Rule # 1: First things first - First, decide whether you are a trader or an investor? Be sure that you really want to trade. It is common for people who think that they want to trade to discover that they really do not. Examine your motives and think about why you really want to trade. If you just want to trade for the excitement, you might be better off riding on a roller coaster or taking up hang-gliding. You need to examine your motives and the activity that will result from it as many times there may be some form of conflict. The share market is a stern master. You need to do almost everything right to win. If parts of you are pulling in opposite directions, the game is lost before you start.
Rule # 2: Match the trading or investment strategy to your personality - It is critical to choose a strategy that is consistent with your own personality and comfort level. If you cannot stand to give back significant profits, then a long-term buy and hold strategy, even a very good one, will be a disaster, because you will never be able to follow it. If you do not want to sit in front of your computer monitor, jobbing the market all day long, then do not even consider a day-trading method. The strategy that you decide to use must be right for you; it must feel comfortable.
Rule # 3: Know who you are financially for a moneyless man goes fast through the share market - This is one of the most important aspects of trading on the share market. Generally, a happy person is better at everything, including the share market. Consider your prospects and answer the following questions:
Is the capital you have all you will ever have?
Are you likely to need some capital in the near future?
Are you starting off by putting small amounts into the market and are you likely to increase it periodically?
How old are you?
Can you handle the stress of a fluctuating market?
Can you devote as much mental effort to the share market as you do to earning your livelihood?
Remember that you have tough competition out there. Once you have defined your prospects, you will discover how easy it is to adapt and learn. Some pundits feel that it is not necessary to define whether or not you are a short-term or long-term investor. One view is that one’s investment strategy needs to be constantly reviewed and tailored according to the general economic condition and trends. Sometimes you will find that your short-term flirtations may end up being long-term passions.
Rule # 4: The trend is your friend or a trend in motion is assumed intact until it actually ends - As long as the majority of both technical and fundamental indicators point in the same direction, one may logically conclude that market statistics and news can be trusted and that the trend will continue in the same direction. As night follows day, shares go from absurd undervaluation to outrageous overvaluation and it is within these parameters that the major investment opportunities lie. There is nothing to suggest that the approximate 20% annual historic rate of return that shares have been enjoying for the past 40 years, is about to drop. It is impossible to identify the exact bottom or top of the market. However, for those who take appropriate action once the junctures are recognised, the rewards can be substantial.
Rule # 5: Do not ever make the mistake of telling the market that it is too high or too low - The market is not a game of logic, but rather of mass emotion or psychology. It is not foolish enough to do what other people are doing. The public is right more often than not. Humans tend to imitate and it is the foundation of habit and custom. But be careful - the public is right during the trend, but wrong at both ends.
Rule # 6: If you catch the wrong bus, get off and catch the right bus - If you catch the bus to Kensington when your destination is Rosebank, no matter how long you stay on the bus, you will never reach Rosebank. In other words, do not continue with an incorrect decision. Forget about bookkeeping and trying to recover your costs. This is an academic approach. Rather invest your money in a share that at least gives an opportunity to recover your shortfall. The saying in the market is “do not throw good money after bad”. Contrary to what some analysts may recommend, this rule also applies to those people who love to average down. Charles H Dow once said “Pride of opinion caused the downfall of more men on Wall Street than all other opinions put together”.
Rule # 7: Never marry a share - A share can easily be replaced. There are times to hold shares and times to sell shares. If you want to buy back shares, you will find them.
8:Rule # Take your losses quickly, your profits slowly - Do not be eager to sell too soon or put a ceiling to your income. Conversely, one can add, do not fail to take profits. However, once you are in a loss-making situation, do not be locked in. Sell soon and buy something else that is rising. Discipline is probably the word most frequently used by exceptional traders. There are two basic reasons why discipline is critical. First, it is a prerequisite for maintaining effective risk control. Second, you need discipline to apply your trading or investment strategy without second-guessing and choosing which trades to take. You are almost always guaranteed to pick the wrong ones. Why? Because you will tend to pick the comfortable trades or in other words, what feels good is often the wrong thing to do. Remember, you are never immune to bad trading habits. The best that you can do is keep them latent. As soon as you get lazy or sloppy, they will return.
Rule# 9: He who looks back on the market, usually dies of remorse - The past has happened, put the future ahead of you. If you read the market incorrectly, go back and ask why. Keep a record of your share dealing transactions, not only for tax reasons, but also for discussion and analysis. This will enable you to analyse your investment decisions, good and bad, and learn from the experience. Remember, the virtue of patience. Waiting for the right opportunity increases the probability of success. You do not always have to be in the market.
Rule # 10: It is far better to buy a fine company at a fair price, than a fair company at a fine price.
Most individuals get bored when the usual market favourites are recommended, but their ears prick when the talk centres around a bargain that should not be missed. Dismiss talk like: “It is trading at a discount to Net Asset Value (NAV)” or “It has a large assessed tax loss, its problems will be overcome soon”. Too true, too true. The share market is a great leveller and when it discounts a share, there is normally a very good reason for it.
Rule # 11: After a drunken spree, you must expect a hangover - Following every rise in the share market, there is a correction or fall.
Rule # 12: When in doubt, stay out - If you are unsure about a decision, withdraw. You do not have to be fully invested at all times. With experience you will develop an inner sense and begin to judge the temperature of the market. Understand that you are responsible. Whether you win or lose, you are responsible for your own results. Even if you lost on your broker’s recommendation, or a bad technical signal, you are responsible because you made the decision to listen and act. Successful investors do not blame others for their losses.
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