Writing your trading rules

Without trading rules you're just shooting from the hip

Most of us don't like rules. Rules restrain us from free expression. We want freedom to do whatever we want. But this doesn't work in the realm of investing.

In the realm of investing, rules are good. They're necessary. And they will make you more money than a no-rule approach. What do we mean by rules? Take a look.

A 3 rule design

1. Never buy or sell any security until you've done a proper pre-mortem worksheet
2. Never buy a cheap stock unless you understand why it's so cheap
3. Never sell a winner unless you have a solid argument that it's overpriced

A 5 rule design

1. Never buy or sell any security until you've done a proper pre-mortem worksheet
2. Never buy a cheap stock unless you understand why it's so cheap
3. Never sell a winner unless you have a solid argument that it's overpriced
4. Never buy a stock that's trading for less than $3 per share
5. When there is news about "accounting irregularities" sell immediately

A 7 rule design

1. Never buy or sell any security until you've done a proper pre-mortem worksheet
2. Never buy a cheap stock unless you understand why it's so cheap
3. Never sell a winner unless you have a solid argument that it's overpriced
4. Never buy a stock that's trading for less than $3 per share
5. When there is news about "accounting irregularities" sell immediately
6. Never double up on a losing position unless you understand why it's a losing position
7. Never buy a stock simply because Jim Cramer likes it (I'm kidding of course, but seriously...) 

A 10 rule design

1. Never buy or sell any security until you've done a proper pre-mortem worksheet
2. Never buy a cheap stock unless you understand why it's so cheap
3. Never sell a winner unless you have a solid argument that it's overpriced
4. Never buy a stock that's trading for less than $3 per share
5. When there is news about "accounting irregularities" sell immediately
6. Never double up on a losing position unless you understand why it's a losing position
7. Never buy a stock simply because Jim Cramer likes it (I'm kidding of course, but seriously...) 
8. Never buy or sell anything until you know how it will affect your asset allocation balance
9. Never buy or sell anything based on rumors or speculation. Do your own due diligence
10. Never do a trade until you consider who might be on the other side and what they might know that you don't

All Master Investors have trading rules

Master-level investors love trading rules. They're what keeps them from making stupid mistakes. Warren Buffet has trading rules. So should you.