Three rules for new traders

If you trade for a while, you will see a lot of rules lists. These are basically list of rules traders put together to, bluntly stated, not screw up like they did in the past.

There is a lot of overlap among rule lists, and frankly most of them aren't worth much. Particularly in cases where the list spans dozens of different rules (on reading these, one can conclude the writer of the list has made a glittering variety of errors that he believes he can circumvent if only he has a long enough set of rules to follow).

I've got my own list, but it is short and sweet. Like all rules writers, I do my fair share of ignoring some of these from time to time, and virtually every time I do, I regret it. I have gone to the length of having the inside and outside of my laptop computer emblazoned with these three rules. Maybe I should do the insides of my eyelids as well.

It has cost me a huge amount of money to formulate these "trading laws", if you will, and I offer them up - as I do everything on this blog - for free, with the hope that it will help some of you. If one day I can follow these three rules absolutely consistently, I'll be a much better trader for it.

• Never Lack a Stop Price - The moment I have bought into a position, I immediately whip right around and set a stop price. There is no delay. Always have a stop price in place for every single position (based, naturally, on good charting). No exceptions. For options, using a contingent stop.
  
• Never Do an Ad Hoc Close - So what's with the Latin? OK, this is my most important rule, and what it means is simply this - don't close on a spur of the moment decision. There are two things that should do your closes for you: (1) a stop price (2) the successful achievement of a pre-determined target price. Impulsively jumping out of a position almost never works to your favor.
  
• Never Act in the First Thirty Minutes - There's something weird about the first thirty minutes of the trading day. Just trust me on this. Do nothing. No opens. No closes. No nothing. Your stops should be in place, and they can do their job, but for you - follow this new spin on old saying: Don't Just Do Something! Sit There!
  

There are rare occasions when I do think ignoring those last two rules is OK, and that is during truly extraordinary market events. Let's say you've got a large position on index puts going into a new trading day, and for whatever reason the market is going to gap tremendously lower at a key support level (which could be a Fibonacci, a horizontal line, or what have you).

In an instance like that, I see nothing wrong with doing a close immediately at the open, because in extreme cases (like when the Dow opens down 400 points), fear is usually greatest at the open. But by "extraordinary" I mean "extraordinary" - - not once a week. The bottom line is that 99% of the time, I do not stray from these rules.