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Trading Rules

  
  Education
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*The big money is made from position sizing. You really must stop chasing a holy Grail and spend time on different position sizing rules. This is the one “secret” that separates a professional from the man in the street.

*Question everything and everyone. Even me. Never blindly believe anything you read or hear about. Be careful about what you read and even more careful about what you believe in. after all an opinion is only some-ones belief.

*If you have to ask you shouldn’t be in. I can’t believe people actually ask other people whether they should hold or sell a stock position they are in. Surely before you enter you have your exits all in place. I’ll guarantee if you are asking this question you are not making money.

Trader's mindset

  
  Education
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How does someone know that they reached the trader’s mindset? Here are a few characteristics:

1. No anger whatsoever.
2. Confidence and being in control of the self
3. A sense of not forcing the markets
4. An absence of feeling victimized by the markets
5. Trading with money you can afford to risk
6. Trading using a chosen approach or system
7. Not influenced by others
8. Trading is enjoyable
9. Accepting both winning and losing trades equally
10. An open mind approach at all times
11. Equity curve grows as skills improve
12. Constantly learning on a daily basis
13. Consistently aligning trades with the market’s direction
14. Ability to focus on the present reality
15. Taking full responsibility for your actions

Rules By Jesse Livermore

  
  Education
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“In cotton I was very successful in my trading for a long time. I had my theory about it and I absolutely lived up to it. Suppose I had decided that my line would be forty to fifty thousand bales. Well I would study the tape as I told you, watching for an opportunity either to buy or to sell. Suppose the line of least resistance indicated a bull movement. Well I would buy ten thousand bales. After I got through buying that, if the market went up ten points over my initial purchase price, I would take on another ten thousand bales. Same thing. Then if I could get twenty points’ profit, or one dollar bale, I would buy twenty thousand more. That would give me my line–my basis for my trading. But if after buying the first ten or twenty thousand bales, it showed me a loss, out I’d go. I was wrong. It might be I was temporarily wrong. But as I have said before it doesn’t pay to start wrong in anything.As I think I also said before, this decribes what I may call my system for placing my bets. It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet, as it were. If a man trades in the way I have described, he will always be in the profitable position of being able to cash in on the big bet.I recollect Pat Hearne. Ever hear of him? Well, he was a very well-known sporting man and he had an account with us. Clever chap and nervy. He made money in stocks, and that made people as him for advice. He would never give any. If they asked him point-blank for his opinion about the wisdom of their commitments he used a favourite race-track maxim of his: “You can’t tell till you bet.” He traded in our office. He would buy one hundred shares of some active stock and when, or if, it went up 1 per cent he would buy another hundred. On another point’s advance, another hundred shares; and so on. He used to say he wasn’t playing the game to make money for others and therefore he would put in a stop loss order one point below the price of his last purchase. When the price kept going up he simply moved up his stop with it. On a 1 per cent reaction he was stopped out. He declared he did not see any sense in losing more than one point, whether it came out of his original margin or out of his paper profits. (more…)

7 Stages of Trading Wisdom

  
  Education
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1)  You feel no pressure to do anything

2) You have no feeling of fear

3) You feel no sense of rejection

4) There is no right or wrong

5) You recognize that this is what the market is telling me, this is what I do.

6) You can observe the market from the perspective as if you were not in a position, even when you are.

7) You are not focused on the money, but on the structure of the market

31 Precepts for Traders

  
  Education
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These precepts are trading and investing guidelines that give a compass heading to trading integrity.

I offer them to you in their raw form. Some may make sense, others not. Please feel free to question, challenge, refine and edit with your responses.

  1. We are who we are and we start from where we start
  2. Each of us brings unique strengths to the markets
  3. Every morning we agree to play as delighted beginners
  4. Reality Pays. The more our minds model the market, the more in synch we get
  5. We build on our strengths and manage everything else.
  6. The outcome we have is the outcome we want
  7. If what you are doing isn’t working over and over again, re-examine your internal models
  8. Our internal process is more important than anything else because it drives everything else
  9. You have the resources to improve your mental trading game. Coaching just helps find them
  10. We begin our trading practice slowly and build it with flow and grace
  11. Lean into fear. Fear is a primary cause of failure
  12. If you are frustrated with the markets, that means they aren’t following the internal model you have projected on them
  13. We increase the level of our awareness rather than the intensity of trading
  14. As we expand our awareness, our interventions will happen sooner and be more creative and effective
  15. We respect ourselves and celebrate our profits no matter how large
  16. If we can experience a new behavior for a moment, we can experience it for a minute, an hour, a week, a year.
  17. Change happens when we experience a new behavior that is aligned with who we are, feels emotionally satisfying in the moment and takes us to where we want to go
  18. Avoidance is buying pain on credit with interest
  19. If self-criticism made us trade better we would all be rich
  20. We allow the markets to breathe through us
  21. The markets are messy, our information is imperfect, our systems will fail and we can still make money
  22. All trading systems are successful in some markets, all trading systems will eventually fail in all markets
  23. The markets don’t care about you or your position
  24. We seek the practice rather than the result
  25. Learn about yourself with the delight of an anthropologist finding a lost tribe
  26. We make internal maps of the market, but our maps are always distorted
  27. Our negative responses are created by our maps, not the market
  28. By changing our map, we change how we respond to the markets
  29. All our trading errors have an ultimate positive purpose or intention
  30. There is no “failure” just feedback
  31. You have all the resources you need, although some may be out of your awareness

4 Faiths For Traders

  
  Education
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While trading is a game of math, probabilities, charts, and earnings it is also a mind game. Many times a trader’s beliefs will determine their success more than anything else. All traders start out believing it is possible to make money in the markets. Many want to earn their living one day by trading. However it is perseverance, beliefs, and mental determination that will determine who wins and who just quits. Shockingly the majority of millionaire traders lost most of their accounts when they started or they experienced huge draw downs while learning lessons the hard way.

 

  1. You must have faith in yourself. You must believe that you can trade as well as anyone else.. This belief arises from doing your homework and staying disciplined in your system. Understanding that it is not you, that it is your system that wins and loses based on market action will keep the negative self talk at bay.
  2. You must have faith in your method. You must study the historical performance of your trading method so you can see how it works on charts. Also it is possible to quantify and back test mechanical trading systems for specific historical  performance in different kinds of markets.
  3. You must have faith in your risk management. You must manage your risk per trade so it brings you to a 0% mathematical probability of ruin. A 1% to 2% of total capital at risk per trade will give almost any system a 0% risk of ruin.
  4. You must have faith that you will win in the long term if you stay on course. Reading the stories of successful traders and how they did it will give you a sense that if they can do it you can to. If trading is something you are passionate about all that separates you from success is time.

Don't Confuse the Concepts of Winning and Losing Trades with Good and Bad Trades

  
  Education
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A good trade can lose money, and a bad trade can make money. 
Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money.

My 10 Favorite Nicolas Darvas Quotes

  
  Education
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My favorite Nicolas Darvas quotes from the book on the subject of:
Discipline:
“I knew now that I had to keep rigidly to the system I had carved out for myself.”
Risk/Reward:
“I was successful in taking larger profits than losses in proportion to the amounts invested.”
Exiting profitable trades:
“I decided to let my stop-loss decide.”(Speaking on when to exit an up trending stock)
Bear Markets
“I also learned to stay out of bear markets unless my individual stocks remain in their boxes or advance.”
Technical Analysis versus Predictions
“I believe in analysis and not forecasting.”
Trading Psychology
“I became over-confident, and that is the most dangerous state of mind anyone can develop in the stock market.”
Risk Management

“I decided never again to risk more money than I could afford to lose without ruining myself.”
Fundamental Analysis

“All a company report and balance sheet can tell you is the past and the present. They cannot tell future.”
Trend Following
“I made up my mind to buy high and sell higher.”
The Market tells its own story best

I accepted everything for what it was-not what I wanted it to be.”

Forecasts Predictions And Prophets

  
  Education
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Here’s what Max Gunther, author of ‘The Zurich Axioms’ has to say:

The Zurich Axioms: ‘On Forecasts’, page 62:

Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.

‘Speculative Strategy’:
The Fourth Axiom tells you not to build your speculative program on a basis of forecasts, because it won’t work. Disregard all prognostications. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word. Nobody.
Of course, we all wonder what will happen, and we all worry about it. But to seek escape from that worry by leaning on predictions is a formula for poverty. The successful speculator bases no moves on what supposedly will happen but reacts instead to what does happen.
Design your speculative program on the basis of quick reactions to events that you can actually see developing in the present. Naturally, in selecting an investment and committing money to it, you harbor the hope that its future will be bright. The hope is presumably based on careful study and hard thinking. Your act of committing dollars to the venture is itself a prediction of sorts. You are saying, “I have reason to hope this will succeed.” But don’t let that harden into an oracular pronouncement: “It is bound to succeed because interest rates will come down.” Never, never lose sight of the possibility that you have made a bad bet.
If the speculation does succeed and you find yourself climbing toward a planned ending position, fine, stay with it. If it turns sour despite what all the prophets have promised, remember the Third Axiom. Get out.

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