Apprenticed Investor: The Zen of Trading

3. Predetermine Stops Before Opening Any Position: Sign a "prenuptial agreement" with every stock you participate in: When it hits some point you have determined before you purchased it, that's it, you're out, end of story. Once you have come to understand that you will be frequently wrong, it becomes much easier to use stop-losses and sell targets.
This is true regardless of your methodology: It may be below support or beneath a moving average, or perhaps you prefer a specific percentage amount. Some people use the prior month's low. But whatever your stop-loss method is, stick to it religiously. Why? The prenup means you are making the exit decision before you are in a trade -- while you are still neutral and objective.

4. Follow Discipline Religiously: The greatest rules in the world are worthless if you do not have the personal discipline to see them through. I can recall every single time I broke a trading rule of my own, and it invariably cost me money.

RealMoney's Chartman, Gary B. Smith, slavishly follows his discipline, and he notes that every time some hedge fund -- chock full of Nobel Laureates and Ivy League whiz kids -- blows up, the mea culpa is the same: If only we hadn't overrode the system.

In Jack Schwager's seminal book Market Wizards, the single most important theme repeated by each of the wizards was the importance of discipline.

5. Keep Your Emotion In Check: Emotion is the enemy of investors, and that's why you must have a methodology that relies on objective data points, and not gut instinct. The purpose of Rules 1, 2 and 3 is to eliminate the impact of the natural human response to stress -- fear and panic -- and to avoid the flip side of the coin -- greed.

Remember, we, as a species, were never "hard-wired" for the capital markets. Our instinctive "fight or flight response" did not evolve to deal with crossing moving averages or CEOs resigning or restated earnings.

This evolutionary emotional baggage is why we want to sell at the bottom and chase stocks at the top. The money-making trade -- buying when there's blood in the streets, and selling when everyone else is clamoring to buy -- goes against every instinct you have. It requires a detached objectivity simply not possible when trading on emotion.