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26 -W. D. Gann’s Never-Failing / Valuable Rules

  
Analysis, Education
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  1. Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.
  2. Use stop loss orders. Always protect a trade when you make it with a stop loss order 1 to 3 cents, never more than 5 cents away, cotton 20 to 40, never more than 60 points away. (3 to 5 points away for stocks)
  3. Never overtrade. This would be violating your capital rules.
  4. Never let a profit run into a loss. After you once have a profit of 3 cents or more, raise your stop loss order so that you will have no loss of capital. For cotton when the profits are 60 points or more place stop where there will be no loss.
  5. Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts and rules.
  6. When in doubt, get out, and don’t get in when in doubt.
  7. Trade only in active markets. Keep out of slow, dead ones.
  8. Equal distribution of risk. Trade in 2 or 3 different commodities, if possible. (Trade in 4 or 5 stocks, is possible.) Avoid tying up all your capital in any one commodity or stock.
  9. Never limit your orders or fix a buying or selling price. Trade at the market.
  10. Don’t close your trades without a good reason. Follow up with a stop loss order to protect your profits.
  11. Accumulate a surplus. After you have made a series of successful trades, put some money into a surplus account to be used only in emergency or in times of panic.
  12. Never buy or sell just to get a scalping profit. Never buy just to get a dividend.
  13. Never average a loss. This is one of the worst mistakes a trader can make.
  14. Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.
  15. Avoid taking small profits and big losses.
  16. Never cancel a stop loss order after you have placed it at the time you make a trade.
  17. Avoid getting in and out of the market too often.
  18. Be just as willing to sell short as you are to buy. Let your object be to keep with the trend and make money.
  19. Never buy just because the price of a commodity or stock is low or sell short just because the price is high
  20. Be careful about pyramiding at the wrong time. Wait until the commodity or stock is very active and has crossed Resistance Levels before buying more and until it has broken out of the zone of distribution before
    selling more.
  21. Select the commodities that show strong uptrend to pyramid on the buying side and the ones that show definite downtrend to sell short. For stocks, select the stocks with small volume of shares outstanding to pyramid on the buying side and the ones with the largest volume of stock outstanding to sell short.
  22. Never hedge. If you are long of one commodity or stock and it starts to go down, do not sell another commodity or stock short to hedge it. Get out at the market; take your loss and wait for another opportunity.
  23. Never change your position in the market without good reason. When you make a trade, let it be for some good reason or according to some definite rule; then do not get out without a definite indication of a
    change in trend.
  24. Avoid increasing your trading after a long period of success or a period of profitable trades.
  25. Don’t guess when the market is top. Let the market prove it is top. Don’t guess when the market is bottom. Let the market prove it is bottom. By following definite rules, you can do this.
  26. Do not follow another man’s advice unless you know that he knows more than you do.
  27. Reduce trading after first loss; never increase.
  28. Avoid getting in wrong and out wrong; getting in right and out wrong; this is making double mistakes.

There are only 3 types of traders.

  
Analysis, Education
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There are only three types of traders, they are defined by how well they execute their trading plan (rules applied to strategy).

A trader that performs worst than their trading plan.  These traders often have a weak understanding and belief in their trading plan.  How they feel is more or as important as making money.  They fail to see past the current trade.

A trader that performs the same as their trading plan.  These traders have a strong understanding and belief in their trading plan.  They get a majority of their satisfaction from making money.  They can see past the current trading day.

Those that perform better than their trading plan.  These traders have spent time in the previous two groups so they not only understand and believe their trading plan, they have 100’s or thousands of experiences that “prove” it to them.  The only satisfaction is following their plan and knowing that the money will follow. They can see past the current trading year.  They find areas and times to be aggressive and times to hold back.

The purpose of trading is to at least perform as well as your trading plan.  Any trader will tell you that he has spent time in all three and is always susceptible to be in any of the categories.  Each category is filled with important lessons, the lesson is often that I do not want to end up back there.

Those that under perform their trading plan are usually not honest with themselves about their level of belief in said trading plan.

Most Common Advice is Ineffective

  
Analysis, Education
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“Plan the trade, and trade the plan!” is perhaps the most common advice given to traders. As far as advice goes, it’s well meaning, but unfortunately falls well short of addressing the problem most traders actually face. 

Looking at the advice, it has two parts. The first part says you need a plan. No argument there. But the second part, about executing the plan, that’s where the problems appear. Why?

The two parts to the advice ‘plan the trade’ and the ‘trade the plan’ require two very different skill sets. Without understanding the different skills required, it’s highly likely that you will continue to regularly veer from your plan.

Here’s the disconnect. Planning the trade depends on your intellect. And most of the time, the development of the plan does not occur in the heat of battle.  It’s relatively easily to let your intellect guide you, to be the primary driver when you’re not in the heat of battle. But in the heat of battle, when we have to decide right now whether to enter or exit, an entirely different situation occurs.

At the time of execution, no longer are we cool, calm, and collected. Now, a whole slew of things enters the picture – and many of these things are subconscious to a degree. Our feelings about our P&L, our feelings about our performance, or concerns about how we appear in the eyes of others, etc.

And no matter how smart you are, how much you believe you are not an ‘emotional person’, modern brain science is telling us emotions, including subconscious emotions, are very much a part of our decision making that leads to actions whether we realize it or not. Viewed this way, you can see why the typical advice to ‘plan the trade and trade the plan’ may be well intentioned, but ineffective.

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