Larry Hite described his conversation with a friend who couldn’t understand his absolute adherence to a mechanical trading system. His friend asked, Larry, how can you trade the way you do? Isn’t it boring? Larry replied, “I don’t trade for excitement; I trade to win.”
Archives of “objective” tag
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It is interesting to observe the way most futures traders play the futures game in relation to the possible ways that money games can be played:
1. The most effective approach to the objective of maximizing results is to play a favorable game on a small scale.
2. Less desirable, but still providing a reasonable chance of success, is playing a favorable game on a large scale with enough profits coming early in the game to avoid ruin.
3. A basically unfavorable game may yield profitable results (presuming that one insists on playing unfavorable games) if one plays seldom and bets heavily.
4. The only road that leads inevitably to disaster is playing an unfavorable game continuously.
The trader who trades on impulse or uses some other invalid method of making trading decisions is following the fourth route, which is crowded with bumper-to-bumper traffic.
It is interesting to observe the way most futures traders play the futures game in relation to the possible ways that money games can be played:Dennis Gartman- Trading Rules
R U L E # 1
Never, ever, under any circumstance, should one add to a losing position … not EVER!
Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out.
R U L E # 2
Never, ever, under any circumstance, should one add to a losing position … not EVER!
We trust our point is made. If “location, location, location” are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.
R U L E # 3
Learn to trade like a mercenary guerrilla.
The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.
R U L E # 4 DON’T HOLD ON TO LOSING POSITIONS
Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.
Holding on to losing positions costs real capital as one’s account balance is depleted, but it can exhaust one’s mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.
R U L E # 5 GO WHERE THE STRENGTH IS
The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.
We can never know what price is really “low,” nor what price is really “high.” We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we’ve no idea how high high is, nor how low low is.
R U L E # 6
Sell markets that show the greatest weakness; buy markets that show the greatest strength.
Metaphorically, when bearish we need to throw our rocks into the wettest paper sack for it will break the most readily, while in bull markets we need to ride the strongest wind for it shall carry us farther than others.
R U L E # 7
In a Bull Market we can only be long or neutral; in a bear market we can only be bearish or neutral.
In a bull market we can be neutral, modestly long, or aggressively long–getting into the last position after a protracted bull run into which we’ve added to our winning position all along the way. Conversely, in a bear market we can be neutral, modestly short, or aggressively short, but never, ever can we–or should we–be the opposite way even so slightly.
R U L E # 8
“Markets can remain illogical far longer than you or I can remain solvent.”
The University of Chicago “boys” have argued for decades that the markets are rational, but we in the markets every day know otherwise. We must learn to accept that irrationality, deal with it, and move on.
R U L E # 9
Trading runs in cycles; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly.
Thus, when things are going well, trade often, trade large, and try to maximize the good fortune that is being bestowed upon you. However, when trading poorly, trade infrequently, trade very small, and continue to get steadily smaller until the winds have changed and the trading “gods” have chosen to smile upon you once again.
R U L E # 10
To trade/invest successfully, think like a fundamentalist; trade like a technician.
It is obviously imperative that we understand the economic fundamentals that will drive a market higher or lower, but we must understand the technicals as well. When we do, then and only then can we, or should we, trade. (more…)
10 Questions for Traders
Traders must have rules and trading plans because in the heat of trading when emotions flare up that is when greed, fear, and ego can easily hijack the trader. Traders all have many different conflicting parts that can interfere with trading execution. The need to be right, the need to make money, the fear of loss, and the greed of making a lot of money can take over any trader that does not have a disciplined approach that is created before the day begins. Mechanical systems, trading rules, along with positions sizing and risk management factors can keep a trader safe from making huge mistakes.
Here are the top 10 Questions Traders must ask to protect them from themselves.
1. Where does the price of my trading vehicle have to go to prove I was wrong about my entry?
2. How much is the maximum I will lose on the trade if I am wrong?
3. What are my rules for entries?
4. How will I exit my winner to bank profits?
5. What is the current trend of the time frame I trade in?Where is my best entry point to trade in this direction? (more…)
5 Points for Traders
Concentrate on what is important. The most important thing when I am trading is profit and education, to some extent. You can get to profit many ways but your actions need to all bend towards that one objective. Me talking about my position takes me away from analyzing the position. Also, for me, it makes me less flexible. Now I am thinking about what the market is doing and how I look to other people. Also, if you are going to talk your book the most effective way is to get out into it, albeit the most unethical. - Start with a logical thesis. For example, leave out the fact that you said the following about the company “offers a useful, attractively priced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet,” but still decided to short the company anyways. I realize this statement does not always mean a stock price is going to rise but the next logical step does not mean the stock is going down.
- Follow your plan. Do not make reference to your strategy as the following “outright frauds (our very favorite), industries in decline or facing major headwinds, weak or faddish business models, bad balance sheets, and incompetent,excessively promotional and/or crooked management” and not follow it. See above statement.
- Do your research before you make a trade. Don’t use anything with the word “monkey” in it for research purposes and tell someone about it. Also, 500 people is not a very big sample size.
- And finally, don’t act like a loss is the end of the world or a win. If you are doing the right things, your best and worst days are always ahead of you. After the trade is over the next trade is the most important, once again assuming you are doing the right things.
Concentrate on what is important. The most important thing when I am trading is profit and education, to some extent. You can get to profit many ways but your actions need to all bend towards that one objective. Me talking about my position takes me away from analyzing the position. Also, for me, it makes me less flexible. Now I am thinking about what the market is doing and how I look to other people. Also, if you are going to talk your book the most effective way is to get out into it, albeit the most unethical. Nothing is ever going to prevent you from losing but there are several things that can prevent you from winning over a long period of time.
13 Trading Rules
R U L E # 1
Never, ever, under any circumstance, should one add to a losing position … not EVER!
Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out.
R U L E # 2
Never, ever, under any circumstance, should one add to a losing position … not EVER!
We trust our point is made. If “location, location, location” are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.
R U L E # 3
Learn to trade like a mercenary guerrilla.
The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.
R U L E # 4 DON’T HOLD ON TO LOSING POSITIONS
Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.
Holding on to losing positions costs real capital as one’s account balance is depleted, but it can exhaust one’s mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.
R U L E # 5 GO WHERE THE STRENGTH IS
The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.
We can never know what price is really “low,” nor what price is really “high.” We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we’ve no idea how high high is, nor how low low is.
R U L E # 6 (more…)
Trust Your Gut
Throughout my years trading, I’ve learned many things. In fact, it’s rare that a day goes by without learning something new. Which brings me to my first point; If anyone ever tells you they know everything there is to know about trading stocks, run away from that person as fast as you can!
OK, now that I got that out of the way let’s get back to the purpose of this post. One very important rule I have learned as a Trader is to trust your gut. Now, this rule only applies in specific circumstances. There are times when I have tried to convince myself that my gut wants me to do something. That’s no good! If you have to convince yourself that your gut agrees with a move you want to make in the market, it’s bogus.
The same applies if you have to ask yourself if your gut is telling you to make a move. Seeing a good trade idea and then sitting back and asking yourself if your gut agrees is not the way to go about applying the “trust your gut” rule.
Based on my experience, the only time to truly listen is when a “gut feeling” comes out of nowhere. It just happens…there’s no real explanation. You know it when it occurs, and I highly suggest you don’t ignore it.
That said, please do not add “what does my gut say?” to your pre-trade entry checklist. Also, please do not try to force a gut feeling. Let it come naturally! My objective here is to heighten your senses and hopefully make you more confident in acting those gut feelings when they come.
The 20 Rules of Trading
- 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!
- 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. (more…)
Not Having a Trading Plan
“If you fail to plan, then you plan to fail”. I don’t know who first said that, but it’s a very sound piece of advise indeed. Planning is something that is all too often overlooked by traders, and yet a well drafted trading plan is one of the most important tools for success and profit.
In talking to struggling traders, I am constantly amazed at not only how many don’t have a trading plan, but how many don’t even know what such a plan is. In fact a trading plan is quite simple, it’s a document that details every aspect of your trading strategy. It is literally a blue-print for your trading methodology.
What should be in this document? Here are the most important areas it should cover: (more…)
Respect the Trend
One of my favorite trading tales involves a very wise, veteran trader who, when asked his thoughts on the market, would simply respond by saying “It’s a bull market,” or “It’s a bear market.” Younger traders simply seeking out a hot tip from the seasoned pro would often leave discouraged – or even annoyed, believing they were being fed a line. JL himself didn’t understand until years later the wisdom that was actually being dispensed with those words: The veteran was simply relaying the path of least resistance, or the trend for the general market, and therefore giving the trader an incredible edge in determining one of the many variables that makes up stock trading. (more…)
One of my favorite trading tales involves a very wise, veteran trader who, when asked his thoughts on the market, would simply respond by saying “It’s a bull market,” or “It’s a bear market.” Younger traders simply seeking out a hot tip from the seasoned pro would often leave discouraged – or even annoyed, believing they were being fed a line. JL himself didn’t understand until years later the wisdom that was actually being dispensed with those words: The veteran was simply relaying the path of least resistance, or the trend for the general market, and therefore giving the trader an incredible edge in determining one of the many variables that makes up stock trading.