Don't let the market fool you into making a bad trade!

Here's how you can avoid getting burned:

1. Obey Price Action -- No Matter What

"For traders, price is king," Jonas explains. "Price action will tell you everything you need to know about the state of the markets. Everything else is just noise."

The minute you allow your analysis to drift away from price, you are vulnerable to bad decisions that will cost you money. Let's say you believe the markets will correct in the fall because valuations are just too high. It would be a mistake to take this analysis to heart if the market began to move against you. That's where you'd run into trouble. Instead of obeying price action, you insist that your analysis is correct and the market will soon "wake up" and prove you right.

Nine times out of 10, the need to be "right" will end up costing you money. Price is your judge and jury. If you are wrong, allow your trade to stop out and move on to your next opportunity.

2. Don't Chase Breakouts

Sometimes, a stock on your watch list will gap higher due to a positive earnings announcement or other news event. In these cases, it's critical you don't "chase" the stock and buy shares when it's overextended.

"You must be selective and stick to your trading plan," Jonas says. "Don't ever go 'all in' and buy more shares than you should just because you saw a choice setup trigger. If you're looking to hold a trade for a few weeks to a few months, you might want to consider waiting for additional confirmation before entering a trade."

Chasing breakouts will lead to more stopped-out and unsuccessful trades. That will lower your winning percentage and saps away your hard-earned gains. Be selective and patient and you'll dramatically improve your trading results.

3. Identify Your Quick Trades vs. Core Holdings

You should never buy a stock without first defining your trading goals. I recommend placing your potential trades into two categories: quick trades and core holdings.

A quick trade is just that -- a stock you plan to hold for a few days to a few weeks. On the other hand, a core holding can be a play on a much larger trend, such as the housing market recovery or the rising popularity of firearms. Trades in each of these categories should come with their own set of rules that work for you, along with the appropriate stop loss levels.

If you have set goals for all of your trades, you're less likely to let a quick trade turn into a long-term hold -- or take gains off the table too quickly in the case of a potential longer-term play.

If you look back on the last "bad trade" you executed, I can all but guarantee it went wrong because you bought out of excitement without considering all of the possible outcomes.

"A little planning can go a long way," Jonas concludes. "Before you make your next trade, consult these simple rules to make sure you're jumping into the market with the proper expectations and an open mind."


Thanks to The Daily Reckoning