12 rules to beat the markets

Mike McCudden meets day-trading veteran David Rogerson and discovers how his 12 golden rules helped him to play with someone else's money and hit the jackpot.

Interactive Investor's recent Market Maestro competition, and its £5,000 first prize, was open to anyone and was designed to help the inexperienced to trade with discipline, which it did.

But there was nothing to stop the professional day trader entering - and winning.

David Rogerson is exactly that. Trading with demo money should differ hugely from trading with real cash; nevertheless, Rogerson converted his notional £10,000 into £300,000 in just two weeks. "Trading £10,000 and returning £300,000 in two weeks doesn't happen in the real world," he says.

"Trading with dummy funds is very much a case of risk-on trading (where your stake rises alongside the increasing value of your winnings), and the more profitable your trades the greater risk you can take."

It's not for amateurs, obviously, as Rogerson establishes. He was involved in the stockmarket for more than 15 years, beginning in a private client fund management firm.

He found the pace of private client work rather ponderous, so moved towards the pointy end of the market as a market maker in UK equities at Aitken Campbell in Glasgow. But trading, as he did, with the firm's money, he couldn't resist taking on the challenge of trading with his own funds too.

"Initially, I had a six-month plan to see if it was financially possible to day-trade my own funds and be self-sufficient, and that was almost seven years ago."

To be a professional day trader on your own funds over seven years is by any measure a rare thing. Twelve rules helped Rogerson achieve that feat.

Rule 1: Discipline

"I'm at my desk by 7am for the day's corporate results. I check out overnight Asian markets, any major news that may have broken overnight and the UK FTSE 100 futures to give me an overall feel for where the market might open.

"I then read through the day's major corporate results, broker upgrades/downgrades and finally list the main economic figures due for release in Europe and the US. Then the fun begins at 7.50am."

Rogerson demonstrates that you can't day-trade unless you have a set of rules and stick to them, so let's find out more.

Rule 2: Build a strategy and stick to it

Rogerson has accumulated about 75, mostly FTSE 350, stocks which he watches fastidiously, and very rarely strays off his list - and if he does, it's only when driven by unusual news.

"Stick to stocks with good liquidity, allowing for easy entry and exit prices. Financial stability is another important factor when I trade, although given what has happened to many of the larger financial companies since 2007 - Enron for example - the truth is no company is too big to fail.

"I start by looking at the bigger picture, getting a feel for what the overall market is going to do, then I make myself aware of expected economic announcements. Then I will be very open-minded as to what I will trade on in any given day. I usually follow equities that have released some news, be it corporate or a broker up/downgrade - something that will create activity."

Rule 3: The internet has given traders a massive toolbox. Use it

"I use Interactive Markets for equity CFD trading, which allows me total control over my positions and order management. When I trade I use spread betting as there is usually no more than a one-point spread."

Rule 4: Pick the right tool for the right job

"I need to feel I have as much control over my positions as possible. When I am responsible for my own orders, I require a reduced level of risk. I also use Direct Market Access (DMA) contracts for difference (CFD) as they can reduce the spread, which ultimately increases your profit margin.

"With spread betting the tax advantage is obvious - they don't attract capital gains tax (CGT) - but the downside is that you pay the spread. I prefer to increase my profit margin and increase risk management at the expense of paying CGT on CFD gains."

Rule 5: Sift information

"The most important thing any investor or trader in the stockmarket can do to help themselves is to read as much as possible. Sure, you won't remember everything, but the more you read the more you will learn. You won't always agree with everything you read, but over time you will gradually form your own views and this will give you confidence when it comes to trading."

It is important to remember at this point that day-trading is a different beast from investing. Day traders such as Rogerson can open and close a trade within five minutes if the profit is hit or a stop-loss activated. It is very rare to maintain an open position overnight and even then only if there is an obvious opportunity.

Rule 6: Know yourself

"I believe anyone can do it, but some people are more suited to it than others. The most important attributes would be self-discipline, the ability to work under pressure and patience."

Rule 7: Learn to read a chart

As anyone who has made a few successful trades will tell you, it is not luck. The ability to read a chart is vitally important.

"Technical analysis is a major part of understanding where a share price is going to move. With increased volatility in the markets, share prices tend to have larger trading ranges and as a result charting has found a place for itself in a market that is looking for formulated price levels. I would always look to the fundamentals of a company first, but you would be a fool not to take into account technical analysis as well."

Rule 8: Take internet chat with a pinch of salt

"Forums are a last resource or point of research. They have their uses and sometimes you can pick up something new, but generally it's a little like hearing a rumour from a friend in the pub. The forums do have some day traders who post on a regular basis, and will generally welcome you into their conversation."

Rule 9: Take losses on the chin

"Dealing with losses is the making or breaking of a day trader. Before I place a trade, I know two things. The first is what profit I will make if the trade goes in the right direction, and the second is how much I will lose if the trade goes the wrong way.

"Knowing this before I place my trades gives me the peace of mind to execute my orders. Losses are tough. Work on the basis of getting seven out of 10 trades correct and you will be successful."

Rule 10: Manage risk

"Risk management is, for me, the most important part of trading. As I mentioned above, I know what is at risk financially when I execute a trade. I have strict stop-losses that are generally one third of any profit I am looking to make from the trade. So if I am looking to make a profit of £150 from a deal I will only risk £50 on the downside.

"So, working on the basis you get seven trades right and three wrong:

Profit (7 x £150) = £1,050

Losses (3 x £50) = £150,

Profit from 10 trades = £900.

"The most important advice I could give is to be firm on any trade that goes wrong, and cut at the level you decided on before entering the trade."

Rule 11: The more I practise the luckier I get...

"Run a demo account for at least six months before embarking on this career move; have a strict trading method worked out beforehand and stick to it. If this doesn't work it has cost nothing and you can always alter your trading strategy and try again."

Rule 12: Don't trade with more than you can afford to lose

"Never trade with more than you can afford to lose. The stockmarket is an unforgiving environment.

"I'm lucky in that as well as trading, I have a number of clients to whom I offer consultancy services, and I am always available to offer these services to others."

So, winning Market Maestro was more than a happy accident. Trading is fulfilling and can be profitable and fun, but take it from the Maestro himself: learn the rules.

For more guidance on trading, visit theInteractive Investor Knowledge Centre.