Whether you consider yourself an investor or trader, a fundamentalist or technician, long-term or short-term biased, I believe we should strive to follow a set of rules when it comes to the financial markets. In the past couple of weeks, the volatility we witnessed in the markets have demonstrated how a single headline can move asset classes in ranges way outside the normal standard deviations.
MY PERSONAL VIEW
I consider myself more of a trader than an investor, favouring technical over fundamental analysis. There is no right or wrong approach here. It is more of a function on your personality traits and how you view the financial markets.
Being involved in the derivatives market for over 20 years, where markets react in mere seconds and minutes (rather than days) using technical trading is the only way to thrive in that world. As for stocks, I prefer to be take on a more medium-term approach as stocks typically do not move as rapidly as in the futures markets (of course recent events have shown otherwise!)
1) ALWAYS HAVE A STOP LOSS POLICY
From most good investment books that you read out there, this is always the number one rule that is frequently mentioned. Stop loss should be determined once a trade or investment is initiated. Most people like to ask what the target price or profit objective is, but the more important question should be where to place the stop loss. It is human nature to be optimistic when a trade is entered, the excitement of the profit potential that we do not account for worst case scenarios.
2) NEVER FALL IN LOVE WITH A INVESTMENT/TRADE
How often do we hear of how good a stock is and the fundamental reasons why it should be worth this much? All the fundamentals could be true, but let us not forget we are living in volatile and uncertain times, and there are many macro conditions to consider when assessing a particular investment or trade.
So, to fall in love with a particular investment or trade without employing a stop loss policy, could be potentially devastating to your bankroll and financial health.
3) NEVER GIVE UP ON A TRADE IDEA
This could sound contradictory to the previous rule, but it is actually quite the opposite. Let us assume that you do really believe in a certain hypothesis on why you want to enter a particular trade. However, due to bad market conditions or some other reason, your stop loss was triggered. Now, if you think your original hypothesis is still sound, you could still explore the trade again but from a better price point and better risk-to-reward profile.
4) CAPITAL PRESERVATION
To quote one the greatest stock trader of all time, Jesse Livermore, “Don’t lose your stake. A speculator without cash is like a store-owner with no inventory”.
This highlights the importance of using a stop loss policy to conserve our firepower. As long as there is a market, we can always come back and fight another day!
5) STAYING POSITIVE AND BELIEVING IN YOUR METHODOLOGY
As an active trader, having drawdowns is a very normal occurrence. However, having CONSECUTIVE drawdowns for an extended period of time can be very debilitating to our bankroll as well as to our self confidence!
Believing in our trading or investing methodology is important. I like looking at good risk-to-return setups so that when I catch on to a good trade, it can make up for the many small losses that i had to take from the losing trades.
Losing money in financial markets is part and parcel of investing or trading. However, when I lose MORE than what I was supposed to, it was probably because I violated one of my own trading rules!
Stay safe in these uncertain times and happy trading!
Disclaimer: This blog is created for sharing of trading ideas only. It is not in any way or form meant to be an inducement or recommendation to buy or sell any stocks. Consult your financial consultant before making any financial investments.