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Trading rules

 

R U L E # 1

Never, ever, under any circumstance, should one add to a losing position … not EVER!

Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out.

R U L E # 2

Never, ever, under any circumstance, should one add to a losing position … not EVER!

We trust our point is made. If “location, location, location” are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.

R U L E # 3

Learn to trade like a mercenary guerrilla.

The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.

R U L E # 4 : DON’T HOLD ON TO LOSING POSITIONS

Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.

Holding on to losing positions costs real capital as one’s account balance is depleted, but it can exhaust one’s mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.

R U L E # 5 : GO WHERE THE STRENGTH IS

The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.

We can never know what price is really “low,” nor what price is really “high.” We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we’ve no idea how high high is, nor how low low is.

 

Four Basic Traits of Successful Investors

1. They look at objective indicators. Removing the emotions from the investing process, they focus on data instead of reacting to events;

2. They are Disciplined: The data drives decision making with pre-established rules. External factors do not influence them;

3. They have Flexibility: The best investors are open-minded to new ideas, or revisiting previous thoughts;

4. They are Risk adverse: Not always obvious to investors, it is a crucial part of successful investing.

 

RISK MANAGEMENT:

1. I attempt to never lose more than X % of my total capital on any one trade.

2. I NEVER add to a losing trade.

3. I use trailing stops to get out of winning trades.

4. I use mental stop losses to get out of losing trades.

5. I use position size to limit my risk.

6. I use stock options to limit my risk.

7. I know my biggest advantage in trading is small losses and big profits.

8. I never expose more than X % of my capital to risk at any one time.

9. I understand the market environment I am trading in.

10. I understand the volatility of the stock I am trading.

 

Trend Following Lessons from Jesse Livermore

Remember, you do not have to be in the market all the time.

Profits take care of themselves – losses never do.

The only time I really ever lost money was when I broke my own rules.

Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting.

Reasonable people act unreasonably when they are afraid. And people become afraid when they start to lose money, their judgments becomes impaired. This is our human nature in this stage of our evolution. It cannot be denied. It must be understood.

The successful speculator must always have cash in reserve, like a good general who keeps troops in reserve for exactly the right moment, and then moves with great conviction, and commits his reserve armies for final victory, because he has waited until all the odds are in his favor.

I believe that the public wants to be lead, to be instructed, to be told what to do. They want reassurance. They will always move on masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because the pressure is to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous wolf-patrolled prairie of contrary opinion.

Think about these immortal words. Nothing ever changes. Internalize these thoughts from Jesse Livermore and you will be on your way to be a better trend follower.

 

Wisdom from Market Wizards

Tony Saliba

“How do you lose money? It is either bad day trading or a losing position. If it’s a bad position that is the problem, then you should just get out of it.”

“Clear thinking, ability to stay focused, and extreme discipline. Discipline is number one: Take a theory and stick with it. But you also have to be open-minded enough

to switch tracks if you feel that your theory has been proven wrong. You have to be able to say, “My method worked for this type of market, but we are not in that type

of market anymore.” “Until recently, I set goals on a monetary level. First, I wanted to become a millionaire before I was thirty. I did it before I was twenty-five. Then I decided I wanted to make so much a year, and I did that. Originally, the goals were all numbers, but the numbers aren’t so important anymore. Now, I want to do some things that are not only profitable, but will also be fun.”

Dr Van K. Tharp

“The composite profile of a losing trader would be someone who is highly stressed and has little protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in his/her personality, and blames others when things go wrong. Such a person would not have a set of rules to guide their behaviors and would be more likely to be a crowd follower. In addition, losing traders tend to be disorganized and impatient. They want action now. Most losing traders are not as bad as the composite profile suggest. They just have part of the losing profile.” “One of the basic problems that most traders face is dealing with risk. For example, two primary rules to successful speculative trading are: Cut your losses, short and let your profits run. Most people cannot deal with those two rules. For example, if making money is important to you – as it is to most people who play investment games – then you will probably have trouble taking small losses. As a result, small losses turn into moderate losses, which are even harder to take – all because it was so hard to take a small loss. Similarly, when people have a profit, they want to take it right away. They think, “I’d better take this now before it gets away.”

The bigger the profit becomes, the harder it is to resist the temptation to take it now. The simple truth is that most people are risk-averse in the realm of profits – they prefer a sure, smaller gain to a wise gamble for a larger gain – and risk-seeking in the realm of losses – they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success.” “Generally, I find that top traders believe 1) Money is NOT important; 2) It is OK to lose in the markets; 3) Trading is a game; 4) Mental rehearsal is important for success; 5) They’ve won the game before they start.”