It takes an average investor or trader a substantial amount of time before he comes to the conclusion that market success depends not only on an ability to predict. At least two important ingredients of survival and success are a critical approach to information and an attention to the psychological factors. However, the investment position management techniques are very important as well. Knowledge of some little tricks makes the investment process cheaper and more effective. One of the key well known and yet unutilized elements is proper preparation for trading.

There is a tendency not to treat investment activity with the same attention as other kinds of occupations. Being an individual investor, you regard this occupation as a hobby. If you work or used to work for a bank, you are set to think more in terms of the market action and internal bureaucratic procedures than about investment process. Then comes a moment when you decide to start an investment fund. At this point you are required to describe your business plan. Suddenly a question strikes you: “what exactly am I doing: buying at a low price and selling at a high price or something more than that?”

I still remember how confused I was when I had to describe my approach to trading. By that time I had already worked for several years in the market. Still I failed to answer the question, what rate of return I expect. What was even more surprising; even more experienced traders whom I consulted were not capable of answering this question.

Of course, one should take into consideration that we were dealing with derivatives. Our banks had unlimited access to capital and traders actually did not need to know how capital intensive their positions were.  Nevertheless later it turned out that even those who traded simpler assets like stocks and bonds, could hardly give an answer. They had a difficult time answering this question because it was not clear whether they should divide results by the total amount of available capital or by the amount of utilized capital (or risk limit) or only to the equity (if they used leverage) and so on.

The purpose of this article is to help you put down on paper a set of trading/investment rules. These rules will be your own guidance in trading. They are like your formalized business-plan and decision-making process which you may have been following without consciously recognizing. Why do you need such a set?  For self discipline – I hope once you write the rules down you will carry them out yourself.

Thus, let’s start with the questions:
1) What assets do you trade and what instruments do you use to trade these assets? It seems like an easy question about your subject of trade. For example, most of us trade options on a limited range of underlying assets such as stocks. The question can be paraphrased like: which instruments do you trade and on which assets? For instance somebody may prefer trading options on stocks and bonds to trading stocks and bonds themselves. Interestingly some investors say that they do not trade either products or instruments. They would say that they prefer special situations like trading whatever they may based on good information. What do you trade, i.e. what is your subject of trade/investment? 
2) What is your approach to trading? Are you a system trader? Do you tend to benefit from trading some technical patterns, including trends (momentum traders), range trading, breakouts, “head and shoulders”? Are you a “bottom up” (fundamental) investor? Or is your trading based on the market abnormalities: the January effect, situations before information releases and so on.
3) If you have a broad range of interests, then what don’t you trade and what methods don’t you use? E.g. real estate investments are in fashion all over the world the same way Internet stocks were in fashion before. Would you invest money in real estate related projects? Are you planning to you invest in shares, bonds and options on them at the same time?

These questions help you to determine the boundaries of your activities. Now let’s discuss your style.

4) How do you come up with your trading ideas: astrology, spiritualism, fundamental analysis, technical analysis, brokers’ advice?  Why them? Looking critically at your style, can you say what are the strong points of your approach?
5) How do you come to a decision? Do you make them based on the relative strength of conviction of yours or your adviser? Maybe you prefer to compare sources, talk to a few brokers or other traders?
6) How do you manage a stand alone investment? How do you structure position entries and exits?
7) Once you make an investment, which principals help you to recognize an error?
8) What is your approach to money management?  For now one of the issues is to define your preferable ways of dealing not only with stop losses but with capital allocation per trade.
9) Do you use leverage?
10) Do you hedge?