Dennis Gartman’s Trading Rules List

Some food for thought for the weekend. Trading rules from great traders are always worth reading. If you spend some time to understand the concept behind each trading rule this will improve your trading skills and take you to the next level. Also check this video where Dennis Gartman talks about the concept of keeping it simple.

1. Never, under any circumstance add to a losing position…. ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is “low.” Nor can we know what price is “high.” Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. “Markets can remain illogical longer than you or I can remain solvent,” according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds… they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect “gaps” in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In “good times,” even errors are profitable; in “bad times” even the most well researched trades go awry. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.

11. Respect “outside reversals” after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more “weekly” and “monthly,” reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance. (more…)

Improving Your Decision Making Skills

One of my all-around favorite quotes on trading is actually about poker.
It comes from cash game pro Tommy Angelo, who says, “The best way to get better at poker is to get better at everything and let poker rise with the tide.”
An intimidating thought for some. To REALLY up your game (be it poker, trading, or something else entirely) you have to improve as a competitor. As a human. As a thinking, acting, decision-making machine.
For others, though, this thought is not intimidating but inspiring. “Raising the game,” i.e. getting better at everything, is part of the attraction in the first place.
To that end, trading is all about making decisions.
And making good decisions is not just an art, but a skill set — an area of focus where you can learn and practice and improve. (more…)

Psychology and Gaining Confidence

Hi All,

There has been a lot of talk on the  psychology of trading and getting rid of fear etc. I think that one way to help is to understand the performance parameters of your trading system and this means extensive
backtesting and changing the way you think when entering a trade.

Now whenever I have placed a trade I have assumed that I was wrong and so if the market did not immediately prove my position correct I would be taking measures to reduce my position and, if necessary,
get out. This kept my losses small and when correct I was able to do nothing and just move my stop up. This is contrary to the way most people trade in that they place a trade assuming they are right and wait
for the market to prove them wrong.

IAlso if you have backtested a system thoroughly you will know what percentage of profitable trades you can expect. From this you can also determine the number of consecutive losing trades that you can
expect for a given number of trades. The formula is quite straight forward and is:
Consecutive losses = LN(N)/-LN(S) where
N = Number of expected trades
S = (100-strike rate %)/100

Now if you place say 30 trades a month and you have a 50% success rate, you can expect to have 5 consecutive losing trades.

But the more trades you place the bigger the chance of consecutive losing runs. So if our trader has 12 x 30 trades a year = 360 they can expect to have nearly 9 consecutive losing trades.

Of course the opposite is also true in that you could expect to get 9 consecutive winning trades as well. The problem is that I have seen many systems that have only a 40% success rate and in the same
example above this would result in 12 consecutive losing trades. Psychologically this is very difficult to handle yet if you had backtested your system thoroughly it is easily seen that this is to be expected and
means that your system is operating within normal parameters.

Food for thought I hope

Psychology and Gaining Confidence

CONFIDENCEThere has been a lot of talk on the  psychology of trading and getting rid of fear etc. I think that one way to help is to understand the performance parameters of your trading system and this means extensive  backtesting and changing the way you think when entering a trade.

Now whenever I have placed a trade I have assumed that I was wrong and so if the market did not immediately prove my position correct I would be taking measures to reduce my position and, if necessary, get out. This kept my losses small and when correct I was able to do nothing and just move my stop up. This is contrary to the way most people trade in that they place a trade assuming they are right and wait for the market to prove them wrong.

IAlso if you have backtested a system thoroughly you will know what percentage of profitable trades you can expect. From this you can also determine the number of consecutive losing trades that you can expect for a given number of trades. The formula is quite straight forward and is:
Consecutive losses = LN(N)/-LN(S) where
N = Number of expected trades
S = (100-strike rate %)/100 (more…)

The Mathematics of Persistence

Many years ago (circa 2005), I came across the below food-for-thought piece from a musical theorist named Lee Humphries. The ideas presented intrigue to this day.

Investment assumptions aside — An 8.5% passive return? Good luck with that— the concepts of compounding and Metcalfe’s law (aka network effects) apply strikingly well to the development of expert knowledge… and the theory and practice of trading.

What’s more, a persistently cultivated “perception of subtleties” is, indeed, a large part of what trading is all about.

So without further ado…

The Mathematics of Persistence (more…)

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