Rules to Trade By....

Rules to Trade By: Focus on your top stocks in your portfolio and do not be afraid to let go of laggards.

Regardless of whether you have been following my picks or adding your own, there is one important rule that you should keep in mind that will help you out in the long run. It is a simple rule (and I'm sure most of you know it) and for those of you who are not familiar with it, pay attention. The rule is, add onto your leading/top positions and cut loose your lagging/losing positions (laggards). This of course all depends on what you have in your portfolio. Some of you may have a portfolio filled with laggards and little to no winners. You may be thinking that it is better if you wait out on your losing position in hopes that it will resurrect itself and give you back your money. This is usually foolish and only leads to more losses. Losing positions (those that were bought at the incorrect buy point) usually continue to deteriorate in value (unless there is some spectacular news or inside info that saves the stock). It is usually better to cut your losses early on and move on to another stock. IBD says to bail out on an 8% loss. This is a good idea and I try to follow this rule as well. Sometimes I even lag and unfortunately allow a loss to escalate over 8%. This is of course human nature. No one wants to admit their wrong and we all hope that we were right on the buy and believe that it will bounce back up. Alas, we need to abandon our emotions when it comes to trading and instead, follow precise rules (such as the sell at 8% loss rule and buy only at proper buy point rules) that will allow us to maintain a competitive edge in the shark infested waters that we call the U.S. Stock Market.

- Nick M. H.