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10 Trading Tips - Keep Your Head in the Game

Posted on January 24, 2009 by Adam

So much of trading is emotional. I believe it was Yogi Berra who said:

99% of the game is half mental.

Yogi, who may have been half mental himself, was so right. Trading is the same way. Most traders make bad decisions based on bizarre emotions that run through their heads. I promise you that is the fastest way to lose money, period. I remember when I started out I used to get emotionally attached to stocks I liked and hold onto them as they went down. Eventually I vowed to get out as soon as I broke even.

Talk about a self-destructive habit!

These ten rules are designed to help you separate your emotions from your trading, and will hopefully keep your account in the black. Even equipped with the best technical analysis knowledge around, without the mental preparation, trading is usually a losing endeavor.

1. Don’t consider trading against the trend. If you categorically reject buying any stock that is trending down, and selling any stock trending up, you have already upped your probability of success by 50%. Why swim against the current when you can swim with it? I break this rule all the time, but when I do, I have a damn good reason.
2. Don’t enter a trade during the 1st 15-30 minutes. Better yet, wait until noon. If you’re super-dooper patient then wait until the last hour of the day. Why? It’s good to let things settle into a consistent trend before you jump in. Even when prices take off running, most of the time they will retrace a little bit before heading off again. Secondly, most amateurs place trades at the open - pros wait until the close. Whatever you do, you always want to trade with the institutional money.
3. For one week, restrict yourself to a total of three trades. Practicing restraint will help you be more selective in your trading. You should get in the habit of taking only the absolute best setups.
4. Turn off the TV. Cramer is a moron. Trust yourself. ‘Nuff said.
5. Forget about profits - focus on how much you can lose. You heard me right. Pros always consider their risk before entering a trade. If you can limit your losses, profits will take care of themselves. That doesn’t mean you can throw the reward side of the equation out of the window. I asses reward on every trade I take, but risk should be your primary factor. If you can minimize risk, then rewards will follow.
6. Consider probability. When sizing up a trade, consider how likely the move your looking for is. Buying a pullback off of support in a strong upward trend is much higher probability than buying it at the highs looking for it to go higher. If you don’t get the pullback, forget it and move on.
7. Admit when you’re wrong: set a stop-loss. Rookies don’t do this. Don’t be a rookie. Even if it’s a mental stop-loss, just have it there as a mechanical circuit breaker to shut down a failed trade. Admitting you are wrong is a huge part of trading. If you just get out and move on, you will stay in the game to trade another day.
8. Don’t be ashamed to take profits. If I get a great one day move, I go in and take profits. That doesn’t mean you shouldn’t let your winners run, but you need to do what makes you comfortable. I happen to be a very short term minded trader. Leaving a huge gain on the line wrenches my gut, and that’s not why I’m in this game. Just last week I bought puts into a breakdown in PNC. The next day it collapsed 10%. I’m out with a sick gain. The day after it was down another 33% - wow - I think the option premium quadrupled. I wasn’t in the second move, but at least I had my peace of mind. I didn’t sweat it. The best compromise strategy when you get a gift from the trading gods is to take half the position off the table. At least raise your stop to break-even, if not more.
9. Stare at the chart for at least a minute thinking about all the possible outcomes before you place the trade. Use this time to plan the trade: entry, exit, and why you’re getting in. Talk to yourself out loud if it helps (yeah, I do that sometimes). This will keep you from making rash decisions.
10. If you’re in a slump, take a one-week break. You’ll feel refreshed when you come back to it next Monday. Just make sure you force yourself to start up again when it’s time - otherwise you may never get back in. I had to take a break after a horrible losing streak early in my career. When I came back to it after three weeks, I was profitable again.

I hope these tips help. In the end, it only makes sense to do what works for you, though. Sometimes it helps to write down your own guidelines. If you follow them strictly, they can help to eliminate bad habits that eat into your profits.