This list is for traders but also applies to investors as mentioned by Teresa Lo!
1. Recognize mental blocks. If you believe that the financial markets are rigged, stay away. Bias is blinding. If your ego requires constant feeding and vindication, do not trade. If being right is more important than making money, steer clear of the stock market. If you must be dogmatic, direct your energy into following these rules.
2. There is no needle in the haystack. There’s no reliable way of picking a single winner from the thousands of stocks listed on the exchanges. Resist betting it all on the longshot because the outcome is based purely on luck. Dr. Ziemba explains the mathematics of horse racing. The point is that the bettor is better off with horses that finish the race “in the money”. They don’t have to come in first.
3. Diversify. Spread your bets around. It’s the only way to be on board the winner.
4. Trade small. Bet only a small fraction of your equity on each position. You must take risk to get reward, but ruin is certain if you take insane risk. It’s defined in Fortune’s Formula. Think Adventures in Conditional Probability.
5. Press the winners. You must compound a winning streak.
6. Never throw in good money after bad. Never double down. Ever.
7. Do not rationalize. Down is NOT up. Red is NOT the new BLACK. If the account equity is shrinking, your bets are in the wrong direction.
8. Establish a stop loss. Place it in the appropriate location (except just above the swing high or under the swing low where everyone else put theirs), a place where you can be statistically confident that the move in the present direction is over. Don’t use a tight stop for lack of equity. The market doesn’t care about how much is in your account, so trade a smaller position size and put the stop in the proper place.
9. Use the stop loss. Just do it. Immediately. No excuses. Having a “mental” stop loss is the same as lying. There’s no point, because the longer you let it slide, the deeper the doo-doo.
10. Observe Rule Nine. Always. Don’t go to the bathroom without it.