Recently, I was watching my son’s volleyball tournament for middle school.  Our team scored, but it appears in the volley a player may have touched the net, and the opposing team’s coach was disputing the point.  Suddenly, it was as if college scouts were hidng in the bushes the way everyone started unraveling. No one could come to an agreement. Then out came the rule book.  We waited patiently as middle aged dads ran for their 'readers' to focus on the fine print, finally - confirmation.  In the end, we gave up the point.

Rules, although inconvenient at times, do really have their place.  Is this true with the stock market? Absolutely!  Here are a few tested standards to live by as we maneuver the S&P (SNP: ^GSPC), Dow Jones (DJI: ^DJI), and Nasdaq (Nasdaq: ^IXIC) indexes:

1) Have a plan before entering any position in the market.  This should include a solid entry point, a stop loss percentage, gains percentage, and a solid foundation for why this equity/fund, and why now.

2) Use funds you don’t need to live on and can say goodbye to without deep despair.  Be realistic that you are trying to grow an investment.  It is not time to quit your day job. 

3) Stop loss orders:  You can place the parameters of a stop loss order at the time of market entry, or you can keep the point of sale in the back of your mind.  When you choose to execute a (stop) loss order, you must stick with your plan and not get emotional. Generally, a stop loss limit of 7% to 10% is what many traders recommend.

4) Sell orders: Don’t be afraid to lock in gains! Have in mind a percentage gain you’re willing to accept and be ready to pull the sell trigger when you reach it.  You can always buy back your investment at a lower price if it falls in value.

5) Emotional control: Like any drug, once the adrenalin surges, you start second guessing yourself. No one wants to sell at a 10% loss, but who wants to sell at a 25% loss or more? Stick to your plan.

If you follow these general guidelines, does it mean you will always come out on top? Not necessarily, but (at least) you will live to play another day.  As Albert Einstein aptly said, “You have to learn the rules of the game.  And then you have to play better than anyone else.”

Playing better means you have to also use your innate common sense.  This may translate into riding the market’s euphoria with the upside, while acknowledging today’s sobering economic conditions.  Are you rounding third base on a home run, the next ‘batter up’, a benchwarmer, or a spectator? A good equities opportunist learns to play all positions well at some time or another.

Have you been removed from your position more than once with stop loss orders?  It may be time to watch the game from the sidelines until the playoff season begins. Regardless of what happens in the future, being disciplined with your resources will leave you in a better position than those who play without rules.

As we learned during the tournament, you may lose a point to the rule book, but the rules may graciously give you the win in the end.