1. Every investment must pass the "Sleep Test".

An investment should not be so large that you lie awake at night worrying about it. To be a successful speculator or investor you must be able to remain relaxed. An uncomfortably large investment or trade, although offering a potentially great return, can jeopardise your ability to remain objective and can thus lead to mistakes.

2. Avoid the emotions of hope, greed and fear. Objectivity is critical.

Hope is often associated with unrealistic expectations and causes an investor to cling to a losing position, magnifying the losses unnecessarily. Greed causes an investor to buy at the wrong time, such as near the peak of a rally, and to risk excessive amounts of money. Fear prevents an investor from buying at a time when the market presents the best opportunities to buy and prompts him/her to sell at the worst possible time (at the bottom of a correction or bear market).

3. Automatic Stop Losses must be set at the time of purchase to limit losses.
---Trailing Stops must be set to lock in profits.

It is difficult to admit to a mistake. There is also usually the fear that if I sell now for a small loss the price will immediately rebound and I will have lost the opportunity to profit from the rise. After all "hope springs eternal" and that stock that keeps dropping like a stone will one day soar like an eagle, all I need to do is be patient.

Losses should be taken early, systematically and ruthlessly to protect your investment capital. This is a hard lesson to learn and can usually only be learnt the hard way through experience. However, the quicker an investor learns to cut their losses the more successful they will eventually become. Stop losses, wherever possible, should be automatic to remove any chance of them being 'adjusted' or 'over-ridden' by the emotions of hope and greed.

Occasionally, a 'stop loss' will be triggered right at the bottom of a decline and the stock price will immediately begin moving upwards. If this happens and the story behind the stock is compelling, then you can always re-purchase it at a higher level. The important thing is to avoid the devastating losses that can result from holding on to a losing position.

The use of stop losses is the ONLY truly effective and reliable means for a trader to manage risk.

4. Only ever buy stocks that are trending upwards.

It is often tempting to buy a stock simply because it represents good value at its current price. However, there is no telling how low the price will eventually become (see Rule 8) and there is simply no point owning a stock unless its price is going to move up within a reasonably short time of making the purchase. Obviously there is no way to guarantee with absolute certainty that a stock will rally shortly after you have bought it, but buying something that is already in an uptrend greatly improves the odds.

5. Only buy when the fundamentals, mass psychology and tape action are favourable.

With respect to stocks, the fundamentals relate to the type of business and the profit and revenue growth. The greatest stock price gains are often associated with businesses that are demonstrating high profit and revenue growth. When the business is involved in a new technology, such as the Internet, the most important considerations may be customer and revenue growth. The mass psychology relates to the general sentiment within the overall market (bullish or bearish) and the attention being drawn by the stock in question. For example, a market where the sentiment is over-whelmingly bullish has probably reached at least an interim peak and will often decline over the short term. Similarly, the stock of an otherwise good company that has recently declined due to some unfavourable press will often rebound in the aftermath of the emotionally driven selling. The tape action refers to the price as per Rule 4.

6. Let profits run, but take some profits on the way up.

A common mistake is to take profits too early. As long as the fundamentals, the mass psychology and the tape action remain favourable, the stock should not be sold. However, after a large move up it is prudent to take some profits whilst letting the remainder run. This is done to mitigate risk and ensure that Rule 1 (the sleep test) is not violated.

7. Don't focus on the profit / loss of a trade while the trade is on-going.

Thinking about how much money you are making or losing on a trade while the trade is on-going may cause the emotions of fear and/or greed to influence your decisions. Set your stop loss to limit the downside and continue to monitor the fundamentals, mass psychology and tape action to determine whether to hold or to sell.

8. Avoid the "Buy Low Sell High" mentality. There are no absolute highs or lows.

It is often the cheapest stocks that fall the furthest and the most expensive stocks that show the greatest price appreciation. Also, a price level that seems low or high today may appear the opposite in 12 months time. For example, when the gold price fell to $350 in early 1997 this was considered a very low price by many gold investors. Two years later the gold price had dropped to around $250. The fact that gold may have been 'cheap' or 'low' at $350 did not translate into profits for those who bought at this level.

9. Always maintain a substantial cash balance.

You must always be in a position to take advantage of any opportunities that arise and the only way to do this is to always have significant cash reserves.

10. An event-based trade must be closed as soon as the anticipated event occurs.

For example, let's say a company you follow is about to announce its latest earnings. You expect the company to announce earnings that surprise on the upside and purchase the stock with the aim of taking a profit in the days following the announcement. If the company subsequently announces a result that does not exceed expectations you must immediately sell because the basis for your trade has proven to be false. If the company does announce higher than expected earnings, then you must sell within a few days of the announcement irrespective of the price action because this was your intention going into the trade. A disciplined approach will prevent short term trades from becoming unwanted long term investments.

11. Don't be stingy when it comes to brokerage, stock market information or stock buy / sell prices.

The speculative investor does not day trade and does not enter a position with the aim of taking a quick small profit. The time frame for a trade will generally range from 1 month to 24 months and the goal will be to achieve an above average return (for example, a return of at least 30% on a 12 month investment would generally be sought). As such, saving a fraction of a percent on brokerage or holding out for that last few cents when making a purchase is not relevant and may, in fact, be very costly. For example, holding out for a marginally lower purchase price may cause you to miss a great opportunity and opting for the lowest cost brokerage will mean you will get poor access to information/research and will not be able to participate in the best IPOs. Stock market information is usually worth what you pay for it (refer to LINKS for details on some good sources of investment information).

12. When the vast majority are either extremely bullish or extremely bearish, they are invariably wrong.

When the vast majority are extremely bullish then everyone who is going to buy has already bought and there is only one direction for the market to go - down. Similarly, when the vast majority are extremely bearish then everyone who is going to sell has already sold and there is only one direction for the market to go - up.

13. Never sell options

An option seller's maximum potential profit on a trade is the option premium received at the time of the sale, whereas the potential loss is much greater (in the case of call options, the potential loss is unlimited). Since most options expire worthless, an option seller will tend to make frequent small profits but suffer the occasional large loss. It is usually not possible for an option seller to manage risk using protective stop losses because options are far more volatile than the underlying securities or commodities and their markets are often less liquid. Therefore, although they will occur infrequently, substantial losses are inevitable. As such, a good trader never sells options.

14. Be patient !

On average, you should not realistically expect to find more than two great opportunities per year to profit from market timing (sometimes there will only be one and there will never be more than three). As such, it pays to be patient and to wait for the major market reversals that usually accompany extremes in market psychology. When these opportunities occur, the speculative investor must be financially prepared (refer to Rule 9) and psychologically prepared (refer to Rule 2) to take full advantage.

15. Remember and learn, but don't regret.

You should learn from the past but live for the present. Investment mistakes should be considered as an expensive form of training which is money well spent only if it prevents you from making the same mistakes again.

16. Don't take it too seriously - have fun !

After all, it's only money.