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Seven Rules of Engagement


Setting personal trading guidelines keeps you in the game.

OK, we're all on the same page now. No one is talking Bull Market, the problems in our economy and financial system are well documented and just about every sector has been hit or has started its decline. So what now?

We all need to take a deep breath and start looking at this with a more rational frame of mind. Emotions are high and investors are deeply confused by the endless noise of talking heads, politicians and market gurus all with a sound-bite of quick solutions to extremely complex problems. So here it comes. My two cents:

1) Time: This is going to take time. Some of our problems were decades in the making and you can't expect anyone -- especially the government -- to wave a magic wand and make them disappear overnight. Eventually the wounds will heal but medicine doesn't taste good and it hurts when you rip off the band-aid.

2) Get smaller: When the market is working against you, position size your trades accordingly. Start off by making investments half their normal size. Most of your trades in this environment aren't going to work so you need to keep some ammunition on the sidelines to fight what has turned out to be a long war. He who loses the least wins.

3) Keep your losses under control: It's imperative that you don't let your stocks run away on the downside. Mental stops are imperative. If a trade is taking out its stop and you aren't ready to give up on it, sell half. Reduce risk. Our first job as investors and traders is to live to fight another day.

4) 30 day rule: If the market forces you out of a position, do not, I repeat DO NOT buy the stock back for at least 30 days. With volatility as high as it is now the potential to be whip-sawed is very high, compounding your losses.

5) The Rally: We all know the market is oversold and at some point there will be a rally that lasts more than a few hours and even closes on the high. Don't get emotional. More than likely you won't be fully invested when it happens and you'll experience performance anxiety. Forget about it. Stick to the game plan. Move in baby steps while you learn to walk again.

6) 10:30 rule: No buying or selling until at least 10:30. The open is an emotional event filled with overnight news on the market and individual securities. Opening moves are usually exaggerated and often reversed or tempered latter in the day. Generally if I wait till after the morning rush hour I can get a better entry or exit point.

7) Stay in the game: Look, I understand the temptation is to throw in the towel and swear off stocks for the rest of your life. While you may be short term right, eventually you'll be wrong big time. More than likely you'll go "ALL IN" at a market top.
No positions in stocks mentioned.
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