The 12 Golden Rules for Successful Trading
1. Adopt a definite trading plan.
Because of the emotional stress that is
inherent in any speculative situation, you must have a predetermined method
of operation, which includes a set of rules by which you operate and adhere
to, thus protecting you from yourself. Very often, your emotions will tell
you to do something totally foreign or negative to what your market trading
plan should be. It is only by adhering to a preconceived formula that you
can resist the emotional temptations and stresses that are constantly
present in a speculative situation.
2. If you're not sure, don't trade.
If you're in a trade and feel unsure of
yourself, take your loss or protect your profit with a stop. If you are
unsure of a position, you will be influenced by a multitude of extraneous
and unimportant details and will probably end up taking a loss.
3. You should be able to be right 40% of the time and still show handsome
profits.
In speculating, it would be folly to
expect to be right every time. An individual with the proper trading
techniques should be able to cut his losses short and let his profits run so
that even being right less than half the time will show excellent profits.
This point is re-emphasized in Rule Four.
4. Cut your losses and let your profits ride.
The basic failing of most speculators
is that they put a limit on their profits and no limit on their losses. A
man hates to admit he's wrong. Therefore, an individual will often let his
loss ride, becoming larger and larger in hopes that eventually the market
will turn around and prove him correct. Then after a while, he begins hoping
for a small loss and gives up hoping for a profit. Human nature also
dictates that an individual wants to take his profit right away and thus
prove himself correct. There is an old saying, "You never go broke taking a
small profit." But you'll certainly never get rich that way.
Being satisfied with small
profits is the wrong mental approach for making money in speculation. If you
are correct when entering a speculative situation, you will know it almost
immediately and will show a profit quickly. However, if you are wrong, you
will show a loss and you should remove yourself from the situation quickly.
Taking a small loss does not necessarily mean you were wrong in your
thinking. It simply means that your timing was perhaps incorrect and that
you should wait for the correct timing and situation to allow you to reenter
the market. Remember, in any speculative situation, the market is the final
judge.
An individual must let the
market tell him when he is wrong and when he is right. If you show a profit,
ride it until the market turns around and tells you that you are no longer
right, and, at that time, you should get out...but not before! On the other
hand, the market will also tell you if you are wrong and it would be a
serious mistake to argue with what it is saying.
5. If you cannot afford to lose, you cannot afford to win.
As we have stated in Rule Four, losing
is a natural part of trading. If you are not in a position to accept losses,
either psychologically or financially, you have no business trading. In
addition, trading should be done only with surplus funds that are not vital
to daily expenses.
6. Don't trade too many markets.
It is difficult to successfully trade
and understand a specific market. It is next to impossible for an
individual, especially a beginner, to be successful in several markets at
the same time. The fundamental, technical, and psychological information
necessary to trade successfully in more than a few markets is more than the
individual has either the time or ability to accumulate.
7. Don't trade in a market that is too thin.
A lack of public participation in a
market will make it difficult, if not impossible, to liquidate a position at
anywhere near the price you want.
8. Be aware of the trend. ("The Trend is your friend")
It is vitally important that a trader
be aware of a strong force in the market, either bullish or bearish. When
this force is at its height, it would be folly to attempt to buck it.
However, one must learn to recognize when a trend is about to run its course
or is near a period of exhaustion. By an ability to recognize the early
signs of exhaustion, the trader will protect himself from staying in the
market too long and will be able to change direction when the trend changes.
9. Don't attempt to buy the bottom or
sell the top.
It simply can't be done unless
you have the aid of a crystal ball or some other tool which could be
peculiar to the mystic. Be content to wait for the trend to develop and then
take advantage of it once it has been established.
10. Never answer a margin call.
This rule acts as a stop loss when your
position has weakened considerably. By dogmatically and arbitrarily adhering
to this rule, you will be forced to get out of the market before disaster
sets it. It is often difficult to admit you're wrong and get out of the
market (which you probably should have done well before you received a
margin call). However, the presence of a margin call should act as a final
warning that you have let your position go as far as you conceivably can
(unless the initial margin is out of line with the volatility of the
contract).
11. You can usually sell the first rally or buy the first break.
Generally, a market which has just
established a trend either up or down will have a reaction and good interim
profits can be made by recognizing this reaction and taking advantage of it.
For example, in a bull market, the first reaction will generally be met by
investors waiting to buy the break. This support generally causes the market
to rally. The reverse is true of a bear market.
12. Never straddle a loss.
A loss by itself is difficult enough to
accept. However, to lock in this loss, thus making it necessary for you to
be right twice rather than the once (which you previously found impossible)
is sheer absurdity.
While the following are not specific trading rules, they are general
observations which will aid the speculator in formulating an understanding
of markets:
You must retain control of the situation and yourself. Do not allow your
position to control you. It is a mistake to find yourself in a position
larger than you can reasonable handle. When this occurs, you will find that
the sheer size of the position, rather than the facts of the situation
itself, affects your judgement.
The commodity does not know that you own it. You must remain impersonal in
your trading. When you take a position and you are wrong, remember it is
better to get out immediately! The market will not feed badly about it if
you do, but you will if you don't.
The market always looks its worst at its bottom, and the best at the top. It
is important to remember that before the market turns around, it is at its
very worst. Therefore, be prepared to treat each day objectively by not
allowing the emotional fever to carry over and cloud your judgment.
Equity...Equity...Equity...Not Cash. If a man is long from 100 points below
the market and you are long from the opening that day, you both had the same
amount invested in the market from the time both of you were long.
Therefore, if the market goes up ten points, you each have made the same
amount that day. If the market goes down 10 points, you have each lost the
same amount. You should not be confused by the fact that someone has taken a
position before you. You must be concerned with your own situation
primarily. Each day, start fresh. Your paper profits or losses from previous
days should not enter into your decisions regarding the course of action you
will take.
Treat paper profits as if they are your own money. They are! Naturally, the
opposite also holds true.
THE RISK OF LOSS EXISTS IN FUTURES TRADING.
A note about Derek of
Express Futures:
I got to know Derek about 4
years ago, and he rapidly became one of my favorite brokers. He is the most
helpful soul to a new trader, goes way beyond the call of duty, and never
makes a person feel as though you are wasting his precious time by asking
dumb questions. I personally have never had anyone complain about Derek or
his company to me...so I feel quite confident in recommending him as a
broker.
-shaggy
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