These are the rules by which we trade as members of LLTC. As you gain experience and trading skill, you’ll no doubt develop your own “rules of the trade.” Until then, please learn and do your best to adhere to these:
1. Making money is more important than being right. Check your emotions at the door.
2. Challenge your upside bias.
3. Never trade a tip. Never give a tip. A misinterpreted tip has the potential to bankrupt someone who doesn’t know everything you know.
4. No single trade should ever risk more than 20% of your working capital.
5. Change sides when the market tells you to.
6. Don’t fight the trend. Or the Dow.
7. Don’t chase prices. Let them come to you.
8. If you can’t explain the trade to your mother, you don’t understand the trade.
9. No one ever went broke by taking profits too soon.
10. Be patient with winning trades; impatient with losing ones.
11. The market is always right. When you start thinking the market is wrong, that means you are.
12. Sometimes, cash is the smartest position. Take money off the table in good times. Gains aren’t profits until you bank them.
13. Pick expiration dates at least 5-6 weeks out. Close the trade at least 10 days prior to expiration.
14. Never hold more than 6 positions. 4 is optimal.
15. In-the-money options only. The deeper in-the-money, the better.
16. Watch your round-trips (day trades). No more than 2 in any given week.
17. Double and triple check your orders before you execute. Some mistakes can’t be fixed. One effective way to do this is to verbalize the order out loud before clicking that final confirmation button.
18. Being uncomfortable with trading is normal. If it doesn’t scare you just a little bit, you’re doing it wrong.
19. Dump your traditional notions of “cheap” and “expensive.” A cheap stock is not a low-priced stock, a cheap stock is one with a low EPS ratio.
20. It doesn’t matter where a stock has been, only where it’s going.
21. Recognize that human psychology is what drives prices and the market. It isn’t always going to be logical, but it will always conform to an emotional paradigm.
22. Be able to “tell the story” of a stock’s price action. This includes being able to explain the emotional state of every stakeholder group at each point in the chart.
23. There are no “good stocks” or “bad stocks.” There are only stock prices that are behaving within acceptable parameters. Or not.
24. Volume is king. Rising volume validates, dropping volume invalidates. Treat prices in low or no volume periods with suspicion. Indicators are clues, not guarantees.
25. Never turn a trade into an investement, or an investment into a trade.
26. Bad news doesn’t get better with age.
“We are told that talent creates its own opportunities. But it sometimes seems that intense desire creates not only its own opportunities, but its own talents.” ~ Eric Hoffer