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My Rules of Trading and What Happens When You Break Them

The past 2 weeks have been a bit rough and I am still a bit gun shy.  I am working to rebuild my confidence and start making profitable trades again.  First I will explain the rules of trading I established for myself.  I will then explain how I managed to break all of them and how much of my account I gave up while learning these rules.

The Rules

Rule #1, Cut Losses Quickly.  This is a rule from Tim Sykes and he makes no secret that it is the most important rule.  Everyone who has read or watched any of his free content knows this rule.  This is so important because when you trade lower priced stocks, almost all of them are eventually going to zero.  You never know when that is going to happen and you don’t want to be trapped in the trade when the stock does go to zero.

Rule #2, Plan Every Trade.  I keep a pen and paper at my desk and sketch out a basic plan before I make the trade.  The notes include the stock symbol, position size (number of shares), entry point, and 2 exit points.  I include 2 exit points, one is a stop, the price where I will get out to protect my account; the other exit is the target price, where I hope to sell and take a profit.

Rule #3, NEVER CHASE.  Plain and simple, if I miss my entry point that’s it, I missed it.  I will never buy above my entry point again.  It is better to keep my account intact and use it to fight another day.  There will always be another spiker, when you miss one use it as motivation to find the next one.  Never sulk and think about what could have been, because it is not what happened.

Rule #4, Stick to the Plan.  A plan is only useful if you use it and stick to it.  Not only must you make a plan but you must stick to that plan.

Rule #5, Cut Losses Quickly.  This rule is so important I listed it twice.  Everyday before I trade, I read all these rules and remind myself that they are the ticket to my future success.

A successful trade, in my book, is one that is executed according to these rules.

Sample Plan

Here are the actual notes I was taking on 10/8.

Note the top line is the only position I took, my position (P) was 1000 shares for $5.03 each.  My stop was $5, and my target was the top of the initial spike.  Given I had an issue selling and sold below this price, I made a plan and stuck to it for the most part.

Everything else on there was part of a watchlist for the day.  I keep a few notes on each one as the morning progresses.  I have noted some entry points for DNR and UUU.  Neither got to the target price so I didn’t trade either one.

Breaking the Rules of Trading

On 9/21 I was watching the market and all the weed stocks were continuing to blow up.  IGC, one I had traded last year was in play and moving fast.  It had closed at $2.14 the day before and opened at $2.70.  I decided that if it broke through $3 I would buy it and ride the spike as long as I could.  I placed a buy order at $3.05 but was too late.  Another order at $3.25, too late again, $3.50, $3.75 I couldn’t catch it as it was moving too fast.  Finally as it blasted above $4 I placed another order at $4.05, it executed at $4.03!  I bought 6000 shares for a total cost of $24,184.95.

I was happy to finally be in as this had the potential to keep running!  After the order executed I realized that I was actually too late again, my order had filled because the price had reversed.  I was suddenly staring at a $1,000 – $2,000 loss.  What a disaster I had created for myself!  Not wanting to just give up 10% of my account, I looked for reasons not to sell.  I got a nudge from someone on twitter encouraging me not to sell, they thought it would come back.

As the day progressed the price rebounded, I placed a break-even limit order at $4.03.  As the price moved quickly above and back below that price, my order never executed.  Not enough people bought at that level to take my shares.  As the price slipped further from $4 I was a wreck mentally.  I kept looking for and finding reasons not to sell.  In the back of my head I kept saying, the first loss is the smallest, but I managed to drown out this voice.

Planning Again

At the end of the day the stock completely crashed closing at $2.81.  I never sold and was looking at a loss of $8,000 on paper.  I took my time over the weekend and came up with a plan, I would sell at the first sign of weakness after the markets opened on Monday.

Monday morning rolled around and the stock opened at $2.57 and started dropping, I sold as soon as I could at $2.38.  The sale was $14,292.01.  This was a loss of $9,892.94, about 40%.  This was also about 1/2 of my trading account since I was using margin.  The rest of the week I kept my trade sizes small and cut my losses quickly.  I have begun picking back up again but am concentrating on trading based on the rules listed above.

As an additional reminder I have scheduled an automatic text from myself everyday at 9:25 AM.
“Cut losses // Make plan // Don’t chase
-Future self (you’ll thank me)”

Since this time I’ve had a few decent wins and several small losses.  I’m still a little trigger shy but I am conditioning myself to be a profitable trader by first minimizing losses; now I am working on maximizing profits.

Final Thoughts and Notes

I had a long delay between this post and my last, I needed time to get my head right and wait a few weeks before I revisited this story.  While I wish it hadn’t happened, I will use this as a learning opportunity and will hone the emotions in a positive energy.  90% of traders lose, I’m working everyday to join the 10% on the other side.  Check back often to see where I am on my journey.

All my trades can be found here: Profit.ly
Profit.ly is the social media for traders.  I encourage you to post all your trades as well.

In my next post I will tell you about the Pattern Day Trade rule and how to get around it.

Thanks for reading and happy trading!  Follow me on twitter of all trades live!