In his book 'Stock Market Trading Rules, fifty golden strategies', William F Eng suggests practical rules and strategies for stock market trading. In this article, some of the trading rules are presented.
Don't over trade
William F Eng mentions that one of the fellow traders wore a badge with DOT written on it. Hwondered about this letters because these are not the initials of the person. Later on he realized that the trader wore them to keep him reminded of the trading rule â Do't over trade.
Over trading is very easy because one can trade using margins in derivatives. Since margin money is small, the losses are not clearly known easily. Moreover when one is overtrading, it is easy to miss the calculations because one is busy trading! And finally only when the margin falls short, one realizes about over trading.
Apart from the above reason, overtrading also creates lot of expense in the form of brokerage. Unless you are a exchange member, these expenses can be heavy.
It is important to trade as per a selected, tested pre-defined system to reduce over trading.
Never let a profit turn into a loss
This rule seems very simple but is very tricky. As markets don't go straight up or straight down, it is difficult to keep the stop losses very close to start with. If the trailing loss is too close, one may get out prematurely, reducing the profits and if it is too far, it may create losses.
William F End says that this problem can be handled only through systematic approach to risk evaluation and valuing market losses.
Tips don't make you any money
This is a nice tip! Everyday we keep hearing in the tv or magazines various tips. Some times same stock will have different advices by different people.
Why one can not make money using tips is because the source of tips is not known, the sources are diverse and may not be reliable.
So when you are trading based on tips, you are on a loose foundation. Instead a systematic approach to trading system is required in order to trade correctly.
As long as a market is acting right, don't rush to take profits
So many times, I just came out of a trade very prematurely fearing that the profit will be eroded. However it is important to ride the wave if we have to maximise the trade.
William F Eng says taking positions that will only break even is a waste of time and money. The only way to make money is to nurture winning positions.
Never permit speculative ventures to turn into investments
I have read this rule many times but I learnt this rule in the hard way. The normal psychology is when a long trade is getting in to loss, buy the equity and keep it. This does not work because the basic strategies behind investment and trading are completely different.
Experienced traders never mix the two approaches.
Don't try to predetermine your profits
The basic premise we start a trade is that a trend in motion stays in motion. Once a trade is taken based on some signal, there is no need to 'predict' how much it will move. Instead WF Eng says to go with the flow of the market and using trailing stop loss orders. When we keep a profit target, we may not be utilizing complete movement of the market. On the other hand, a trailing stop loss order gets triggered only when market reverses and so you utilize the trend movement fully.
Don't watch or trade too many markets at once
With computer online trading, it is easy to automate most parts of the trading system. This frees the trader to watch and analyze the moves much better than earlier. But when one uses the online trading to trade more markets, the advantage of watching and analysing trades in hand become less.
By not watching trades fully, we not only miss the moves, we miss the learning also. Moreover, when we are trading in several markets at once, we tend to over trade.
Don't average the losses
Needless to say this is a bad idea, again another one, I learnt it hard by wrong practice. When one is in losses, the trade is in the opposite direction and one has to come out based on the signals in the trading system being used. However when one is averaging, it may look like the cost is coming down but the trade is still in opposite direction.
This only adds up more losses. In order to get into profit, such a trade has to reverse quite big which is very unlikely.
Added to this by averaging, you are increasing your trade size, and so using more margin, and spending more commissions with a very little probability of gaining profit.
Withdraw a portion of your profits
WF Eng suggests withdrawing half of the profits every month. This way you can still take somewhat bigger trades than before but at the same time, you are not risking all the profits. Some traders think by increasing the trading amount or trading frequency, the profits can be increased. But in those cases, even the risk also is increased.
Trade the active stocks and futures
It is important to trade stocks and futures which are liquid and which are actively traded in the market. There are several advantages to this: (a) You will be able to come out of the trade with least loss of time and slip (b) When stocks are liquid, they are less vulnerable to unfair practices and you are more safe (c) Information on actively traded stocks is more readily available (d) When the volumes are large, you will be able to enter and exit easily.
The book 'Stock Market Trading Rules' by William F Eng is a classic and contains valuable information from years of experience and analysis. Here I could only give a brief explanation of some rules. You may check up the book for 50 important rules and strategies with detailed explanation of each.