Today I would like to discuss some important rules every market participant needs to be familiar with before making any trading decision.

The first important thing you must decide upon is the kind of market participant you wish to be, investor, trader or speculator.

I have noticed from the emails I get from readers that the great majority trade with no rules and no plan.

Some readers ask for advise in choosing stocks to purchase, I am afraid I cannot give that kind of advise.

Rule No. 1: Never ask for advice in choosing stocks, entering a position based on someone else’s advice or tip makes you vulnerable and gives you no base for getting out.

The biggest mistake most of the people make here is opening positions based on Internet group tips, history is repeating itself, it happened before the Saudi stock market crash and it’s taking place again.

Internet group advisers are showing up again, but have you not noticed that most of them disappear when the stocks they have recommended lose their value.

Rule No. 2: Have a clear plan and stick to it.

This is a very important rule, because whenever you enter a position not only are you committing money but part of your emotions are committed to that position as well.

This has to do with defining all the scenarios the market may take in terms of the price action, and later defining your response to each scenario.

It also has to do with identifying clear price objectives for risk and reward.

As your trade progresses, you will be faced with different emotions, during periods of price decline, confusion will be your biggest enemy, having a clear plan with clear price objectives will keep you from making the wrong decision, saving you a lot of anguish and sorrow later.

Rule No. 3: Do not overtrade; this rule has to do with identifying the right time to trade and being patient.

Some of the emails I get are from persons working during market hours and wanting to trade daily in speculative stocks.

Daily trading requires your full concentration; meaning following intraday charts, this cannot happen if you are working during market hours.

Others are so excited about entering the market, and making quick profits, they are familiar with some technical indicators and would like to apply them.

I would strongly advise here to start by doing paper and pencil trading until you are fully confident in your skills.

Some technical analysts take up to one year doing paper and pencil trading before actually risking their money.

Rule No. 4: Do not average down.

This I have noticed happens a lot here, a great majority of people add to losing positions on the assumption that they will get out of the position when the price rallies back.

Never add to a losing position; committing further capital to a losing position on the assumption that prices will rally back, always cut your loses short.

People who have added to their losing positions during the Saudi stock market crash, are vary familiar with the concept and I am sure can tell you that it did not work.

Adding to a losing position by buying more shares in the stock with a lower price than the purchase price so that the net percentage loss is less than it would be if the losses were calculated based on the price of the first opening trade.

Almost 90 percent of the time, the share price does not rally to the point where the market participant can get out even, you end up with more losses, and more capital committed to a losing position.

Rule No. 5: Always take your profits when you can.

The main question to ask when evaluating positions is; would I buy this stock today? If the answer is “No” then you must get out of that position by selling the share and taking your profits.

The list of rules is still not over yet, I will resume with the most important ones in next weeks article.