(THIRD PART OF A 5 PART SERIES)
NOTE: FOR LACK OF SPACE, THE AUTHOR IS PUBLISHING THIS ARTICLE IN A 5-PART SERIES.
- 1. Thou must first know thy self and thy market well.
- 2.Thou must deal only with registered brokers.
- 3. Thou shall not invest money you can not afford to lose!
- 4. Thou shall not use unprotected computers!
- 5. Thou shall not trade without a plan!
- the choice of item/market to trade, (which security, commodity, or currency)
- the specific position to take (whether to buy or to sell)
- the specific price range on which the position will be executed (entry point)
- the targeted price objective or exit point on which the trade must be closed
All
these trading decision parameters must be clearly defined and set
before executing any trade. Never attempt to trade fast moving markets
online in the same manner and with the same do or die spirit as in
placing bets on online gambling sites. Every trading decision must be
based on a trading plan and every trading plan must be followed to the
letter.
- 6. Thou shall not execute orders without trading stops!
Every
trading plan must incorporate trading stops which shall act as a safety
nets to limit your losses in case the market moves unfavorably against
your established positions. There is no set or fast rule for creating
your stops. However, in establishing your initial position you need to
set your initial stop with a wider range - taking into account the
highs and lows of the trading range established for the day, the
proximity of your entry price
to historical turn points (chart supports and resistance levels), and
your tolerance level as dictated by your initial equity. (Make it a
point that your initial stop must not be beyond the price level where
it will eat up more than 20% of your equity). When the market starts to
move in your favor, adjust your initial stop turning it into a trailing
stop in the direction of the price movement. You must adjust your
trailing stops tighter and tighter (closer to the spot price) as prices
approach historical turn points or significant technical price levels
(such as those established using the Fibonacci theory).
Stops are
vital to your becoming a disciplined investor. They help you decide
without hesitation when to cut a losing or winning trade. They prevent
you from becoming an emotional trader and a perpetual loser. But most
important of all,trading stops limit your actual loses. I have seen
people lose all their investments in one single session because they
adamantly held on to losing positions in the hope that the price will
soon make a turn-around. I have also seen people who have reached their
profit objectives but out of greed, held on to their positions. And
when the market whipsawed they ended up losing everything. |
