Investment: The Top 10 Trading Rules - Part 1

By Todd Harrison

I remember why I wanted to be a trader. I figured that the easiest way to make money was to stand near the cash register. Of course, as I discovered through my 17-year career, there's a reason why consistent producers get paid the big bucks. Flashy bets and big swings sometimes connect but, in the end, a disciplined approach pays the bills.

I've tripped plenty through the years, the types of missteps that almost cost me my livelihood. But I persevered, climbed the ladder and morphed those mistakes into valuable lessons.
I evolved and matured as a vice-president at Morgan Stanley (MS), a Managing Director at the Galleon Group and as the President of Cramer Berkowitz, a $400 million hedge fund. My approach wasn't always constant but, in the end, certain rules allowed me to stay in the game.

These are those rules.

(1) Respect the price action but never defer to it
The action (or "eyes") is a valuable tool when trading but if you defer to the flickering ticks, stocks would be "better" up and "worse" down and that's a losing proposition.

(2) Discipline trumps conviction
No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always attempt to define your risk and never believe that you're smarter than the market.

(3) Opportunities are made up easier than losses
It's not necessary to play every day, it's only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability. (aC: Oh man, this is so true! The tempation to make a quick buck is always there, so one of the top trader's discipline is to resist temptation.)

(4) Emotion is the enemy when trading
Emotional decisions always have a way of coming back to haunt you. If you're personally attached to a position, your decision making process will be flawed. Always take a deep breath before risking your hard earned coin.

(5) Zig when others Zag
(aC: This is otherwise known as the Contrarian rule; Contrarians believe that the general investing public is usually wrong in its trading strategy, so the smart thing to do is to do the opposite) Sell hope, buy despair and take the other side of emotional disconnects (in the context of controlled risk). If you can't find the sheep in the herd, chances are that you're it.

Read Part 2 of this Post here...