Trading Rules

by Donald Harder

1. Before you trade, establish your trade position size. We recommend never trading more than 1/5 of your trading account in any one trade. Thus, if your account is $10,000, you would allocate $2,000 per trade. $2,000 is your position size in this instance.

2. Never buy during the first 15 minutes of the trading day. Too many false starts occur during this period.

Charts like this are more common than you might think. The price opened at a breakout level and then immediately sold off sweeping any stops that may have been placed. Traders who followed the 15 minute rule would have been protected against buying a false breakout here.

3. Use trailing stops. After a stock you have purchased or sold short has a follow through day, move your stop order just below the breakout level.

A follow through day is a strong up day that closes above the breakout point. Moving up your stop allows you to reduce your risk exposure and protect your profit.

4. Always use stops. When you buy a stock or sell a stock short, always place a stop order just below support. We will highlight support with our recommendations so you don’t have to guess.

The general rule of thumb is to never use a stop loss that is no further than 3% below your entry price (you can achieve an average risk level of only 2% or less on failed trades by also incorporating trailing stops into your system as outlined in Step 3 above).

With this stock we recommended to buy if it traded above $14.00 and we highlighted support, which was $13.50 at the time we recommended it. Let’s say you purchase this stock at $14.10. That would mean that support was $0.60, or 4.5% below your entry price. Remember, you never want to place a stop lower than 3%. Unfortunately it is not always possible to buy a stock precisely 3% or less above support, therefore you need to accommodate for this by decreasing your risk exposure in other ways.

If our recommended stop area is greater than 3%, you need to reduce your position size (see Step 1 above) in order to accommodate the additional risk.

This means that if support is 6% below your entry price you must only use 1/2 of your established position size for that trade.

For example, if your established position size is $10,000, you can only buy $5,000 worth of shares for that trade. In the example above, risk is 4.5% so you could purchase no more than $6,666 worth of shares in that trade to keep your total risk exposure 3% (3%/4.5% = .6666 x $10,000 = $6,666).

5. Sell into strength. When a price gain of 10% is achieved, exit the trade to lock in your profit. If you choose to hold, at a minimum we recommend taking half of your profit at that level and then move your trailing stop up close to the 10% level in order to protect your remaining shares. Unless you are an experienced trader that recognizes continued potential, we recommend just exiting the entire position at 10%. You may miss a few stocks that run higher but over time you will do better by using a disciplined profit taking approach.

There is a famous saying on wall street: Bulls make money, bears make money, but pigs get slaughtered. In other words, don’t get greedy.

6. If your trade isn’t working like you expect, exit. If you buy above the breakout level and the stock closes the day back below the breakout level, exit it even if it didn’t trigger your stop. If after 2-3 days the stock hasn’t had a follow through day higher, sell it and move on to the next recommendation. This will save you a lot of grief and frustration over time.