The 22 Rules of Trading

Hirschhorn: 13 Trader Resolutions for 2010

1. I will create game plans for all of my trades.
2. I will trade only when I have edge.
3. If I have 3 losing trades in a row, I will take a break, walk away and clear my head.
4. I will never trade for revenge.
5. Anytime I’m hoping, wishing or praying, I will exit the trade immediately.
6. I will never give back more than half of my profit on any trade.
7. I will keep a daily trading journal and email it to who will hold me accountable.
8. I will think in terms of probabilities and risk/reward.
9. I will remain objective in my trades by asking, “If I had no trade on, what would I do?”
10. I will never put more than 20% of my capital at risk in any single position.
11. I will not make trades just because I’m afraid to “miss out.”
12. I will quickly recognize my emotions and compartmentalize them rather than waste time trying to get rid of them.
13. And finally, I will trade to make money, not to be right.

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The 22 Rules of Trading

Ref. Kirk referred these rules couple of times.

We give you Master Trader Dennis Gartman's 22 Rules of Trading, many of which you can apply to all sorts of life situations, as well as the markets.

Every day, Dennis Gartman gets up at bout 2:30 AM and writes an information packed 4 page newsletter on the world markets, oil, currencies, commodities political happenings and much more. He is read by the major trading houses and traders all over the world, as they stumble bleary eyed into work, grabbing the Gartman Report to find out what happened as they slept and to get insight as to what the issues of the day will be, and suggestions on how to trade. Dennis puts his trades on public display and talks you through his logic. It is a most remarkable work, and I find it a key part of my struggle in trying to keep up with what is going on. I am always amazed when on the occasions I find myself in the office at an early hour to find Dennis' letter hit my inbox about 5:00 AM. His travel schedule makes mine look tame, and from wherever in the world he finds himself, he writes and sends his letter. And he still maintains a single digit handicap on the golf course.

On the Friday after Thanksgiving, he publishes his "Rules of Trading," adding to them as wisdom increases. Here is today's list:

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.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.

15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first "addition" should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed.

19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.

20. The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach! This is the "winning" new rule submitted by our friend, Tom Powell.

22. All rules are meant to be broken: The trick is knowing when... and how infrequently this rule may be invoked!
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Time Tested Classic Trading Rules for the Modern Trader to Follow
Posted By: Linda Bradford Raschke
By Linda Bradford Raschke

This is a list of classic trading rules that was given to me while on the trading floor in 1984. A senior trader collected these rules from classic trading literature throughout the twentieth century. They obviously withstand the age-old test of time.

I’m sure most everybody knows these truisms in their hearts, but this list is nicely edited and makes a good read.

1. Plan your trades. Trade your plan.
   
   
2. Keep records of your trading results.
   
   
3. Keep a positive attitude, no matter how much you lose.
   
   
4. Don’t take the market home.
   
   
5. Continually set higher trading goals.
   
   
6. Successful traders buy into bad news and sell into good news.
   
   
7. Successful traders are not afraid to buy high and sell low.
   
   
8. Successful traders have a well-scheduled planned time for studying the markets.
   
9. Successful traders isolate themselves from the opinions of others.
   
   
10. Continually strive for patience, perseverance, determination, and rational action.
    
11. Limit your losses – use stops!
    
    
12. Never cancel a stop loss order after you have placed it!
    
    
13. Place the stop at the time you make your trade.
    
    
14. Never get into the market because you are anxious because of waiting.
    
15. Avoid getting in or out of the market too often.
    
    
16. Losses make the trader studious – not profits. Take advantage of every loss to improve your knowledge of market action.
    
    
17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
    
    
18. Always discipline yourself by following a pre-determined set of rules.
    Remember that a bear market will give back in one month what a bull market has taken three months to build.
    
    
19. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
    You must have a program, you must know your program, and you must follow your program.
    
    
20. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
    Split your profits right down the middle and never risk more than 50% of them again in the market.
    
    
21. The key to successful trading is knowing yourself and your stress point.
    The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes.
    
    
22. In trading as in fencing there are the quick and the dead.
    Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
    
    
23. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
    
    
24. Accept failure as a step towards victory.
    
    
25. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work.
    One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.
    
    
26. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.
    It’s much easier to put on a trade than to take it off.
    
    
27. If a market doesn’t do what you think it should do, get out.
    
    
28. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
    
    
29. Never add to a losing position.
    
    
30. Beware of trying to pick tops or bottoms.
    
    
31. You must believe in yourself and your judgement if you expect to make a living at this game.
    
    
32. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be – up or down.
    
    
33. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss – that is what does the damage to the pocket book and to the soul.
    
    
34. Never volunteer advice and never brag of your winnings.
    
    
35. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.
    
    
36. Standing aside is a position.
    
    
37. It is better to be more interested in the market’s reaction to new information than in the piece of news itself.
    
    
38. If you don’t know who you are, the markets are an expensive place to find out.
    
    
39. 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! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
    
    
40. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.
    
    
41. When the ship starts to sink, don’t pray – jump!
    
    
42. Lose your opinion – not your money.
    
    
43. Assimilate into your very bones a set of trading rules that works for you.