The Ten Rules of Trading

For more than five years now, a fellow named Daniel Rosenblum has been trading with me in my chat room. He has done a nice job of building his portfolio and now makes a very good living as a full-time trader.

Dan recently wrote the following 10 rules, which distill the primary lessons he has learned over the years. All of these are things I've constantly stressed as keys to success, and it's really very fulfilling when someone has incorporated them into his methodology and has had good success trading.

Here are Dan's rules:

1. Don't swing for the fences or put it all on red. Never, ever let one trade determine your profit and loss for the year, or if it goes wrong, put your capital at risk. I did it once and the memory of that experience burns me almost daily. In most cases, margin should be avoided and "doubling down" a bad trade is a sucker's bet. Most times it just pays to take the loss and move on. The good thing about being a trader is that every day there are new opportunities to make money. Just make sure you can stay in the game.

2. When the market is bad, it's time to be more cautious. It sounds obvious, but when the market is below key moving averages, unless that trade looks really enticing, it is probably better to sit on your hands. We did a lot of hand-sitting during the bear market and we survived better than most.

3. Most times you won't find the perfect entry or exit, so don't worry about it. Many traders waste too much energy looking for that perfect trade. What I like to do is "partial buy and partial sell," that is, when a stock looks good, buy some and you can average up and down as warranted. When you have a gain, you can take profits on the way up or down likewise.

4. Volume is the key. When looking at a chart for a good entry, many times the key to whether the trade will turn out well is if there is an increase in volume; chart breaks without volume are not as meaningful.

5. Keep your emotions in check. Don't get too up when things are going well and too down when you hit a bad streak. If trading were easy, it would be called winning, not trading. It's important to keep your emotions in check on a daily basis to grind it out longer term.

6. Patience, patience, patience. For me personally, this is the hardest one to abide by. When the market isn't giving you anything, don't compound the problem by doing what I like to call a boredom trade, that is, to buy a stock because you're "bored." If the trade isn't there for you, don't do it. Likewise, if a stock you are holding has done nothing wrong, don't sell it just because it hasn't "moved." If you don't need to put your capital in something else, it usually pays just to be patient and hold on. I have found it easier to hold on to a position when one is holding a smaller amount of stock. When one is loaded up in something, it is much harder not to get caught up in every tick.

7. When the odds are in your favor, go for it. Although it's important to be cautious and very careful with your capital, there are times, like a poker player who has that great hand, that you find that potentially great trade. When this happens, don't buy a tiny amount and watch it; be aggressive.

8. Don't get caught up in guruism or CNBCitis. We all like to both hear and give predictions and prognostications about next month, next year or next decade, but that doesn't help the trader make money. All it does is possibly freeze your decision-making process when there is a trade to be made. The market will tell you when to be bullish or bearish, not some loudmouth in the media.

9. Invest for success. Anything that can lead you to trade better is vital. Trading is hard enough with all the proper tools at your disposal. Buy a comfortable chair, get as many screens as you need, buy enough memory for that computer, and have at least two brokers in case one goes down right when you have to sell your biggest position. (Yes, it has happened to me.)

10. Take breaks. Trading is very stressful on both the body and mind. Sitting in one place staring at six screens for hours on end is not easy on the eyes or back, so take frequent walks and stretch. It's also good sometimes just to get away from trading for a while to rejuvenate yourself, so don't be afraid to take that vacation. The market will be there when you get back.

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James "Rev Shark" De Porre is a self-taught trader who primarily trades for his own account from his home on Anna Maria Island, Fla. He is a member of the Michigan Bar Association and a former tax attorney and CPA. De Porre holds business and law degrees from the University of Michigan. He was formerly the host of America Online's The Shark Attack and presently operates SuperTraders.com. At the time of publication, he did not have any positions in any of the stocks mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback and invites you to send your comments to [e-mail].