I remember it like it was yesterday…
When I first joined Tim Sykes’ Trading Challenge, there was a lot I didn’t know yet.
I had read some books on trading and tried to learn as much as possible, but nothing was “clicking” … yet.
Once I discovered Sykes’ “Pennystocking Framework” DVD, which details his 7-step Framework … I started to grasp what he was teaching.
Now, 17 years later, I’m so glad that I did…
Without the priceless lessons I’ve learned from Sykes, I wouldn’t have made it this far as a trader.
And I definitely wouldn’t be the Lead Trainer at StocksToTrade, writing this today…
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But before I met Sykes, I listened to “gurus” without a proven track record … and paid the price.
Now, it’s my job to make sure you don’t do the same.
With that in mind, I want to show you four game-changing trading rules I’ve learned from Sykes over the years…
Table of Contents
Rule #1: Focus on the Best Setups Only
First, Sykes taught me how important it is to trade the best setups only…
If I had to choose one key to my longevity in the stock market, it would be focusing on stocks in hot sectors.
These stocks provide the best volume, volatility, and price action for day traders.
I’ve narrowed it down to a five-item checklist that I go over before entering any trades:
- Trading Checklist Item #1: Is It in a Hot Sector?
- Trading Checklist Item #2: Does It Have Unusually High Volume?
- Trading Checklist Item #3: Is It a Low-Float Stock?
- Trading Checklist Item #4: Does It Have News?
- Trading Checklist Item #5: Has It Run Before?
Nearly every time I break this rule and trade a setup that doesn’t fit my boxes, I regret it.
Say it with me: If a potential trade doesn’t check these boxes, it’s off the list. That simple.
Do this — and this alone — and you’ll already be ahead of the curve.
Filtering potential trades through this checklist doesn’t take long. But it could make a huge difference in your trading — and state of mind.
And if you’re still struggling to find the best setups in the market…
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Rule #2: Be Aggressive on Killer Setups
I’ve missed out on a few killer setups throughout my career because I doubted myself.
Looking back, the chart patterns were flawless. Yet I allowed small technical concerns to stop me from pulling the trigger.
But Sykes taught me that if the pattern checks all of my boxes, it’s time to get aggressive and size up.
This is especially true for traders with small accounts. You must seize golden opportunities when they come your way.
That said, don’t risk more than you’re willing to lose. Figure out the maximum loss you can take without shattering your confidence and stick to that size on perfect patterns.
Take the time to do your research and study diligently.
As you get more experience, you’ll gain confidence in your trading strategy.
Then, when the pattern you’ve been patiently waiting for finally appears, don’t hesitate…
Trust your gut and pull the trigger.
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Rule #3: Cut Your Losses (and Learn From Them)
Even the most perfect-looking setups will occasionally go against you.
You could be exactly right on a trade thesis, only for some shocking headline to completely shake market sentiment out of nowhere … and ruin your entire play.
Taking losses is part of the game — the key is how you react to them.
First things first, you need to cut any losses immediately.
Nothing is more important than going on to trade another day. If you don’t protect your capital, you’ll blow up your account and you won’t be able to trade.
But after you cut a loss, you need to do some self-reflection…
Ask yourself:
- Why did this trade turn into a loss?
- Was your timing off? Was your initial thesis wrong? Or did something outside of your control affect the trade?
- Does this loss have anything in common with your other losses?
- Is there a counterproductive trend that you can identify (and eliminate) from your strategy?
- What valuable lessons can you take away from the loss?
- What steps can you take to improve your trading moving forward?
- How will you avoid making the same mistakes in the future?
Start taking accountability for your losses. I promise you’ll be a better trader for it.
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Rule #4: Know Your History
Last, but certainly not least — know your history.
This lesson is especially timely as the stock market is making new all-time highs.
Traders worldwide are wondering if this is the beginning of a new secular bull market, or if we’re nearing the top of a speculative bubble…
Sykes taught me to use history as a prediction engine for the stock market.
Even though the stock market is filled with numbers, Sykes says he views himself as more of a history teacher than a math teacher.
The market isn’t a perfect science. You need to understand the historical context of how stocks tend to trade.
No matter what stock you’re trading, you should learn everything you possibly can about its history.
Pay particularly close attention to the following historical metrics:
- Prior price action in the chart…
- The company’s earnings history…
- Major catalysts in the past…
Study how the chart has reacted throughout time. Then you can form a strong trading plan for what may happen next.
You can also take the same steps when evaluating the charts of the major indexes…
Understanding how the broader stock market has reacted to certain periods throughout history can potentially help you prepare for future moves in the major indexes.
Think about the price action in the major indexes during 2022.
Had you studied prior bear markets, you likely could’ve predicted certain moves before they happened…
SPY chart: 1-year (2022), daily candle — courtesy of StocksToTrade.com
If you knew that stocks generally struggle as interest rates rise, you might’ve had the foresight to sell everything (and maybe even short the S&P 500) as soon as the Fed began its hiking cycle.
The bottom line is that Tim Sykes’ lessons have changed my life.
By focusing on ideal setups, cutting losses immediately, being aggressive on perfect patterns, and understanding stock market history … you can potentially gain a significant edge over your competition.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade