There are certain core competencies that must be implemented for profitable trading. Unfortunately, most investors either don’t understand these fundamentals, or choose to ignore them. According to Edelson, investors who follow these concepts - which he calls “Larry Edelson’s five golden rules of profitable trading” - each and every time they invest will have the essential framework to make money in any market:
First, making money in the markets has almost nothing to do with how often one wins, but everything to do with how one manages risk. By strictly and consistently controlling risk and one’s losses, the “risk of ruin” on any one trade or investment is avoided.
• An investor can withstand losing streaks and stay in the game until the big winner comes along and can be wrong 90% of the time and still make money.
• And then, as more investments become winners, more money can be made.
Second, never risk more than 2% of account equity on any one investment, trade, or recommendation. This is for any trading done alone. The only exceptions: Long-term core positions where no leverage or margin of any kind is being used. But for short-term investing never risk more than 2% of account equity on any one trade.
Third, always use protective stops. This is an absolutely imperative measure to implement and it works hand-in-hand with rule #2. Once 2% of risk is defined in terms of account equity, always place a protective sell stop to get out of that trade at a maximum 2% loss.
Fourth, remember that how a trade is exited is as important, if not more important, as how it is entered. Exiting with a small loss, the 2% rule, is critical. But knowing how and when to exit with profits is equally as critical. So how should an investor exit a trade with locked-in profits? By always using a trailing stop to reduce the risk and the odds – as well as the amount -- of profits that can potentially be given back. And no matter what, when that trailing stop is hit, get out of the trade.
And fifth, ignore the news. Watch news shows in the evening. When the markets are open, the commentary found on these shows will more often than not be confusing or misleading. News does not dictate the major trends in any market or security. To the contrary, news flows from the trends.
“How often has a stock reported better-than-
