Discipline, Discipline, and Discipline!

To win this game you have to have discipline :-)

    Timing

  • Do not predict the market / trend; instead, just follow the trend. In a bull market mostly you should Long (as opposed to Short stocks); and in a bear market, you should stay in cash (or Short if you are really confident).
  • Buy new high stocks; do NOT catch falling knives!
  • Do NOT chasing high: e.g. > 5% above buy point.
  • Do NOT trade stocks / markets that you do not very understand, e.g. gold, bond, how it is related to goverment policy, and US / global economy.
  • Avoid trouble stocks: e.g. pending lawsuit, nobody knows the result; e.g. bio-tech stocks who have drugs waiting FDA approval.
  • Buy Day

  • Before market open, you can check futures
  • always check the big picture first: SPY, DIA, QQQ, TNA.
  • When the market tops, do NOT buy breakout stocks, esp blue chip stocks as they usually follow big index.
  • try to open a position on a quiet day, i.e. Dow Jones change (up or down) < 100 points; Actually if it goes up > 150 ~ 200, even 300 points, you should seriously consider sell / close all your Long positions; similarly, do NOT Short on a big down day, you should close your existing Shorts instead.
  • avoid stock that is too close to its earning release (ER) day; do NOT bet any stock's ER.
  • Avoid the stock on the first (few) day(s) even after the ER release, wait for the dust to rest before step in. Depending on the situation, wait for a few days, even weeks before a base setup, e.g. big jump on ER day, then fall back to 20MA support and rise from there.
  • Buy Time

  • Do NOT buy anything in the first hour after the market open.
  • Unless you are doing day trading, try to buy in the last hour before the market close, after making good observations. E.g. you can avoid many false stock break-out.
  • If you missed the best time to enter a position at the last hour of the day, you can try next day, e.g. by setting a buy stop order.
  • Volume

  • Check stock volume: make sure the stock is up with decent volume (> average daily volume).
  • Money Management

    Buy Size

  • should be < 1~2% of the stock's average daily volume; avoid thinly traded stocks, e.g. average daily volume < 1M shares.
  • Buy small, try to improve win rate first!
  • Each stock should be < 10% of your total trading capital, at most 20%. Do NOT put all the eggs in one basket.
  • Put more money into stocks that you have strong confidence.
  • Never, ever average down.
  • the first buy in one stock should be 1/3 or 1/2 of your intended buy size; if the stock move in your expected direction, you can buy the next 2nd 1/3 or 1/2, or 3rd 1/3.
  • Emotional Control

    Orders

  • Use market order instead of limit order, esp when cutting loss. You should focus on the daily/weekly/monthly big picture movement instead of minute/hour noise.
  • Use trigger (if your brokerage support it) instead of STOP order.
  • Holding Period

  • Most stock picks here are intended for short-term trading; long term holding is a consequence (e.g. the stock up-trends forever :-), not a plan. (Please check FAQ.)
  • When the stock moves in the expected direction, hold the stock for a few days, weeks, or months, depending on how the stock behaves. If you are really lazy and do not want (or able to) to check your stock holding everyday, then immediately set 5~10% Stop trailing order after the purchase (see below).
  • Do NOT day-trade, it's too stressful for human; and you do not want to compete with computers on the Wall street.
  • Cut Loss

  • This is the single most important rule that you must abide by. If the stock moves aginst your expected direction, you must cut loss, there are a few choices:
    • cut when the stock drop 5, 7 ~ 10%.
    • 15 ~ 20% is the max drop that you must cut loss.
    • some people cut loss in a step-wise manner: 5% drop, cut half; and if it continue drop another 5%, cut the other half.
    • the stock drop below major support line, e.g. 20-day-moving-average (20MA), 50-day-moving-average (50MA), or trend-line, etc.
    • However, do NOT cut loss too soon, e.g. 3 ~ 5% in case the stock turn around quickly after get rid of those weak hands :-(

    Take profit

  • When the stock stops moving and starts wandering side-ways (some people call it "resting"), you should consider take profit.
  • Set 5% or 10% Stop trailing order: when your stock have > 3~5% profit, you should set stop order higher than your purchase price; do NOT lose money on an already gaining stock; However, do NOT set the stop order too close to the current price, this is similar to the last point of "cut loss" rule. 5% Stop trailing order is recommended.
  • Do NOT use margin (or any form of borrowed money) to trade. Scared money cannot win: your emotion under pressure will hurt your judgement.
  • Normally you should NOT trade options, unless you can consistently make money from trading stocks alone :-) The main problems of options trading are:
    • You need to get both price and time-frame right to win.
    • Time decay: sometimes even when you get both right, you still lose, because of the time decay.
    • Wide spread between bid/ask price, esp for thinly traded stocks; the moment you enter a position, you have a loss already.
    • (I will write more about options trading when I get time.)