20 GOLDEN RULES FOR TRADERS

Want to trade successfully? Just choose the good positions and avoid the bad ones. Poor trade selection takes a heavy toll as it bleeds your confidence and wallet. You face many crossroads during each market day. Without a system of discipline for your decision-making, impulse and emotion will undermine skills as you chase the wrong stocks at the worst times.

Many short-term players view trading as a form of gambling. Without planning or discipline, they throw money at the market. The occasional big score reinforces this easy money attitude but sets them up for ultimate failure. Without defensive rules, insiders easily feed off these losers and send them off to other hobbies.

Technical Analysis teaches traders to execute positions based on numbers, time and volume.This discipline forces traders to distance themselves from reckless gambling behavior. Through detached execution and solid risk management, short-term trading finally "works".

Markets echo similar patterns over and over again. The science of trend allows you to build systematic rules to play these repeating formations and avoid the chase:


1. Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming.

2. Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat.

3. Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool.

4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.

5. Don't buy up into a major moving average or sell down into one. See #3.

6. Don't chase momentum if you can't find the exit. Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can.

8. Trends test the point of last support/resistance. Enter here even if it hurts.

9. Trade with the TICK not against it. Don't be a hero. Go with the money flow.

10. If you have to look, it isn't there. Forget your college degree and trust your instincts.

11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.

12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don't expect anyone to change the channel.

13. Avoid the open. They see YOU coming sucker!

14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.

15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.

16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.

17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.

18. Trends never turn on a penny. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.

19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.

20. Beat the crowd in and out the door. You have to take their money before they take yours, period.


Feel free to add your own rules.

HAPPY TRADING ALL!!

Time to give this thread another airing for traders old and new ...

Dennis Gartman's Rules of Trading.

The "Not-So-Simple" (But Really Utterly So) Rules of Trading

The world of investing/treading, even at the very highest levels, where we
are supposed to believe that wisdom prevails and profits abound, is littered
with the wreckage of wealth that has hit the various myriad rocks that exist
just beneath the tranquil surface of the global economy. It matters not what
level of supposed wisdom, or education, that the money managers or
individuals in question have. We can make a list of wondrously large
financial failures that have come to flounder upon these rocks for the very
same reasons. Let us, for a bit, have a moment of collective silence for
Long Term Capital Management; for Baring's Brothers; for Sumitomo Copper...
and for the tens of thousands of individuals each year who follow their lead
into financial oblivion.

I've been in the business of trading since the early 1970s as a bank trader,
as a member of the Chicago Board of Trade, as a private investor, and as the
writer of The Gartman Letter, a daily newsletter I've been producing for
primarily institutional clientele since the middle 1980s. I've survived, but
often just barely. I've made preposterous errors of judgment. I've made
wondrously insightful "plays." I've understood, from time to time, basis
economic fundamentals that should drive prices--and then don't. I've
misunderstood other economic fundamentals that, in retrospect, were 180
degrees out of logic and yet prevailed profitably. I've prospered; I've
almost failed utterly. I've won, I've lost, and I've broken even.

As I get older, and in my mid-50s, having seen so much of the game--for a
game it is, with bad players who get lucky; great players who get unlucky;
mediocre players who find their slot in the lineup and produce nice, steady
results over long periods of time; "streak-y" players who score big for a
while and lose big at other times--I have distilled what it is that we do to
survive into a series of "Not-So-Simple" Rules of Trading that I try my best
to live by every day ... every week ... every month. When I do stand by my
rules, I prosper; when I don't, I don't. I am convinced that had Long Term
Capital Management not listened to its myriad Nobel Laureates in Economics
and had instead followed these rules, it would not only still be extant, it
would be enormously larger, preposterously profitable and an example to
everyone. I am convinced that had Nick Leeson and Barings Brothers adhered
to these rules, Barings too would be alive and functioning. Perhaps the same
might even be said for Mr. Hamanaka and Sumitomo Copper.

Now, onto the Rules:

NEVER ADD TO A LOSING POSITION

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. The only thing that can happen
to you when you average down into a long position (or up into a short
position) is that your net worth must decline. Oh, it may turn around
eventually and your decision to average down may be proven fortuitous, but
for every example of fortune shining we can give an example of fortune
turning bleak and deadly.

By contrast, if you buy a stock or a commodity or a currency at
progressively higher prices, the only thing that can happen to your net
worth is that it shall rise. Eventually, all prices tumble. Eventually, the
last position you buy, at progressively higher prices, shall prove to be a
loser, and it is at that point that you will have to exit your position.
However, as long as you buy at higher prices, the market is telling you that
you are correct in your analysis and you should continue to trade
accordingly.

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.

INVEST ON THE SIDE THAT IS WINNING

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.

Once, when Lord Keynes was appearing at a conference he had spoken to the
year previous, at which he had suggested an investment in a particular stock
that he was now suggesting should be shorted, a gentleman in the audience
took him to task for having changed his view. This gentleman wondered how it
was possible that Lord Keynes could shift in this manner and thought that
Keynes was a charlatan for having changed his opinion. Lord Keynes responded
in a wonderfully prescient manner when he said, "Sir, the facts have changed
regarding this company, and when the facts change, I change. What do you do,
Sir?" Lord Keynes understood the rationality of trading as a mercenary
guerrilla, choosing to invest/fight upon the winning side. When the facts
change, we must change. It is illogical to do otherwise.

DON'T HOLD ON TO LOSING POSITIONS

R U L E # 4
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.

GO WHERE THE STRENGTH IS

R U L E # 5
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.

Nortel went from approximately the split-adjusted price of $1 share back in
the early 1980s, to just under $90/share in early 2000 and back to near $1
share by 2002 (where it has hovered ever since). On the way up, it looked
expensive at $20, at $30, at $70, and at $85, and on the way down it may
have looked inexpensive at $70, and $30, and $20--and even at $10 and $5.
The lesson here is that we really cannot tell what is high and/or what is
low, but when the trend becomes established, it can run far farther than the
most optimistic or most pessimistic among us can foresee.

R U L E # 6
Sell markets that show the greatest weakness; buy markets that show the
greatest strength.
Metaphorically, when bearish we need to throw our rocks into the wettest
paper sack for it will break the most readily, while in bull markets we need
to ride the strongest wind for it shall carry us farther than others.

Those in the women's apparel business understand this rule better than
others, for when they carry an inventory of various dresses and designers
they watch which designer's work moves off the shelf most readily and which
do not. They instinctively mark down the work of those designers who sell
poorly, recovering what capital then can as swiftly as they can, and use
that capital to buy more works by the successful designer. To do otherwise
is counterintuitive. They instinctively buy the "strongest" designers and
sell the "weakest." Investors in stocks all too often and by contrast, watch
their portfolio shift over time and sell out the best stocks, often
deploying this capital into the shares that have lagged. They are, in
essence, selling the best designers while buying more of the worst. A
clothing shop owner would never do this; stock investors do it all the time
and think they are wise for doing so!

MAKING "LOGICAL" PLAYS IS COSTLY

R U L E # 7
In a Bull Market we can only be long or neutral; in a bear market we can
only be bearish or neutral.
Rule 6 addresses what might seem like a logical play: selling out of a long
position after a sharp rush higher or covering a short position after a
sharp break lower--and then trying to play the market from the other
direction, hoping to profit from the supposedly inevitable correction, only
to see the market continue on in the original direction that we had gotten
ourselves exposed to. At this point, we are not only losing real capital, we
are losing mental capital at an explosive rate, and we are bound to make
more and more errors of judgment along the way.

Actually, in a bull market we can be neutral, modestly long, or aggressively
long--getting into the last position after a protracted bull run into which
we've added to our winning position all along the way. Conversely, in a bear
market we can be neutral, modestly short, or aggressively short, but never,
ever can we--or should we--be the opposite way even so slightly.

Many years ago I was standing on the top step of the CBOT bond-trading pit
with an old friend Bradley Rotter, looking down into the tumult below in
awe. When asked what he thought, Brad replied, "I'm flat ... and I'm
nervous." That, we think, says it all...that the markets are often so
terrifying that no position is a position of consequence.

R U L E # 8
"Markets can remain illogical far longer than you or I can remain solvent."
I understand that it was Lord Keynes who said this first, but the first time
I heard it was one morning many years ago when talking with a very good
friend, and mentor, Dr. A. Gary Shilling, as he worried over a position in
U.S. debt that was going against him and seemed to go against the most
obvious economic fundamentals at the time. Worried about his losing position
and obviously dismayed by it, Gary said over the phone, "Dennis, the markets
are illogical at times, and they can remain illogical far longer than you or
I can remain solvent." The University of Chicago "boys" have argued for
decades that the markets are rational, but we in the markets every day know
otherwise. We must learn to accept that irrationality, deal with it, and
move on. There is not much else one can say. (Dr. Shilling's position
shortly thereafter proved to have been wise and profitable, but not before
further "mental" capital was expended.)

R U L E # 9
Trading runs in cycles; some are good, some are bad, and there is nothing we
can do about that other than accept it and act accordingly.
The academics will never understand this, but those of us who trade for a
living know that there are times when every trade we make (even the errors)
is profitable and there is nothing we can do to change that. Conversely,
there are times that no matter what we do--no matter how wise and considered
are our insights; no matter how sophisticated our analysis--our trades will
surrender nothing other than losses. Thus, when things are going well, trade
often, trade large, and try to maximize the good fortune that is being
bestowed upon you. However, when trading poorly, trade infrequently, trade
very small, and continue to get steadily smaller until the winds have
changed and the trading "gods" have chosen to smile upon you once again. The
latter usually happens when we begin following the rules of trading again.
Funny how that happens!

THINK LIKE A FUNDAMENTALIST;
TRADE LIKE A TECHNICIAN

R U L E # 10
To trade/invest successfully, think like a fundamentalist; trade like a
technician.
It is obviously imperative that we understand the economic fundamentals that
will drive a market higher or lower, but we must understand the technicals
as well. When we do, then and only then can we, or should we, trade. If the
market fundamentals as we understand them are bullish and the trend is down,
it is illogical to buy; conversely, if the fundamentals as we understand
them are bearish but the market's trend is up, it is illogical to sell that
market short. Ah, but if we understand the market's fundamentals to be
bullish and if the trend is up, it is even more illogical not to trade
bullishly.

R U L E # 11
Keep your technical systems simple.
Over the years we have listened to inordinately bright young men and women
explain the most complicated and clearly sophisticated trading systems.
These are systems that they have labored over; nurtured; expended huge sums
of money and time upon, but our history has shown that they rarely make
money for those employing them. Complexity breeds confusion; simplicity
breeds an ability to make decisions swiftly, and to admit error when wrong.
Simplicity breeds elegance.

The greatest traders/investors we've had the honor to know over the years
continue to employ the simplest trading schemes. They draw simple trend
lines, they see and act on simple technical signals, they react swiftly, and
they attribute it to their knowledge gained over the years that complexity
is the home of the young and untested.

UNDERSTAND THE ENVIRONMENT

R U L E # 12
In trading/investing, an understanding of mass psychology is often more
important than an understanding of economics.
Markets are, as we like to say, the sum total of the wisdom and stupidity of
all who trade in them, and they are collectively given over to the most
basic components of the collective psychology. The dot-com bubble was indeed
a bubble, but it grew from a small group to a larger group to the largest
group, collectively fed by mass mania, until it ended. The economists among
us missed the bull-run entirely, but that proves only that markets can
indeed remain irrational, and that economic fundamentals may eventually hold
the day but in the interim, psychology holds the moment.

And finally the most important rule of all:

THE RULE THAT SUMS UP THE REST

R U L E # 13
Do more of that which is working and do less of that which is not.
This is a simple rule in writing; this is a difficult rule to act upon.
However, it synthesizes all the modest wisdom we've accumulated over thirty
years of watching and trading in markets. Adding to a winning trade while
cutting back on losing trades is the one true rule that holds--and it holds
in life as well as in trading/investing.

If you would go to the golf course to play a tournament and find at the
practice tee that you are hitting the ball with a slight "left-to-right"
tendency that day, it would be best to take that notion out to the course
rather than attempt to re-work your swing. Doing more of what is working
works on the golf course, and it works in investing.

If you find that writing thank you notes, following the niceties of life
that are extended to you, gets you more niceties in the future, you should
write more thank you notes. If you find that being pleasant to those around
you elicits more pleasantness, then be more pleasant.

And if you find that cutting losses while letting profits run--or even more
directly, that cutting losses and adding to winning trades works best of
all--then that is the course of action you must take when trading/investing.
Here in our offices, as we trade for our own account, we constantly ask each
other, "What's working today, and what's not?" Then we try to the very best
of our ability "to do more of that which is working and less of that which
is not." We've no set rule on how much more or how much less we are to do,
we know only that we are to do "some" more of the former and "some" less of
the latter. If our long positions are up, we look at which of those long
positions is doing us the most good and we do more of that. If short
positions are also up, we cut back on that which is doing us the most ill.
Our process is simple.

We are certain that great--even vast--holes can and will be proven in our
rules by doctoral candidates in business and economics, but we care not a
whit, for they work. They've proven so through time and under pressure. We
try our best to adhere to them.

This is what I have learned about the world of investing over three decades.
I try each day to stand by my rules. I fail miserably at times, for I break
them often, and when I do I lose money and mental capital, until such time
as I return to my rules and try my very best to hold strongly to them. The
losses incurred are the inevitable tithe I must make to the markets to atone
for my trading sins. I accept them, and I move on, but only after vowing
that "I'll never do that again."