As we hit 2010, I look back on what a really weird year 2009 was - a year where in the first quarter everyone was selling anything that wasn't nailed down. Then, on a cold March day, a decidedly bearish day in the markets, a weird thing happened" the market went up. For most of us, me included, I wasn't convinced that the market was going to keep moving higher. Most of the analysts on TV were as cheery as a root canal, and it's hard to get excited to buy when the words "short covering" kept highlighting the screen.

We are a long way from March of 2009, but as the market moved upwards to 10,000 and eventually the retail traders came back into the markets, I was reminded of something I learned long ago. In order to win in this business, you have to think the opposite of people who come and go. You have to have a set of rules. Before the rules of each trade are placed, consider placing the rules of a trader into your brain. They should include the following:

1. Capital Preservation - The number one rule of this game is that you have to have it to make it. Forget this rule and you're dead in this world. I get asked this question all the time, "What's a proper account size to get started in trading?" Well, there really isn't a hard fast answer to this one, just like there isn't a hard fast answer to how to trade AAPL or Oil. Each person is different, and the best answer I can give you is that the money shouldn't amount to more than risk capital. If you're thinking about your account too much, then you have too much at risk.

2. Greed vs. Fear - I used to think Greed and Fear were bad things to a trader, but like anything, they should be taken in moderation. It's been said by many traders that Greed makes us do things that we shouldn't, and fear keeps us from doing the things that we should. Let's face it: this is a business of millions of traders where the only real competition out there is you.

3. Find a good system and learn it frontwards and backwards - If you're a fundamental trader, than learn fundamentals and apply them to the companies you are trading. If technicals intrigue you, then learn technical analysis. There are other areas you could look into to master. Sentiment trading is one that studies bulls-vs.-bears, put call ratios, velocity and volatility. Contrarian trading involves trading against the herd. And then there's seasonality, which factors in patterns that occur over a calendar year. Whatever it is, becoming a master of one of these is better than being a jack-of-all-trades.

4. Risk Management - Just how much do you intend to risk on any one trade? Ten percent? Five percent? Do you know that the most successful traders risk less than 5% on any one single stock trade and less than 10% on a single sector or index? Risking too much on one trade might seem fine before you enter the order, but if the trade goes against you it will impede your decisions to do the right thing when it comes time to exit. Having a trade that loses 50% of your account means that you have to now get 100% to get back to break even.

5. Money Management - It doesn't matter how good your system is, if you don't apply sound money management to your trade, you won't get anywhere. Money management is more than just how much to risk on a single trade. It's looking at the entire portfolio and strategizing on how to correctly correlate several trades over time. Let's assume that you have bullish opportunities in 3 different stocks: AAPL, GOOG, and MSFT. Assuming you risk no more than 5% on a bullish trade in each, how much are each of these stocks correlated to one another? You may think you're diversified, but you're not. AAPL and MSFT correlate more than 80%!

Before you commit a dime of your hard-earned money to trading, consider learning these crucial rules and applying them. Always keep in mind that identifying opportunities, creating low-risk trades and planning your trades are all part of the success equation in trading!

Tom Gentile
Chief Strategist
Profit Strategies Group, Inc.