You could be very good at picking the right stocks, predicting the trend, and executing the right strategy, but if you do not have a defined set of rules of when to get into a position or when to get out of it, you may still lose money. It is important to define and follow a set of rules on when to Enter into a position or when to Exit from it.
Decide beforehand on how much money to allocate for each trade and avoid putting more than 5% of your portfolio into any one position. You should always be comfortable with Portfolio Drawdown and develop your Portfolio Management Skills by looking at the various Portfolio Management Tools found at Tradespoon. Good traders are disciplined traders. Know exactly how much money you might lose at any given position and what your maximum return for that position can be. Never compromise on those numbers. Follow the golden rule of ‘trade small and trade often’ to take advantage of Statistical Analysis such as Probability of Success and Implied Volatility.
Rules for entering a position
Before entering into a position, look at the Tradespoon tools that show the Support and Resistance of the stock or trade in question. Tools like Seasonal Charts can show you trends and their reversal from a seasonal perspective. It can also show the short-term bias in the stock based on Tradespoon’s neural networks – whether it is going to go upwards, downwards or will remain unchanged. Buy weakness and sell strength. Always make sure that the monthly Trading Plan goals are achievable and are not adversely affected by your getting into a new position.
Rules for exiting a position
The Probability of Success decreases as expiration approaches. It is always better to sell an open position if the underlying has moved in the anticipated direction, instead of waiting till the Expiration Date to do so. For this same reason,always close your option position 5-20 days prior to expiration. If a stock goes against you, always try and limit you losses to no more than 50% of the maximum risk you took on any given option position. And again, always remember to buy on weakness because that gives you more opportunity to gain by selling off during periods of market strength.