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Richard Rhodes’ 18 Trading Rules

“Old Rules…but Very Good Rules”

  1. The first and most important rule is – in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I’ll do it again at some point in the future. Thus, we’ve not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
  2. Buy that which is showing strength – sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher”. Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
  3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don’t enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
  4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
  5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
  6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
  7. Be patient. The old adage that “you never go broke taking a profit” is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
  8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
  9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
  10. Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
  11. Do more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.”
  12. Don’t trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don’t care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
  13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.
  14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial “hay” when the sun does shine.
  15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
  16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don’t need to fight at all.
  17. Markets form their tops in violence; markets form their lows in quiet conditions.
  18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.

There is no “genius” in these rules. They are common sense and nothing else, but as Voltaire said, “Common sense is uncommon.” Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only.

What Separates Traders from Monkeys

monkey1I admit I have difficulties separating myself from the monkeys.

During trading strategy development, most of the time I have found that a ‘good’ strategy by many criteria can’t actually beat out the performance of the random trades by monkeys. So the question is what constitutes intelligence? Is performance the sole criterion that separates intelligence from non-intelligence? If not, what else? What can make me say, “ok monkeys, I can’t beat you in performance, but this thing makes me much more intelligent than you”?

Monkeys’ investments are hypothetical; no one has really actualized this hoary supposition. Your trades are measurable and real.

Et voila la difference.

Because you think too much.

No joke.

You look for an “edge,” i.e. an asymptotic probability weighted mean that is > 0. (more…)

10 Type of Traders.Which are You ?

In the markets there are many different types of traders and many motivations that drive them.  Everyone has heard of  different types of traders based on their trading method: Swing Traders, Day Traders, Momentum Traders, etc. But what about different types of traders based on their psychology, their very purpose?  Some trade for fun and excitement, others trade purely for ego. Other love the game and still others are in it only to make money. In the greatest game on earth it is surprising that many traders have different motivations, in reality the only correct motivation is to make money, that should be the real goal of any trader. Here are a list of ten types of traders I have observed on social media. We have all likely been more than one of these types at some time or another while trading. But we need to focus like a laser on the only real reason we should be trading: to make money and once we have made it, to keep it.

  1. Greedy Traders: They trade too big and risk too much because their only goal is the easy money.
  2. New Traders: They have no idea how the markets work so their only goal is knowledge.
  3. Arrogant Traders: Their only goal is to prove they are right and satisfy their fragile egos.
  4. Trend Traders: Their only goal is to ride a trend and make money.
  5. Scared Traders: Their only goal is to not lose their capital.
  6. Perma-Bull Traders: Their only goal is to go long stocks.
  7. Perma-Bear Traders: Their only goal is to short stocks.
  8. Prophet Traders: Their only goal is to rightly predict market movement then let everyone know they did.
  9. Paper Traders: They love the market and study more than anyone but never quite make the plunge into real trading.
  10. Rich Traders: Their only goal is to consistently make money and grow their capital over the long term.

Which are you?

ARE YOU A SPECULATOR?

Consider this excerpt:

Benjamin Graham, who believed in buying wonderful companies at a fair price rather than a fair company at a wonderful price, defines an investor as “an individual whose investment provides two quantitative qualities – safety of principal and an adequate rate of return.” There are many intricacies within business ownership investments, but does everyone in the stock market consider these particulars when investing in business ownership? Of course not, because not everybody in the stock market is an investor. Individuals who desire to become investors must enter the arena with goals that have a long-term investment horizon. Warren Buffett, a global financial market guru and head of Berkshire-Hathaway, puts it best when he says: “It’s bad to go to bed at night thinking about the price of a stock. We think about the value of a company and the company results; the stock market is there to serve you, not instruct you.”Hence, an investor does not buy a price and will not be affected by the ups and downs of the market. A sound investor buys well-managed businesses, with strong earnings growth and significant barriers to entry that will provide long-term security. A ‘purchaser of price’ is a speculator; a ‘purchaser of solid businesses’ with sound fundamentals is an investor.Mark Croskery