10 Trading Rules -Must Read
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sometimes history rhymes
NOW is all that matters when it comes to executing that next trade
Lao-Tzu was an ancient Chinese philosopher and writer who coined the following phrase:
‘If you are depressed you are living in the past.
If you are anxious you are living in the future.
If you are at peace you are living in the present’
In relation to trading, living in the past may relate to a bad trade you made. Maybe you risked too much and took a heavy loss. Or perhaps you made an impulse trade centred on FOMO which ended badly.
If you replay negative experiences over and over, it can lead to depressing thoughts. And an inability to move forward, clean the slate and inability to execute the next trade. It can also lead to revenge trading and the urge to make up for past losses quickly.
On the flip side if you are living in the future, anxiety can set in. You end up worrying about your future trades and the money side of things. The bills you have to pay. A list of endless hypotheticals start entering your mind.
Yet when it comes to trading, or anything else in life, living in the NOW is crucial. Learning from the past and planning for the future are ok. Yet executing and focusing on what you are doing right now is most important.
We need to remember as well that the market doesn’t care about our past losses. Nor does it care about our future bills. So although worrying about these things is natural, it’s not going to help us succeed with our next trade. In fact it will likely create unwanted blockages towards future success.
Being and working in the present though eliminates negative thoughts and reduces anxiety. It means you are working afresh from a blank slate. With that next trade being completely independent of any other you have recently made.
Doing the right thing right now is what is important. Not the mistake you made last time. That is ‘old news’ and no longer matters. So focus purely on what is in front of you. Plan the trade, trade the plan and refuse to be tempted by impulse or micromanagement. Two actions that are often influenced by past actions combined with future expectations.
Trade in the NOW and affirm to yourself that the NOW is all that matters when it comes to executing that next trade.
10 things that I have Learned the Hard Way
“You adapt, evolve, compete or die.” – Paul Tudor Jones
I do not trade the same way I did when I started actively trading the stock market in the late nineties. The market itself has taught me many lessons about keeping my gains and cutting my losses short. I have traded through one of the biggest bull markets in history (1999) and one of the most vicious bear markets since the great depression (2008). I have learned when to trade big, when to trade small, and when not to trade at all. I have been taught the emotional pain of large losses when my ego wanted me to trade too big, and the pain of missing a huge move due to fear of entering a trade. I know what it feels like to lose $30,000 in my account in a few years and the feeling making $150,000 in a few years with minimum draw downs. I know the thrill of victory and the agony of defeat. I have both lost $4,000 in a morning and made $4,000 in a day. In my quest to make money trading I have read several hundred books about trading and the markets. I have spent well over a thousand hours studying charts and historical price action and seen what works and what does not. I have culled from them what works for me.
What have I learned?
“Trading is an evolution of trader and system.” -Jonathan Keag
I have learned to play the long side in bull markets and the short side in bear markets.
I have learned to only risk 1% of my total trading capital on any one trade through proper position sizing and stop losses.
I have learned to trade based on solid principles and NOT my own opinions.
Focusing on the current market trend is the best way to make money.
When I do not understand the market action, it is best to do nothing.
Studying the greatest traders to ever live is a short cut to market success if you listen to what they have to say.
I have to trade the method that fits my personality.
I should have no regrets on my trading results if I followed my method and rules.
I can not predict anything, I can only attempt to follow what IS happening.
It is possible to pull six figures out of the market with the right homework and perseverance.
“Moving averages are my gurus.” – Larry Tentarelli
Keep learning, keep growing, keep tweaking your trading. Stick with what makes you money and allows you to keep it, discard what does not. How I trade today is nothing like what I did 14 years ago, who I am as a trader is nothing like I was even a few years ago. The question is not where you are now in your trading journey and how much money you have, the REAL question is who you will be and what you will have five and ten years from now if you keep doing what you are doing. Keep studying, keep growing, never give up.
“Stay Hungry, Stay Foolish.” -Steve Jobs
10 Trading Aphorisms
- An entry does not determine profitability it only determines potential profit the exit is where the win or loss occurs, focus on that.
- A robust trading system means nothing unless you can follow it with discipline and self control.
- Charts don’t care about any one persons opinions why should you?
- Good trading will make you some money but only good risk management will allow you to keep the money.
- Good traders search for the right entries, great traders search for the right systems.
- Bad traders have an opinion, good traders have a plan.
- In the markets money flows continually from those who do not really know how to trade to those who do.
- Eventually those with the best risk management and trading method end up with the money from those who only have a good trading method.
- Bad traders tend to be stressed and emotional, good traders tend to be more quiet and at ease.
- Show me a trader overly focused on just one trade and I will show you the 90% that are unprofitable, show me a trader focused on the whole process of trading with little concern over any one trade and I will show you a member of the 10% that are profitable.
Wisdom from Gerald Loeb
1. The most important single factor in shaping security markets is public psychology.
2. To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come.
3. Accepting losses is the most important single investment device to insure safety of capital.
4. The difference between the investor who year in and year out procures for himself a final net profit, and the one who is usually in the red, is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.
5. One useful fact to remember is that the most important indications are made in the early stages of a broad market move. Nine times out of ten the leaders of an advance are the stocks that make new highs ahead of the averages.
6. There is a saying, “A picture is worth a thousand words.” One might paraphrase this by saying a profit is worth more than endless alibis or explanations…prices and trends are really the best and simplest “indicators” you can find.
7. Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed.
8. Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.-
9. In addition to many other contributing factors of inflation or deflation, a very great factor is the psychological. The fact that people think prices are going to advance or decline very much contributes to their movement, and the very momentum of the trend itself tends to perpetuate itself.
10. Most people, especially investors, try to get a certain percentage return, and actually secure a minus yield when properly calculated over the years. Speculators risk less and have a better chance of getting something, in my opinion.
11. I feel all relevant factors, important and otherwise, are registered in the market’s behavior, and, in addition, the action of the market itself can be expected under most circumstances to stimulate buying or selling in a manner consistent enough to allow reasonably accurate forecasting of news in advance of its actual occurrence. The market is better at predicting the news than the news is at predicting the market
12. You don’t need analysts in a bull market, and you don’t want them in a bear market.
The need to adapt
Why Technical Analysis Works
- All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope – that is why the numerical formations and patterns recur on a constant basis.
- There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly built into human nature, that always gets in the way of human intelligence.
Elements of a Plan
- Decide what type of participant you’re going to be
- Investor or speculator?
- What markets to participate in? Needs to be consistent with the characteristics and time horizon of the type of participant you choose to be.
- Select a method of analysis
- Don’t jump back and forth among several methods in search of supporting evidence to justify holding onto a market position.
- Develop rules
- Define hard-and-fast rules on what constitutes an opportunity for you, what are the entry and exit points.
- Establish controls
- Define the exit criteria that will take you out of the market either at a profit or loss, e.g. price order, time stop, condition stop.
- Before you get into the market, you have to decide where (price) or when (time) or why (new information) you will no longer want the position.
- Your exit criteria creates a discrete event, ending the position and preventing the continuous process from going on and on.