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C. Common Sense Rules
Short Term Trading
- Always start with a fraction of your normal size. If your normal investment in a stock is $10,000, invest only $2,500 to $5,000 initially. Wait and see that your investment decision is correct before you commit more capital to it.
- Never "average down" in a position. The only time you add to a position is when the stock is going up, ala making money for you.
- Stay with the trend of the market. If the market is in an up trend, buy the strong stocks on pullbacks. THE TREND IS YOUR FRIEND.
- Have a basket of stocks, not just one or two. Not even the best stock picker in the world picks winners every time. Spread the risk around. Have at least two stocks from each sector you are invested in and invest in at least three sectors. This way you will reduce the chance of one bad stock destroying your account in the event you are wrong.
- Have a game plan, follow your game plan, and be patient.
- Have a sell target for all positions. You should determine what is the maximum loss you are willing to take on the position if it goes down and what profit you are looking for if it goes up. If either target is hit, follow your sell discipline.
- NEVER hold onto losing position. Don't hang in there just because you believe a stock "has to come back." Nothing "has to come back." Remember Enron or Global Crossing?
- AND MOST IMPORTANTLY, if you make profits, take a portion of the profits and use them somewhere else in your life. There is an old saying that "smart people take their profits from Wall street and spend them on Main Street." Pay down your mortgage or take a vacation; make yourself happy. There is no guarentee that actively trading securities will result in a profit. Active trading is a very risky strategy and you could lose a portion or all of your investment. If you use margin, you could actually lose more than your original investment.
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Woodstock U
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