The One Rule You Must Never Break When Trading Stocks. By Gregory Mannarino

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*If you were to believe the general nonsense that “No One Can Predict the Market,” then how is it that traders all over the world are reaping massive sustained profits doing just that? Here is the truth, ANYONE can predict the short term most probable price action of an asset and profit from it substantially...

So, what is trading really about? It is about making decisions. Period.
Believe it or not picking the right stocks plays only a small role in whether you will be a successful trader. The real key to trading successfully comes down to a single very basic money management “skill.”
Here is the truth. If you were to throw darts at a board to pick stocks, and on average were right just half the time, you could still make money trading IF you used a single, simple money management skill or “rule.”
Let’s call this skill RULE ONE, (we will go over how to use this shortly).
Does it help to be able to pick the right stocks? Obviously yes! Picking the right stocks will make you more money faster but again, you could be wrong half the time-using RULE ONE and still be a profitable trader.
My goal in this brief is to outline for you how to manage money in the “process” of a trade using only one rule. Yes! Each trade is a process. Only a fool would throw a sum of cash into a particular investment without understanding that each trade must be “managed,” and this “management” is very simple.
RULE ONE. Never put all your eggs in one basket. I am not talking about being diversified, remember we are talking about executing a single successful trade.
Many people who trade believe that by utilizing only a small fraction of their trading funds for any one trade makes them “safe.” Nonsense…I will tell you that this trading mentality will simply cause you to lose money slower, and that’s all.
RULE ONE is simple. Once you pick a particular stock (traders actually use options buying calls and puts for leverage), you need to think ahead just a little bit. Let’s say for example a random stock just pops into a traders head, it’s Facebook ticker FB. Now, let’s say trader A has the sum of XYZ to invest in FB calls. Now the misinformed (trader A) will simply take the sum of XYZ in its entirety, buy those calls, and hope for the best. Now let’s say that the next day FB falls 1%, (which would be on average a 10% loss for the option if you were buying in the money at 3 months out expiration).
Let’s do some basic math.
Assume the sum of XYZ is 10K. Trader A’s FB calls now suffer a 10% loss and are now worth 9K. Trader A decides to sell at a 1K loss.
Many of you who already know my work have heard me talk about how a trader should always enter a trade with a “half” position- this is where thinking ahead to manage your trade comes in and it is the key to success, and big money.
Let’s assume that I, like trader A, have 10K which I want to invest in FB calls-only I open the trade with a “half” position of 5K. Next day the trade goes against me and I close the position with only a 5% loss of my intended 10K investment.
Recap. Both traders had started with the same investment capital, 10K. Trader A went ALL IN with the 10K and lost 10% of the total leaving him with 9K, while the other trader (me) also with an intended 10K investment cut his losses to half of trader A by utilizing a “half” position-(I lost $500 of my initial 5K which I opened the position with leaving me with 9.5K).
Trader A now has a total sum of 9K to invest, having suffered the previously outlined 1K loss and I have 9.5K as a total sum because of my suffered loss.
Now, trader A and I both want to buy puts on Intel, ticker INTC (again in the money at a 3 month out expiration). Trader A puts his entire 9K into the trade when I enter a “half” position of $4,750. Next day the stock gets an analyst upgrade and goes up 3%. Trader A and I both decide to close our positions. Trader A loses 30% of his 9K and I lose 30% of my $4,750.
Trader A is now left with an initial loss of 1K on FB, followed by a $2,700 loss on INTC. He now has $6,300 in trading capital.
I, using my “half” position entry strategy now have a total of $8,075 in trading capital left having lost $500 on FB and $1,425 on INTC .
Recap. Trader A using his “all in” trading strategy has $6,300 left vs my $8,075 simply by using my “half” position entry strategy, (we both started with 10K entered the same positions with different entry strategies).
Trader A and I now want to buy calls on Nike, ticker NKE.
Trader A again goes “all in” with his $6,300 and I enter a “half” position using $4,037 (again assuming in the money positions with a 3 month out expiration).
The next day NKE goes up 1%, or 10% for the options we both bought.
Trader A’s calls are now worth $6930 and mine are worth $4,440. Now, because the NKE went up and I believe more gains are coming, I will take my remaining capital and invest it into buying more calls (same strike and expiration). My investment in NKE calls is now $8,477.
The next day NKE goes up another 3%, (or roughly 30% for the option).
Trader A’s calls are now worth $9,009 and mine are worth $11,020.
End result: both trader A and I started with the same trading capital, entered the same positions but used different entry strategies.
Trader A lost $991
I made a profit of $1,020
In summary: As a trader NEVER deviate from RULE ONE!
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Happy Trading!
Gregory Mannarino