Trading Rules

by Christopher M. Quigley, B.Sc., M.M.I.I., M.A., WealthBuilder.ie | March 12, 2008

SOME time ago a colleague asked me to give him some guidelines on trading equities. I set out below the schedule of "Trading Rules" which may be of interest to readers who are contemplating entering this fascinating arena.

Rules Of The Trade

Rule 1. Never purchase equities at market price; always use a price limit.

Rule 2. Upon entering a position the maximum loss entertained should be approximately 3%. Thus be prepared to cut your losses early should the price action go against you.

Rule 3. As the price of the stock rises (or falls if you are short) raise your stop accordingly, thus allow your winners to run.

Rule 4. Prior to investing in any equity pay particular attention to the risk reward ratio.

Rule 5. Your potential portfolio of stocks chosen by fundamental analysis should comprise no more than 10/20 stocks. Know everything there is to know about your listing including price history, financials, business model, management and earnings dates. When you become experienced you can modify the degree of diversification in favour of focus.

Rule 6. When starting out do not invest more than 10% of your investment fund until you have proven your ability to make good investment decisions in real time in the real market. Ideally you should paper-trade for 3-6 months before using real money.

Rule 7. Keep yourself educated, informed and aware.

Rule 8. Keep a diary for note taking, analysis and review.

Rule 9. The ideal time to trade is the last 1-2 hours of trading.

Rule 10. Be consistent in your approach. Discipline will help you to eliminate emotion from the process and allow experience, logic and technique to prevail.

Rule 11. Always know the trend of the market and your equity. The trend is definitely your friend and be aware that in a bull market, in the main, significant averages will be price supports whereas in a bear market they will be price resistances.

Rule 12. Be patient and learn to realise that if no investment prospect presents itself very often the best place to be is in cash since the most important trading rule of all is: PROTECT YOUR CAPITAL.

Contact Information

Christopher M. Quigley, B.Sc., M.M.I.I., M.A. | Wealth Builder | Dublin, Ireland | Email