and Canada. He is the author of Trading the Plan and The Strategic Electronic Day Trader. He is also the President and CEO of Tradingschool.com, a school that trains individual and professional traders from all over the world.