Here’s My No. 1 Secret to Trading Success

The winning streak continues…

The Dow Jones Industrial Average has shot up 11 days in a row. The S&P 500 has gone 93 days without posting a 1% drop. The market’s throwing a raging kegger – and everyone’s invited.

Well, almost everyone.

“We’re really experiencing two different stock markets right now. And while one has been charging higher, the other has been struggling to get off the ground,” our own Jonas Elmerraji explains. “As I write, 22% of the stocks in the S&P 500 index are actually down since the start of 2017. That’s a pretty huge chunk of the broad market that hasn’t participated in this year’s rally. And it has a lot to do with all of the top-calling we’ve seen in recent weeks.”

Simply put, investors don’t feel like stocks are ripping to new highs, Jonas says. That’s because almost a quarter of the stocks in the S&P are actually in the red.

Despite the giddy sentiment and the financial media’s obsession with the market’s winning streaks, it’s still possible to lose money in this market.

Ultimately, your success hinges on your ability to shut out the noise and stick to your trading rules.

But it does no good to follow your rules if they suck.

Today I’m going give you a short template you can use to build a list of rules that fits your trading style.

Every trader is different. Some can tolerate higher risk. Some trade more often than others. So it’s only natural that different traders have different sets of rules. But it doesn’t matter if you’re trading options every week or following broad, monthly trends. These tips will help build the foundation for your own trading rules.

Let’s get started:

Category No. 1: The Negatives

Every trader needs to know his limits. And that means you. So you need to ask yourself… what stocks should I avoid at all costs?

Maybe you think buying stocks below $1 is too risky. Or maybe you have volume requirements so you don’t get stuck in a name that’s too thinly traded. Perhaps you trade only domestic equities. Or you have a particular sector or industry group you prefer to avoid.

Whatever your preferences, you need to eliminate your negatives. It’s essential to know what you won’t trade – then put it in writing. Writing it down forces you to commit to your rules in a way you might not otherwise do. So if the market ever tempts you, you’ll be less likely to throw a bet down on a trade that you know, deep down, is a long shot.

Category No. 2: Nuts and Bolts

Now that you’ve written down your risk-related rules, how are you going to pick your stocks?

A majority of your rules in the nuts and bolts section will be geared toward helping you pick the best trades. Now, there’ll probably be some “negatives” in this group — such as “Never buy a stock right before earnings” or “Never let a winning trade turn into a loser.”

This section will also probably evolve with your market experience. You can even add rules about what kinds of chart patterns or breakouts work best for your particular trading style. For example: “Only buy a stock after it’s broken through a key resistance level.”

This part of the list will take a while to build– maybe years. But as it evolves, you should see the rules improving your winning percentage and overall gains. So start writing, keep the list in a safe place, and keep adding to it as you go..

Category No. 3: The Personal and Anecdotal

The final category is for the off-the-wall rules that are part common sense and part emotional.

Here are a couple examples:

“Don’t trade for a week after you book three losses in a row.”

“Always take at least partial profits when a stock is two standard deviations above its short-term moving average.”

These might work for you. Others might not. It all depends on your trading style and personality. The main point to remember is your rules are bits of wisdom you might have picked up after making a bad trade or booking 10 winners in a row. They’re the ones that keep you in the zone. They can also keep you from losing your mind (and all your hard-fought gains) when things aren’t going your way.

Here’s one last tip:

It helps to write out your rules by hand in a notebook. Once you have 10-20 rules you like, type them up in a list and print them out. Keep the rules at your trading station and add to them and make notes regularly.

Every successful trader I’ve ever studied had his own personal trading rules. If you want to succeed in the markets, you need to emulate the pros by developing your own list of winning rules.


Greg Guenthner
for The Daily Reckoning

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Greg Guenthner

Greg Guenthner, CMT, is the editor of Rude Awakening PRO and Seven Figure Signals. Over the past decade, Greg has helped build the small-cap and technical research teams. His analysis has appeared in Forbes, Yahoo Finance, Bankrate, and countless other publications. Greg is a member of the CMT Association and holds the Chartered...

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