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  • 5 Critical Stock Investing Rules - That Work!

    June 29, 2011

    Why is it that 75% of professional investors under-perform the stock market? Is it that they don't properly research the companies they invest in? Do they invest in industries they know nothing about? Do they let their emotions get in the way of intelligent trading decisions? Well, all of these reasons are true. Is it not a sad reality however that even professional investors are losing in the stock game? This paints a bleak situation then for the average investor. After all, if the pros can't get it right, then how can we?!

    Well, the playing field becomes a lot more level if you follow these 5 simple, yet very powerful, rules. Stock trading success no longer depends on whether you are a professional or casual investor; the highest probability of success is in the hands of those who simply follow these 5 rules.

    Rule #1: The 1% Rule

    Only risk 1% of your account (the money you have allocated to stock trading) on any one particular trade. By following this golden rule of fractional trading, it is impossible for you to ever reach $0 - it's mathematically proven! Quite simply, if you lose money, your investments get smaller and smaller. Consequently, the more money you make, the larger your trades become. This is the beauty of the 1% rule!

    Rule #2: Make Use of the EPS Rating

    Select only companies with an EPS rating of 90% or higher. Clearly the EPS (Earnings per Share) of a company are important. The EPS Rating goes a step further and states how the company is performing in relation to all other companies. In other words, a company with a 99% EPS Rating has outperformed 99% of all publicly traded companies in terms of earnings. By selecting only companies with EPS ratings of 90% of higher, you are assured that you are dealing with the top 10% of all companies, and thus have very quickly helped narrow your focus down to a handful of companies. The simplicity of using the EPS rating allows peace of mind in knowing that you are investing in high performing stocks.

    Rule #3: Use the PEG Ratio to Your Advantage

    Remember this rule: the lower the PEG Ratio the stronger the buy. The PEG Ratio is derived by dividing the price to earnings ratio by its growth. Put simply, the PEG ratio unveils how cheap a stock is in terms of its returns. If the PEG Ratio is less than.50 then this is an extremely strong buy signal. A PEG ratio between.5 and 1.0 is still considered a valued buy. When the PEG ratio is between 1.0 and 2.0 the stock is still acceptable, in terms of risk adversity, but warrants further analysis. Ignoring stocks with a PEG ratio over 2.0 would be prudent as they are simply too expensive for what they return. Rule #3 saves you from investing in overpriced stocks.

    Rule #4: 55 Day Breakout Rule

    Buy a break of the 55 day high with a stop loss at the 20 day low. Conventional wisdom might suggest that you should buy on dips and sell on increases. That's easier said than done. Why fight the market when you can join the market? Take the highest price in the last 55 days and set a buy order at that price. This way, you'll be getting in right when the price is pushing significantly higher. Set a stop loss order at the lowest price in the last 20 days and you will protect your investment and still keep the door open for maximum profits. As the 20 day low creates higher lows, you adjust your stop loss accordingly. By adjusting your stop loss to the higher lows, you guard your investments and ensure positive returns! The breakout rule maximizes your returns and provides a safety net to protect your profits.

    Rule #5: Be aware of seasonality

    Sell the beginning of May... see you after Labour Day. This is a very general rule and should not be interpreted literally. This timing does not always work; however there is a pattern of seasonality to the markets that is important to be aware of. Start looking for buy signals using Rule #4 in early September, and be on the lookout for sell signals in early April. During bearish markets (summer) the Dow utilities tend to perform best, while in the bullish winter months the Dow industrials tend to perform best. A simple way to make a play based on seasonality is to research ETFs that mimic the Dow. For example, "IWM" mimics the Dow industrials while "IDU" mimics the Dow utilities.

    There you have it - 5 powerful stocks investing rules that will give you an advantage, even over some of the seasoned professionals who fail to use these techniques! As with all investments, proper due diligence is required for all trades and the above rules simply serve as a starting point. The key is to invest wisely, using proven principles of stock investing, while always minimizing any potential risk. Always place your stop losses, accordingly, on all your trades. Wait a minute... did we just sneak in rule #6 there?

    Stock trading doesn't have to be a foggy guessing game filled with treacherous pitfalls. The more you are able to systemize your trading, the faster and more profitable you'll become.

    At we offer a proven, practical and conservative system developed to help you create winning stock trades. We've combined the top analytics in the industry with the knowledge of the world's top traders. Imagine how much more effective your trading could be. Stop losing money and start making money! Click here to sign up today and unleash a new level of power, confidence and success in your trading, For our readers here we will also throw in for free an exclusive bonus - ETF Hot Hands (our constantly updated list of top performing ETF funds) free when you sign up for an Elite Trader Package.

    Kyle Sarwal is an investment expert and founder of

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