Stock Trading Discipline

There are some general “rules” that I try to apply to my trading discipline. These tips have been established through my personal trading experience. If I can ever apply these without emotion and without exception, I may well proceed to even more successful trading. Well, perhaps I can’t conquer the emotion part as there will always be some level of fear, however, I should turn my tips into rules and apply them stringently without exception. A little fear is not necessarily a bad thing as it is protection mechanism against taking overly aggressive and risky actions.

1. Make the trade based on fundamental and technical analysis. Be confident and committed with the decision. If it turns out to be wrong, get out of the position.

2. Take what the markets will give you. Don’t be greedy. Taking the profit to protect against losing that profit is better than a lost opportunity (the opportunity is what you are hoping for by holding out for more profit).

3. Take the loss when it is due. Don’t take more loss by holding the stock as it drops further. Unless you stop trading, this won’t be the last trading loss you will take.

4. Don’t hold a position past earnings announcement. Quite often, a stock climbs on its way towards earnings announcement only to deflate after the earnings announcement, especially if the outcome is below expectations. Contrarians may do the opposite and buy the position to profit from an anticipated rise in the stock after earnings announcement. The risk is not worth it for me.

A good stock trading system offers the trader clearly defined entry and exit points for stock positions. A good stock trading system shows the historical view which adds to the confidence that the system works. It is true that past performance is not necessarily an indication of future performance. However, the historical backdrop provides credence to the technical analysis method.