Trading is inherently dangerous. Everyone knows that. We know that 90% of people who start to trade stocks eventually fail within the first year and most of their losses can be simply attributed to the fact that they didn’t follow any rules. They acted like gunsligners; randomly picking stocks with no systematic approach and hoping for the best.

If you want to gamble, go to Vegas. You’ll have a lot more fun and most likely lose a lot less than if you started trading.

However

If you want to trade PROPERLY and not blow up your account in the first year, then continue reading this article.

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Watch the video below the top 5 rules for trading!

 

#1: Cut Your Losses Quickly

This rule cannot be overstated enough. I know it seems simple, but its so true: If everyone was simply able to cut their losses quickly, NO ONE would blow up their accounts, and no one would be bagholders. Unfortunately, its an issue that plagues so many new traders. If you cut the loss quickly, yes you lose a tiny amount of money, but small losses are impossible to avoid. As long as your trade was based on a consistent system, then the small loss is just a tiny step back in the long-term.

If you allow a small loss to turn into a huge one, it not only hurts your pocket book, but hurts your soul much more.

You will lose confidence, be upset with yourself, and potentially attempt to revenge trade to make the profits back (which can lead to disaster). Avoid all of this by simply having a risk level in place, and most importantly utilize a hard stop whenever you can. I don’t care if market makers or brokers can ‘see’ my stop; if they decide to take me out then so be it. If this starts to happen on a consistent basis, then that means I simply am entering too early, and look to enter more at the true support.

#2: Trust The Chart!

Never give too much dependence on some sort of indicator or study on the chart.  The hard truth is that every single indicator is calculated from the chart itself. That means, whatever information you’re receiving from the indicator can be also seen just by reading simple price action.

Everyone sees the chart, not everyone sees or respects your indicator.

Have trust in support and resistance, but also understand price action and the trend. Build your knowledge on understanding trends, reversal signals, and signs of front side VS back side. Always base your entries and exits on support and resistance.

Keep this in mind; most (if not all) profitable traders I know mainly rely on price and volume, and maybe have 1 or 2 indicators to confirm what they already know from the chart.

#3: Have A Pre-Trading Checklist

So many new traders have an issue with overtrading, chasing, having FOMO, and overall making terrible entries. The absolute best way to avoid overtrading is to have a pre-trading checklist and STICK TO IT. I offer my pre-trading checklist as a part of my free course here

In order to have a proper trading checklist, you of course need to start identifying and pinpointing exactly what trading strategy you want to go with. Then, you need to narrow the variables and ‘signals’ that you must have checked off before entering the trade.

For example, you must ask yourself questions like:

• Is this stock within my ideal price range?
• Does this stock have a good float value?
• Does this stock have a solid catalyst that will bring volume?

Asking yourself simple questions like this before you give into the adrenaline rush of trading will allow you to proceed with a clear mind and potentially avoid entering impulsively. Remember, stocks ALWAYS pull back, and if you miss this one trade, it won’t be the end of the world. It’s so much better to wait for the ideal moment to position yourself; for your pocketbook and your soul.

#4: Make A Plan Prior To Entering

This rule goes hand-in-hand with having a pre-trading checklist. Just like you should first verify that the trade is actually worth taking, you need to also figure out EXACTLY what price you want to enter at, what price you want to cut the loss (otherwise known as risk level) and what price you want to start locking in profits. YOU MUST DO THIS BEFORE YOU ENTER THE TRADE. If you wait until actually entering, you will be emotionally bias and more likely to act greedy, and not cut losses fast. ALWAYS make a plan prior to entering your trade!

It goes without saying that your trading plan should be based on the basic levels of support and resistance that the chart shows. It doesn’t make sense to take profits if the stock is still in a bullish uptrend and is holding support levels. Likewise, it doesn’t make sense to continue holding if the stock is showing signs of back-side and is breaking critical levels of support.

#5: Have A Trading Journal!

This is quite honestly THE MOST IMPORANT rule to follow. Honestly, I wouldn’t even call it a rule, because you shouldn’t even have the option to break it. This is a necessity of trading.

In order to be a consistent trader, you must first be using a consistent system of trading. Using the same strategy, trading the same stocks, and having the same mindset while trading. Then, you need to track the progress of all of these trades over time, and see your profitability numbers. Average % win, average % loss, win rate, and so on.

Do you REALLY think that you’ll be able to do this from memory?

OF COURSE NOT.

Every single trade MUST be tracked and then reflected on at a later date.

If you don’t do this, I promise you that you won’t be consistent. Every single professional trader that I have asked has a trading journal, and if you want to join their ranks, you will need one as well. Just like my trading checklist, I also provide a template for a trading journal to use in Excel as a part of my free training course. Check it out, learn how to be a profitable trader, and gain access to the top tools required in order to do so all for free.

What trading rules do you live by? Let me know in the comments below!

 

 

 

Volume Weighted Average Price (VWAP): A benchmark indicator that gives the average price a security has traded at throughout the day, based on both volume and price.

VWAP is a very powerful indicator, and is in fact one of the only indicators that I use on my charts when I trade. If used correctly, it can provide deep insight into the current structure of ‘the move’ and allow you to effectively maximize your profit potential and at the same time, help you understand when it is time to jump ship and exit the trade. Keep in mind that the content on this page is meant for small cap day trading, specifically low float stocks. In the video below, I will explain exactly what the VWAP indicator is and how it’s calculated, and how to use vwap when day trading small cap penny stocks.

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Watch the video below for an in-depth explanation of VWAP!

 

How VWAP Looks:

The pink/purple line  on the chart above is the VWAP indicator when displayed on E-TRADE PRO charts

 

 

Key Takeaways

• The Volume Weighted Average Price (VWAP) appears ONLY on intraday charts (1 min, 5 min, 15 min, etc.) and will NOT show up on daily charts.
  • Because of this, VWAP calculations are reset at every market open
• In general, if the stock is above VWAP, it is considered bullish, if it is below vwap, it is considered bearish
• Don’t rely on VWAP exclusively to determine price action and trend, be sure to utilize basic support and resistance principles as well

 

Using VWAP to read price action

 

One important thing to understand about VWAP is that it resets at every market open. This means that, in general, the volume and price action during the morning will dictate which way VWAP will go. (Think of it as the morning volume is weighted more heavily since it is the starting vol for the calculation)

For example, take a look at SOLY on the right. The purple/pink line is the VWAP, and volume is listed at the bottom. In the morning, there was extremely high volume followed by a huge surge in price. Within the first hour or so, the stock spiked from $6 to around $14 on large volume. You can see that because of this massive morning volume, the VWAP was able to stay close to the price and give it support on the way up.

Another thing to note about this chart is how VWAP acted as support at 2 critical points on SOLY’s move. This is largely caused by institutional banks and mutual funds choosing to enter at VWAP since it is considered ‘the point of most liquidity’

As noted before, in general if the stock is above VWAP it is considered bullish, and VWAP can be used as a sort of support level. When the stock is underneath VWAP, it can be considered a resistance level.

Another thing that you can use to your advantage is understanding price action in relation to VWAP. I explain this a lot more in depth with TradeBuddy University students (find out more here…) but, in general, the first big push over VWAP will almost always have a dip down to VWAP. This means that you do NOT need to sell at the first signs of a pullback, because the stock can very easily pull back to VWAP and then break higher. It is only time to sell once the stock puts in a LOWER HIGH after bouncing vwap, and then cracks the VWAP line.

 

 

VISL is another good example of how VWAP can be considered support and resistance, and can help you identify the ‘backside’ of a move; when the stock is truly done for.

Notice that after it hit highs of $8.00 and started to make a descending triangle against VWAP. If I saw this happening live, I would prepare to get stopped out if it breaks VWAP, because that would be a bearish downtrend move. Once it finally broke the VWAP on significant volume, it tanked a ton. Usually, whenever we see a crack from front-side to back-side, we see a bounce that rejects VWAP (thus confirming the new trend) but in some cases, when the sell-off is simply too strong, there will not be a bounce.

 

 

 

I hope this helps you understand a bit more about price action in relation to VWAP and how you can use it to your advantage when trading. Remember, VWAP can only be used on intraday time frames, so don’t freak out if it is not showing up on your daily chart.

Want to learn more about trading, but don’t have the cash to buy a course? Sign up for our FREE trading course that will help you with the mentality and psychology of trading, not just basic chart patterns that you can google easily! Click here to sign up.

Do you use VWAP on your charts? Have you found any success with it? Let me know below!