When it comes to trading, not only is it important to focus on "what to do", but it is also important to think about "what not to do". So, here are a few pieces of negative advice pertaining to trend following trading:
1) Do not risk more than 3% of your capital on each trade
This means that if you are stopped out of your stock, the total value of your account drops by 3%. It does not mean sell your stock once it falls by 3%.
Also, depending on your win rate and tolerance for volatility, it may be necessary to risk much less than than this - 3% is the absolute max.
If your win rate is 50% and you bet more than this amount, it is a mathematical certainty that you will go bankrupt eventually, which is why this is rule #1
2) Do not average down on a losing trade
Doubling down on a stock will lead you down the path to bankruptcy pretty quick.
One of my favourite trading movies is "Rogue Trader". In it, the actor who plays rogue trader Nick Leeson comments, "If you keep doubling up, you're bound to come out ahead". He ended up losing over $1 billion.
3) Do not buy stocks trading beneath their 50 day moving average
This is a very flexible rule that can be combined with other forms of trading, even fundamental analysis. For example, if you love Apple's products or balance sheet (or whatever), wait until the stock clears its 50 day. Following this simple rule would have resulted in you sidestepping that stock's recent 50% correction.
4) Do not buy a stock because it is "too low" or sell a stock because it is "too high"
It's hard for new traders to accept, but often what seems too high just keeps going higher, and what appears too low keeps going lower.
5) Do not make a trade based solely on news or fundamentals
It's okay to have opinions based on fundamentals, but I think it is a mistake to trade off that alone. If you do incorporate fundamentals in your trading, wait until they line up with the technicals before getting in.
