Trading Golden Rule

"Always place an inital stop-loss at 7% below your entry price on any new position. Always! Always! Don't look back and don't second-guess yourself. Wait a couple of days for your emotions to cool and then use that time to analyze your mistake before trying again.

In some cases, you will get stopped out on the same day you buy. (Today probably would've been one of those days.) So it goes. But if you fail to take your medicine early, you can get into big trouble fast. Biting the bullet quickly if you guess wrong is far better than finding yourself trapped with a big loss in a losing trade.

This is the most difficult discipline of investing: taking your losses early while they are still small. I have suffered greatly (as many have) by trying to be a hero and fighting this sell discipline. It's always the same tale of woe... "should've bailed out at $such and such a price" instead of riding it down to the bottom hoping to get out even.

Once you have a profit, keep your stop set at your entry price. Never let a profit turn into a loss. Never! Never! If the trade really starts making nice gains, follow it up with a trailing stop at the previous day's low. Remember, your primary objective is to stay with the momentum. If the price dips below the prior day's intraday low, it's a good indication that momentum is waning.

Finally, don't ever expect to get in at the bottom or out at the top. You will kill yourself emotionally with all the "woulda coulda shoulda" profits that you didn't make. The idea is to catch the middle bulk of the move. Don't try to squeeze out every last dime if you've made a nice chunk.

Suppose you were to buy SSO at the open on any given day since October 1st. The average range from the open to the intraday low has been 6.4% over these 40 trading days. With only one exception, when the price fell more than 7% from the open to the day's low, it continued to move lower in the subsequent 6 days (average) for an average loss of 25%. Those quick 7% losses look pretty good by comparison.

As for entry points, I personally prefer to buy when the fast stochastic oscillator (both %K and %D) dips below 20, indicating a short-term oversold condition. You can use your own favorite indicator or just your gut feeling. The most important thing to keep in mind is not "where" to get in, but "how" to get out. Unless you have steely resolve to exercise a ruthless sell discipline, you would be better off staying in cash."