The following 24 stock trading rules can double your trading results.
It’s a bold statement.
But the reason I write this is that these rules are the results of thousands of profitable trades by dozens of master stock traders over their long investing careers.
Legendary traders such as Mark Minervini, David Ryan, Bill O’Neil, Jesse Livermore, and Nicolas Darvas used these rules to grow their investment accounts many thousands of percent.
While anyone who attempts trading will succeed at times, it takes hard work and discipline to be consistently profitable year after year.
That’s where the 24 rules come into play. You just have to put them into action to improve your results dramatically.
I’ve divided the rules into three sections:
FYI, the rules are not listed in any particular order. But they are all important!
Let’s get started!
Everyone wishes they had bought Apple or Amazon back when they were $10 stocks. They are, without a doubt, two of the biggest winners in the last 20 years.
The good news is that the next huge winner is out there waiting to be discovered by investors like you.
The key to finding the next big winner is to look for stocks with excellent fundamentals and great technicals combined with a product or service that makes a huge difference in people’s lives.
Long-term stock market winners like Cisco, Microsoft, Intuitive Surgical, Domino’s Pizza, Google, Chipotle, Apple, Amazon, and many others all had very strong earnings, sales, return on equity, and top mutual fund ownership BEFORE they made their huge moves.
And this strong growth continued throughout their historic runs.
So, the first rule is this:
Buy the leaders – don’t settle for the laggards!
What will give you better performance, a Ferrari or a Ford Focus?
Like any luxury item, the best stocks always seem expensive. But they’re the ones that start to make new highs ahead of other stocks. And they tend to make the largest moves over time.
So, look for stocks that have the following:
A good screener will help you find these leaders. Please check out my article on screeners to learn more:
How To Use A Stock Screener to Find Top Stocks
Related to always buying the best merchandise is not overlooking higher-priced stocks.
Many investors avoid stocks over $100 a share, thinking they are too “expensive.”
But there’s a reason they are expensive. Usually, these stocks are leaders with outstanding earnings and sales growth.
Early on in my investing career, I made the mistake of avoiding stocks over $100 or so for that very reason – they were too expensive, and I couldn’t buy many shares. That was a very costly mistake over time, as many of these $100 stocks became $300 or $400 stocks in just a few years!
Many of the best-performing stocks in history passed $100 a share (adjusted for stock splits) early on in their moves. You don’t want to miss out on them in the future.
Ultimately, you are investing to make money. Always buy the best stocks, regardless of price. High-priced stocks tend to be some of the best performers.
Penny stocks (stocks under $1) and low-priced stocks (under $5) are tempting for beginning investors. It feels good to be able to buy thousands of shares in the hopes of a big move that creates big profits.
However, the reality is that penny stocks are usually poor investments and should be avoided.
The reason is that the key driver of stocks is the big institutional investors: the banks, pension funds, investment banks, insurance companies, mutual funds, and ETFs who have billions to invest. It is their continued buying that drives a stock up hundreds or thousands of percent over time.
The reality is that most big institutions do not buy stocks under $5, and many won’t touch stocks under $15. Most low-priced stocks are not considered institutional quality stocks.
Also, many are very illiquid with a small float (the number of shares available). Even one small fund would end up pushing the price way up if they bought a lot of shares.
Penny stocks also are prone to “pump and dump” schemes. I regularly get glossy mini-magazines in the mail touting how some company trading at $0.50 is going to change the world and should hit $100 within a few months.
The real story is that PR companies get paid (in cash and stock) to promote these companies.
So, avoid penny stocks. Focus on quality companies with real earnings and sales, or at least those that will soon be profitable.
It’s easy to load up your portfolio with all the racehorse stocks. They go up quickly and can add up to significant gains.
BUT, they also can head back down even faster than they went up!
It’s during a few bad days that many investors get shaken out of their racehorse stocks and end up missing out on a big move in the months ahead.
A good portfolio management rule is to balance out your portfolio with a mix of slower movers as well as high-octane stocks. A balanced portfolio helps reduce volatility and enables you to sleep at night!
Another portfolio management technique is to make sure you aren’t invested too heavily in one industry group or market sector.
In a bull market, it’s easy to buy lots of stocks when they are all going up. But you can end up too heavily weighted in one sector like software, homebuilders, chips, etc. Then, when that sector starts to retreat, your profit gets hit hard, and you end up selling to stop the pain.
A good rule of thumb is to diversify your portfolio across at least a few different sectors.
Timing is everything in the stock market!
It doesn’t matter if you’ve chosen the top leaders, if the overall market is not going up, you’re probably not going to make any money.
And if it is going down, you’ll be losing money.
Studies show that 75% of stocks follow the general market!
And it’s important to realize that top growth stocks will move 1 ½ to 2 ½ times the general market, so it’s imperative to establish positions only during uptrends.
One of the best ways to stay in sync with the market is to use our daily Market Trend Advisory. It tracks the trend for both the Nasdaq and S&P and provides buy, hold, and sell signals based on their technical action.
It’s designed to get you into all major market rallies and keep you out of significant corrections and bear markets.
You can learn more about the Market Trend Advisory and get a free 7-day trial by clicking the link below:
https://www.lifetimeinvestor.com/market-trend-advisory/
Every quarter, companies release their earnings reports with their results for the prior quarter.
Then the fireworks begin.
An earnings report that the market deems positive can result in a 20+% move up the next day.
But one that is not received well can gap down big. I’ve seen 50% gap downs on earnings.
So, earnings have become a crapshoot in recent years.
The best way to protect your portfolio during earnings season is to have a profit cushion in a stock before it reports. A minimum of 10% profit is usually enough to withstand most poor earnings reactions and not get hurt too bad.
Regarding buying stocks in front of earnings, a good rule of thumb is to make sure you have at least two weeks to go before the earnings report. This gives you some time to have the stock rally and give you a profit cushion.
Top traders learn that it’s best to scale in and out of positions. All or nothing trades are usually made emotionally, which in hindsight rarely turn out to be great decisions.
Especially when it comes to selling, sell in parts. An excellent guideline is to sell 50% when the stock hits a predetermined percent gain. You’re locking in profits on half your position and holding the other 50% for a larger move.
Thin stocks (also known as illiquid stocks) are those that trade less than 250,000 shares a day.
Thin stocks are prone to making big moves either up or down. With few shares available, it doesn’t take much buying or selling to move the stock. That’s great if the stock is moving up, but not so if it’s moving down!
Also, the spread between the bid and ask can be very wide, especially during violent market selloffs. You may not be able to exit the trade easily.
So, look for stocks that trade at least 500,000 shares a day.
Dollar Volume
Another way to determine liquidity is to use dollar volume.
Dollar volume is the amount in dollar terms the stocks trades each day. A high dollar volume shows that the stock can be liquid even though not many shares trade each day.
Dollar volume is especially useful for high-priced stocks.
It’s easily calculated by multiplying the share price by the average daily volume. For example, a stock that is $50 and trades 1,000,000 shares a day has a dollar volume of $50 million.
Dollar volume should be at least $25 million.
Bottom fishing refers to buying stocks that that are falling below all support levels.
Bottom fishing is like trying to catch a falling knife – you’re going to get cut!
More money has been lost bottom fishing by investors that almost any other “strategy”.
A much better strategy is to buy breakouts out of bases, or pullbacks to moving averages like the 50-day or 200-day. Breakouts from bases and moving averages give you a line in the sand if the stock does not go up.
For example, if you buy a stock at the 50-day and it breaks below the moving average significantly, then the trade didn’t work, and it’s time to sell.
Stocks that are below their 200-day moving averages are usually in downtrends and are not leading the market.
So why would you want to buy a laggard when there are always leaders well above their 50-day and 200-day moving averages and making new highs?
However, buying a stock that finds support at its 200-day moving average is a sound strategy.
As mentioned earlier, the big institutional investors are the ones who drive the markets higher and lower.
You can spot the signs of their buying and selling in the charts when you see skyscraper volume.
In the following chart, a huge volume spike shows institutional buying in Chegg in May 2020:
Look for lots of high-volume up days on a daily chart and high-volume up weeks on a weekly chart.
Our Market Trend Advisory is a great way to track institutional buying and selling in the market indexes.
Over 75% of stocks follow the general market indexes, so you must be in sync with the overall market to make money consistently. Click here to learn more.
One of the best trading rules I adopted was to always use equal dollar amounts in all stocks I bought.
The reason is that you never know which stock will end up being your biggest winner.
In the past, I would own fewer shares of higher-priced stocks, and more shares of lower-priced stocks. The higher-priced stocks tended to outperform the lower-priced ones by far.
So, the solution is to always buy the same dollar amount. This way, you’re positioned to profit equally no matter which stocks become the big winners.
This rule was developed by Bill O’Neil, who started Investor’s Business Daily.
The rule states that if you have a stock that goes up 20% or more within three weeks, you must hold it for eight weeks.
He came up with this rule after discovering that many of the best stocks that went on to make huge moves started with a quick 20% move. Rather than sell too early, this rule keeps you invested through the initial eight weeks of the move, so you don’t miss a more significant move.
This rule only applies if the stock remains up from your purchase price. If the stock threatens to roundtrip back to your buy price, then you should sell, as you should not let a winner turn into a loser.
With individual stocks, no matter what, do not add to a losing position!
While you may get away with this a few times, eventually, a stock will not come back and continue down and down. Sometimes all the way to zero.
I’ve read about famous hedge fund managers losing billions in a stock because they kept buying it as it went lower and lower. They finally had to capitulate when the losses became too great.
Averaging down will cause you to lose a considerable portion of your trading capital and your confidence.
If a stock is going down after you buy it, the only thought you should have is to protect your capital. It doesn’t matter why it’s going down, it just is, and you must sell when it hits your stops.
However, investors in the stock indexes can take advantage of dollar-cost averaging with multiple buys over time, even if subsequent purchases are lower. As you are buying the whole market, averaging down is an acceptable investing strategy.
All traders will have many losing trades. It’s part of the game.
Even the best traders like Mike Minervini and David Ryan lose can up to 50% of the time and still be enormously successful.
The reason is that they strive to have a 3:1 profit/loss ratio or better.
They cut their losses at a maximum of 7%-8% but take profits in the 20-25% range or higher.
A profit to loss ratio of 3:1 allows you to be right only once out of three times and still break even or make a small profit.
Most traders get it wrong or aren’t even aware of their results.
If you’re taking losses at 10%, but your gains are only 5%, you’ll eventually run out of money!
The only way to know how your trading is going is to track it.
Please check out our free Stock Trading Form that comes as part of a Market Trend Advisory subscription. It will help you calculate your profit and loss, average price, average gain or loss, and much more for each trade.
Buying a stock at its 50-day moving average is a time-tested method to enter into a new trade or add to an existing trade.
The first pullback to the 50-day is the best time to buy, but the 2nd pullback is also a good time. 3rd and 4th pullbacks tend to fail, so avoid those.
Some traders like to buy right at the 50-day, others like to wait to see if the stock bounces off its 50-day and starts moving higher. Experiment with each technique to see which one works best for your style of trading.
Look for an orderly pullback to the moving averages, on lower than average volume. A sharp pullback on high volume is not a good sign and brings up a red flag to the trade.
A stop loss is a sell order that predetermines your loss if a stock goes down from your purchase price.
Think of stops as insurance policies. Each month you pay your car insurance bill and your health insurance bill. You don’t get upset because you didn’t get in a car crash or get sick; the insurance is there to provide against catastrophic loss.
Of course, all traders have had the experience of getting stopped out only to have the stock rocket straight back up.
You can’t get upset; maybe this time you got shaken out, but the next time the stock may not come back. It continues selling off until it’s now a penny stock.
You avoided an account destroying trade because you used stops to protect yourself.
Our free Stock Trading Form automatically calculates stops at 3%, 5%, and 7% for each buy you enter. These settings can be easily changed to fit your needs if desired.
This is the one rule you should never break:
Immediately Sell Any Individual Stock If You Are Down More Than 8%
From The Stock Purchase, No Matter The Reason
Don’t let a trade turn into a big loser when it’s a small loser. Immediately sell unemotionally to protect your account.
A good rule of thumb is not to let a decent winner turn into a loser.
If a 10% gain turns into a 2% gain or ends up back where you bought it, you should consider selling the position. You can always get back in if the stock improves.
Big money comes from holding an uptrending stock for many months and years.
Yet, it is one of the hardest things to do in stock investing.
Most investors say their #1 regret was that they sold their whole position way too soon.
So, always try to hold some portion of your position for a big move.
Holding at least some shares also has the benefit of keeping the stock on your radar; by continuing to own it, you can keep an eye on it.
As mentioned earlier, the overall market is driven by large institutional investors.
Though many think it’s impossible to time the market, this is not true if you know what to look for.
The big institutions leave clues to their actions.
Every market top has signaled by increasing amounts of institutional selling (down days on higher volume than the previous day).
That’s a sell signal.
Also, consistent selling takes the indexes (and most stocks) below key technical levels and moving averages, creating more sell signals.
If you’re paying attention, you can take profits or exit the market before things get ugly.
Subscribers know that our Market Trend Advisory tracks institutional buy and sell signals and well as institutional selling days, market internals, and market sentiment each day and provides buy, hold, or sell signals.
It’s a crucial part of becoming a consistently profitable investor.
If you are not already a member, please check it out here with a free 7-day trial:
Buying stocks is the easy part.
Knowing when to sell is much more difficult.
Selling brings emotions into the picture, which is not a good thing.
You’ll feel regret if the stock heads up after you sell it, and experience the fear of missing out once you are no longer a shareholder.
But all stocks eventually should be sold. Many market leaders throughout history have made their big moves within 1-2 years. And once a market leader tops out, many go on to decline more than 75% from their highs.
Always keep in mind that a profit is not money in the bank until it is sold and realized.
I’ve recently published an article on understanding the two types of selling signals – offensive and defensive. Please see this article for additional info:
Stock Selling Rules & Strategies: How To Maximize Your Profits
Stocks should be sold based on technical sell signals such as breaking the 50-day moving average on huge volume, climax tops, and other signals. These are clues that the big institutional investors are exiting their positions, and you should follow them.
It’s important to realize that the fundamentals may look extremely good at the top. It’s not uncommon for a company to report record earnings and sales, but that earnings report marked the stock’s top.
So, understand the stock’s story, but make sure you don’t get too influenced by the good news that you miss selling at the optimum times!
John Smith
This is truly a very useful post for stock traders. Nice suggested strategies to gain profit from the market. Thanks for sharing.