My Ten Commandments
Option Addict
375 Comments
1 Reference
Here is a compilation of my Ten Commandments of Trading. In my sole opinion, these are the "fundamentals" of becoming a successful trader. Look these over and feel free to comment at will. Keep in mind this took a couple hours to compile, so be nice.
1. Thou shalt have a trading plan
If you don't have a plan, get one. What is your approach? What are your rules? These are questions that you need to answer before you can title yourself a trader. Creating a plan gives you something to follow, an outline of where you want to be, and what is required in between.
2. Thou shalt not trade with emotion
This includes, fear, greed and lack of discipline. There is no room for it in this equation. Find a way to get a better handle on it, and/or walk away from it. I can tell you from experience that you will have an impossible time being successful at trading when making emotional decisions.
3. Thou shalt embrace losing
A trader has to fight a lot of expensive enemies within himself. It is inevitable, it is going to happen, therefore you should plan for it. If I know I am going to lose, I will try and make it easier on myself in anticipation. Please do not judge the success of a trader by the win loss percentage they have. It's not about winning or losing; it's about making money.
4. Thou shalt know how to control losses
As a trader, you will have many losing trades. The idea is that if you keep them small, you give your winners a chance to outpace them. If you can successfully do this, you will be a profitable trader. Identify places on a chart that you know prices should not go in order to take your loss (broken support/resistance for example).5. Thou shalt not turn a trade into an investment
If you didn't chuckle after you read this rule, then perhaps you need to revisit rules 1,2,3 and 4 again. Have you turned a trade into something longer in duration than expected? Do you remember why you did this? Sure...it was because the stock went against me and I figured "It will come back." When you feel the need to stay in a trade until you are right, something is wrong. Know where you are getting out before you get in. STICK TO THE PLAN!
6. Thou shalt remember: Tips are for waiters
Jesse Livermore said it best..."The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking and reaching your own conclusions" He goes on to further state..."The average man doesn't wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn't even wish to have to think." Wouldn't you agree? It is so easy to take the stock pick from someone assuming they have done all the work for you. Truth is, they probably know less than you. This includes commentary you listen to on the television, something you've read on a website, or discovered on this crappy blog. My point is... do your own research, trade your own trades, and be original in your analysis and activities.
7. Thou shalt repeat after me "A gain is not a gain until you sell"
Kenny Rogers said "You never count your money when you're sitting at the table." That profit is not realized, so don't mentally take inventory of it until the trade is closed and you have realized that gain. This will create emotion, and you will stay in trades for the numbers rather than the logical reasons.
8. Thou shalt not know too little about too much
I guess it is hard not to in your position. You are learning to trade. But you need to try to differentiate what you know, and what you are learning. You also must remember that the basics are called basics for a reason. They are the foundation we stand on. Next time you overrule a trend because of a candle formation, or something silly like that, remember that discipline trumps conviction. No matter how strongly you feel that the "*Double Bottom Outside Inverted Triangle Reversal Pattern" will result in a failure of the beautiful uptrend the stock has been trading in, you must defer back to the principles of discipline when you trade. Discipline will allow you to trade tomorrow, whereas the gut feeling of a new trader will send you to the poor house later today.*- This is not an actual pattern, so please don't e-mail me and ask where to learn more about it. Just think of it as an exaggeration of a funny role we have all played.
9. Thou shalt trade with the trend
It takes a trader a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. Try to pick a style that you can easily adapt to a changing market. At times the "motion of the ocean" will differ and different approaches are warranted. It is at these times you need to be able to recognize the changes and adapt accordingly.
10. Thou shalt take the easy opportunities
You don't need to trade everything. There are opportunities that present themselves everywhere and everyday in this market. Just remember two things: Number 1: Its not necessary to play every move, its only necessary to have a high winning percentage on the trades you choose to make. Number 2: Don't go for the trades that don't totally jump out at you as an easy analysis. I call these the "Easy Trades." The trades where you are not 100% sold and convinced of what is going to happen, stay away from them.
View Printer Friendly Version
Email Article to FriendReferences (1)
-
Response: TenBestStocksTo improve the probability of long term investing success investors should seek a fully documented investment tool to improve their decision making. While their is never a guarantee of success, working with a validated process increases the prospects of finding a rational stock trading strategy that really works.
Reader Comments (375)
Well said even if a repeat of an older post!!! Great words of wisdom to guide one through the wilderness towards the promised land of Puts and Calls.
GOD, I love it - the Ten Commandments! For which I agree. Well folks, before lights out, here's the Eleventh (11th) thou shall be loyal, respectful, ask what you can do for the good old USA, but do not (underline do not) give our IRS anymore than what is legally needed. (just saw a bumper sticker, "if God only ask for 10% tidings, than why does the IRS need more?").
There should be a class on making money & preserving money. Cuz, making 100% rtn/yr and keeping all of it is knownledge in the bank. For me, cuz, I'm not smart (just made a life of watching others) and due to various investments - it's just another year of keeping it all.
So, when you speak of 5% 35% 150% return in the stock market, "is that before Uncle Sam knocks on your door?"
Good night! Sleep tight, cuz most of your taxes are at work tonight! My CPA just emailed me - & I am sleeping very well in this Country of Capitalism.
God Bless America
Jeff - Nice post. Having a plan seems to make things possible. I am always impressed to go back and read my old plans and see how I have achieved them.
With that said I was hoping to hear about some crazy vacation adventure. I imagined it would go something like this:
So I left my family at home and now am lounging by the pool with my trading buddy. We're having a great time. My trading buddy is the only one that understands my entry and exit signals. Whenever I take a vacation I remain theta positive. And what could be more liquid then a pool with a swim up bar? The options here are incredible! Gotta go I think that little market maker just winked at me.
Just joking of course (and sorry I think I am bored). I am sure you needed a vacation from everything except the fam.
F2T - Amen to that. Paying taxes are a privillege; when you get to you know you are doing well. Now if we could just get our government to invest intead of blowing up crap with our tax $ we'd be doing really good. Maybe you could get them to sell naked puts on oh I don't the education system or something.
Jeeeesh!
Thanks Jeff. Hope you are having fun and eating lots of ice cream! :-)
Jeff,
dude, you left one out...And FFS, where is ARTY?
AAAARRRRTTTYYYY.
Hi Ghoppa.
ramio,
looks like you were busy yesterday. Appreciate your contributions. I rarely have time for the blog accept early morning and at night. I have learned a lot here from you, jeff, brett, etc...and think more than anything rules and your own research is the biggest. You cant get good until it is your own style.
Can someone explain why the writing down of billions of dollars by UBS, LEH, etc., is considered so bullish?
Doji,
I've asked the same question many a times before in my young career (which is still young!). The answer I've always gotten is this. Clarity. Markets hate uncertainty. Writedowns help clear up that cloud of uncertainty and allow the markets to progress without having item X or Y in the back of their minds. Probably not the answer you were looking for but it's what I've always been told whenever potentially negative items are spun in a positive light.
For those in JEC puts, JEC was awarded a couple of contract for work here in Florida and in the U.K. this morning I believe. Bid/Ask has JEC opening about a point higher from yesterday's close.
Good Morning!
Yes, I agree, where is Arthur FFS?
Jorge, thanks for the heads up on JEC.
Doji,
"They" assume that the more the companies DO right down, they less they "will" have to write down. Simple bear market news. Things are so bad they CAN'T get any worse...(i.e. denial (STILL...ahhhh)).
Berkshire
Doji,
Not a problem. It did open strong but looks to be fading a bit. It's still under my line in the sand so I'll wait and see. VIP on the other hand I think is done as a put play.
Jorge,
I wouldn't count VIP puts out just yet...Looks to be sitting at decent resistance.
Berkshire
I know it's early in the day but anyone else loving AXA?
Jym,
I love it as a short entry...
Berkshire
Jeff,
I know you're not here, but I hope you feel my love. Closed half my GG position for a 110% gain. I haven't had a gain like that in months. Let's let the rest ride on, hopefully like you're doing on a HOG in the middle of the Rockies right now.
Anyone else loving the "financial rally" with no follow through?
Berkshire
Anyone grab CF yesterday with me? See ya, lights out!
Today could be a big breakout for TOL.....market changing directions now???????
Berk,
I think I see what you're saying. To be honest, since the second I took the VIP put trade, it never did feel right. It may be something that I'll regret, but I cut it loose near the open.
http://investingadventures.com/wp-content/uploads/2008/04/vip-2008-04-01-prophet.png
Good Morning OA's
AU: bearflag breakout
Whats up Berk
I think youll like SPN. Look at that 50% retracement with the hammer.
Pump it DRI! Damn baby!
I guess the big boys thing MON is going to miss earnings, or just want to punish anyone who bought in early.
Jorge,
If it never felt right, it might never feel right.
Follow your rules.
Berkshire
Good Morning Bob Raimo!
HLX looks like something that you would like.
Raimo, I cut ZLC out of my life. Relative strength.
Berkshire,
How you figure?
I have it as a breaking out double bottom.
http://img148.imageshack.us/my.php?image=axaprophetcy1.png
RAimo-
Got CF. I guess you are gone. I may pick up a few more.
Jym,
I have a target (upwards) between 37.25 and 38.25.
I also have it at numerous fib resistances. You need increasing volume off of the bottom for a "true double bottom." This volume decreases. The oscillators are higher now than in 4/07...Bearish divergance.
Lastly, and this is the fun part, it is about to complete an Elliott Wave (told ya I'd throw it out there) corrective pattern.
Berkshire
Step,
You liking PH puts here too??
Berkshire
ISRG breaking out here from a nice flag...
Step,
SNP could go either way in my book. I would lean on the bull side, but I need some more conviction.
Berkshire
Brian,
Looks good. Volume is low (early still) and it has stalled at the Oct high. Also, premature, but H/S top set-up is there.
Berkshire
DG,
I found this.
Apr 01 2008 9:00 AM ET
[BRIEFING.COM] S&P futures vs fair value: +14.9. Nasdaq futures vs fair value: +22.2. Futures climb to their best levels on word that Lehman Brothers (LEH) has a significant oversubscription of its deal. It prices $4 billion offering of convertible preferred stock.
Berk
I put PH on the line chart and, in my opinion, it looks to be a double bottom.
Brian,
ISRG looks great but the options cost more than my life.
ISRG trading about +25% of average volume to this point in the day. I have the $350 level back from Dec as my target.
Brian,
the volume on ISRG is going to be insane today. Already half way to the 30 day average. Damn.
Step,
Is there not a larger H/S top with all the correct volume for one to assume it is correct except the volume on the decline that has not yet started.
Besides, like I told Jym, no volume off of the bottom. It should increase significantly.
Also, 2yr chart, from Jul (06) low to Nov (07) top, price today is SITTING on 61.8 retrace, which is coincidentally also the left shoulder.
You haven't read any Elliott Wave have you?
Berkshire
Brian,
You mean $360? That is the only level it is not above right now...
Berkshire
SPY at its downward trendline again today. We will see if it bounces off down today, or if the news will bring us up above.
If we close above 135 that is a very bullish sign.
Step - ISRG not cheap by any means!!! I bought Apr 350's on the 28th for 13.80 anticipating a breakout - which usually fails me miserably- but worked this time. How's that for following rules?!
AMLN. Did you see it?
WOW am I glad I sold off everything but one cheap OTM option. Thank you for rules!
Not to be a naysayer, but I also like the fact the the volume in the spikes has been decreasing also.
Also at 14.6fib retrace (more important than you think it is).
Rock it though Brian.
Berkshire
Berk
No sir, have not read Elliott Wave. Interesting observation on the H/S, it will be interesting to see how it plays out.
Step,
IMO, there is not much question...The H/S cetainly trumps the double bottom. But, time will tell...
Berkshire
Berk- I see a clear H&S on ISRG from Oct thru Dec with a breakdown in January to $225. That pattern is over and done with since ISRG closed above the neckline and then retested the lows with a dip to $250 in early March. I don't see much of a pattern in this recent action other than the Flag breakout...
GGP: double bottom breakout a few days back and maybe bouncing after retest.