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Becoming a Better Trader: Developing Your Personal Rules


Most people could improve their results dramatically simply adopting and adhering to a simple set of rules.


If you trade in stocks and possess a similar passion as I do, you will inevitably pique the curiosity of others when they learn that stocks are one of your interests. Initially I would try and discuss a few of my current ideas, and go to great lengths to make sure a person received a brief lesson in trading so they knew when to get in and when to get out. It took me a while to learn that the question I was being asked was just about as absurd as if I were to ask a doctor, how I could make some quick money practicing medicine, or a lawyer how to make some quick money practicing law? It was only when I realized that the true profession of trading stocks is as intricate as other professions, that I stopped discussing it altogether and started adopting an even more vague answer when asked what I do.

When I do however meet someone who truly desires to learn and our paths cross due to our similar passions, I never shy away from teaching as I am one who believes that each and every person has it in them to become a successful stock trader and therefore has the ultimate power to truly change their life. I am not peddling real estate flipping books, or my top ten secretes to become wealthy, however I do firmly believe that through the financial markets, every single person, should they desire, has unlimited potential to become successful in the market and therefore change their financial future forever.

Most activities requiring some specialized skill first and foremost require a foundation of fundamentals that each person must possess before moving forward. Should they skip this step, at some point it will hinder their progress. Should you desire to learn the English language, building on the fundamental base of the alphabet is key. Should you desire to play basketball, fundamentals such as dribbling, passing and how to properly shoot the ball are all a must before you can be successful in an actual game.

When it comes to trading however, people are at a loss for what these fundamentals are. I too had a hard time quantifying what it is that provides the foundation for becoming a successful stock trader. Most people, when asked, would say that the foundation for becoming a successful stock trader is understanding company fundamentals such as Boeing's (BA) balance sheet, or Corning's (GLW) income statement. Others would say it is understanding technical analysis such as the support lines for Goldman Sachs (GS) or Citigroup (C). Others would say that it is by understanding economic cycles and how it affects companies such as Alcoa (AA) or Caterpillar (CAT).

I however have a slightly different belief. I believe that almost each and every person who is missing the boat or on the wrong path when it comes to stock trading success has not mastered the fundamental basis of trading within a set of parameters, guidelines or rules.

Most people will brush this key variable off, underestimating its importance, while I believe it is not just important, but it is the most important and the foundation for success.

As individuals we naturally shy away from rules. Rules hinder and confine us however are designed to protect us. Imagine if you will if we didn't have simple traffic rules, we would be in harms way at all times and subject to constant chaos. Furthermore, most people view stock trading as this sexy 'gut instinct' gamble where a person positions themselves based on a feeling and if successful reaps huge rewards in due time not a system that adheres to a certain set of rules.

If there is one thing however that each successful stock trader possess, regardless of their biased towards which vehicle they utilize, time frame or style, it is a set of personal rules that they have developed, refined and mastered over the years. Most will have these rules written, and most will always be looking to update and improve these rules as they grow as a trader.

When I meet someone for the first time, I request to see their trading rules. It isn't surprising when most cannot produce this. Simply because it isn't written, doesn't mean they do not possess rules, so I give them some time put these rules down on paper. Typically, if someone has been attempting to learn to trade for a while, the rules that end up on paper are quite good and a great place to begin.

My next step, after reviewing their rules is to randomly review 10 trades. Can you guess what I typically find? You got it, trades that have not followed the specific set of rules, that the person just outlined for me on paper.

I could go on about this exercise but I think you get the idea. So often, I am asked questions by individuals seeking to become better traders however are skipping over the basic fundamentals needed before moving forward. They are attempting to run, before crawling, attempting to play in the game before learning to dribble. It simply can't be done.

Rather than trying to unlock the mystery of trading through the vast array of noise that surrounds our chosen craft, ask yourself a few questions.

1) Do I possess a set of rules by which I follow to execute each and every trade?
2) Are these rules written down and do I review them frequently?
3) Do I constantly review my trades against my rules as my first area of investigation for a trade gone wrong?
4) Am I constantly looking to improve these rules over time?

Most people could improve their results dramatically simply adopting and adhering to a simple set of rules. Picking up any book on trading will give you these rules to follow. Over time, the true professional will slowly start to build his own set of rules that better correlate with his personality and tolerance for risk and ultimately, this foundation will be the building blocks for the true success that I believe is available to all.

No positions in stocks mentioned.

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