My Library: Trading Rules

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Wednesday, April 14, 2010

82 TRADING RULES AND MARKET OBSERVATIONS

Extract from "Getting Started in Technical Analysis"
by Jack D Schwager

ENTERING TRADES

Differentiate between major trades and short-term trades.
If you believe a major trading opportunity exists, don’t be greedy in trying to get a slightly better entry price.
Entry into any major position should be planned and carefully thought out - never an intraday impulse.
Find a chart pattern that says the timing is right. Don’t initiate a trade without such a confirming pattern.
Place orders determined by daily analysis.
When looking for a major reversal in a trend, it is usually wiser to wait for some pattern that suggests that the timing is right rather than fading the trend at projected objectives and support/resistance points.
If you have an immediate instinctive impression when looking at a chart, go with that feeling.
Don’t let the fact that you missed the first major portion of a new trend keep you from trading with that trend.
Don’t fade recent price failure patterns when implementing trades, even if there are many other reasons for the trade.
Never fade the first gap of a price move! For example, if you are waiting to enter a trade on a correction, and the correction is then formed on a price gap, don’t enter the trade.
In most cases, use market orders rather than limit orders.
Never double up near the original trade entry point after having been ahead.

EXITING TRADES AND RISK CONTROL (MONEY MANAGEMENT)

Decide on a specific protective stop point at the time of trade entry.
Exit any trade if newly developing patterns or market action are contrary to trade - even if stop point has not been reached.
Always get out immediately once the original premise for a trade is violated.
If you are dramatically wrong the first day a trade is on, abandon the trade immediately - especially if the market gaps against you.
In the event of a major breakout counter to the position held, either liquidate your position immediately or use a very close stop. In the event of a gap breakout, always liquidate immediately.
If a given stock or futures market suddenly trades far in excess of its recent volatility in a direction opposite to the position held, liquidate your position immediately.
If selling into resistance or buying into support and the market consolidates instead of reversing, get out.
For analysts and market advisers: If your gut feeling is that a recent recommendation, hot line broadcast, trade, or written report of yours is wrong, reverse your opinion!
If you’re unable to watch markets for a period of time (e.g., when traveling), either liquidate all positions or be sure to have stop orders on all open positions.
Do not get complacent about an open position. Always know where you are getting out even if the point is far removed from the current price.
Fight the desire to immediately get back into the market following a stopped-out trade.

OTHER RISK-CONTROL (MONEY MANAGEMENT) RULES

When trading is going badly: (a) reduce position size; (b) use tight stop-loss points; (c) slow up in taking new trades.
When trading is going badly, reduce risk exposure by liquidating losing trades, not wining trades.
Be extremely careful not to change trading patterns after making a profit.
Treat small position with the same common sense as large positions.
Avoid holding very large positions into major reports or the release of important government statistics.
Futures traders: Apply the same money management principles to spreads as to outright positions.
Don’t buy options without planning at what outright price the trade is to be liquidated.

HOLDING AND EXITING WINNING TRADES

Do not take small, quick profits in major position trades. In particular, if you are dramatically right on a trade, never, never take profits on the first day.
Don't be too hasty to get out of a trade with a gap in your direction. Use the gap as initial stop; then bring in stop in trailing fashion.
Try to use trailing stops, supplemented by developing market action, instead of objectives as a means of getting out of profitable trades. Using objectives will
often work against fully realizing the potential of major trends. Remember, you need the occasional big winners to offset losers.
The preceding rule notwithstanding, it is still useful to set an initial objective at the time of trade entry to allow the application of the following rule: If a very large portion of an objective is realized very quickly (e.g., 50-60% in one week or 75-80% in two or three weeks), take partial profits, with the idea of reinstating liquidated shares or contracts on a reaction. The idea is that it is okay to take a quick sizable profit. Although this rule may often result in missing the remainder of the move on the liquidated portion of the position, holding the entire position, in such a case, can frequently lead to nervous liquidation on the first sharp retracement.
If an objective is reached, but you still like the trade, stay with it using a trailing stop. This rule is important in order to be able to ride a major trend. Remember, patience is important not only in waiting for the right trades, but also in staying with trades that are working. The failure to adequately profit from correct trades is a key profit-limiting factor.
One partial exception to the previous rule is that if you are heavily positioned and equity is surging straight up, consider taking scale-up profits. Corollary rule: When things look too good to be true - watch out! If everything is going right, it is probably a good time to begin taking scale-up (or scale-down) profits and using closing trailing stops on a portion of your positions.
If taking profits on a trade that is believed to still have long-term potential (but is presumably vulnerable to a near-term correction), have a game plan for reentering position. If the market doesn’t retrace sufficiently to allow for reentry, be cognizant of patterns that can be used for timing a reentry. Don’t let the fact that the reentry point would be worse than the exit point keep you from getting back into a trade in which the perception of both the long-term trend and current timing suggest reentering. Inability to enter at a worse price can often lead to missing major portions of large trends.
If trading larger positions, avoid the emotional trap of wanting to be 100% right. In other words, take only partial profits. Always try to keep at least a partial position for the duration of the move - until the market forms a convincing reversal pattern or reaches a meaningful stop-loss point.

MISCELLANEOUS PRINCIPLES AND RULES

Always pay more attention to market action and evolving patterns than to objectives and support/resistance areas. The latter can often cause you to reverse a correct market bias very prematurely.
When you feel action should be taken either entering or exiting a position - act, don’t procrastinate.
Never go counter to your own opinion of the long-term trend of the market. In other words, don’t try to dance between the raindrops.
Winning trades tend to be ahead right from the start.
Correct timing of entry and exit (e.g., timing entry on a reliable pattern, getting out immediately on the first sigh of trade failure) can often keep a loss small even if the trade is dead wrong.
Intraday decisions are almost always losers. Keep screen off intraday.
Be sure to check markets before the close on Friday. Often the situation is clearer at the end of the week. In such cases, a better entry or exit can usually be obtained on Friday near the close than on the following Monday opening. This rule is particularly important if you are holding a significant position.
Act on market dreams (that are recalled unambiguously). Such dreams are often right because they represent your subconscious market knowledge attempting to break through the barriers established by the conscious mind (e.g., “How can I buy here when I could have gone long $2,000 lower last week??.
You are never immune to bad trading habits - the best you can do is to keep them latent. As soon as you get lazy or sloppy, they will return.

MARKET PATTERNS

If the market set new historical highs and holds, the odds strongly favor a move very far beyond the old highs. Selling a market at new record highs is probably one of the amateur trader’s worst mistakes.
Narrow market consolidations near the upper end of broader trading ranges are bullish patterns. Similarly, narrow consolidations near the low end of trading ranges are bearish.
Play the breakout from an extended, narrow range with a stop against the other side of the range.
Breakouts from trading ranges that hold for one to two weeks, or longer, are among the most reliable technical indicators of impending trends.
A common and particularly useful form of the above rule is: flags or pennants forming right above or below prior extended and broad trading ranges tend to be fairly reliable continuation patterns.
Trade in the direction of wide gaps.
Gaps out of congestion patterns, particularly one-to-two month trading ranges, are often excellent signals. (This pattern works especially well in bear markets.)
If a “breakaway gap?is not filled during the first week, it should be viewed as a particularly reliable signal.
A breakout to new highs or lows followed within the next week or two by a gap (particularly a wide gap) back into the range is a particularly reliable form of a bull or bear trap.
If the market breaks out to a new high or low and then pulls back to form a flag or pennant in the pre breakout trading range, assume that a top or bottom is in place. A position can be taken using a protective stop beyond the flag or pennant consolidation.
A breakout from a trading range followed by a pullback deep into the range (e.g., three-quarters of the way back into the range or more) is yet another significant bull or bear trap formation.
If an apparent V bottom is followed by a nearby congestion pattern, it may represent a bottom pattern. However, if this consolidation is then broken on the downside and the V bottom is approached, the market action can be read as a sign of an impending move to new lows. In the latter case, short positions could be implemented using protective stops near the top of the consolidation. Analogous comments would apply to V tops followed by nearby consolidations.
V tops and V bottoms followed by multi month consolidations that form in close proximity to the reversal point tend to be major top or bottom formations.
Tight flag and pennant consolidations tend to be reliable continuation patterns and allow entry into an existing trend, with a reasonably close, yet meaningful, stop point.
If a tight flag or pennant consolidation leads to a breakout in the wrong direction (i.e., a reversal instead of a continuation), expect the move to continue in the direction of the breakout.
Curved consolidations tend to suggest an accelerated move in the direction of the curve.
The breaking of short-term curved consolidation (see Chapter 11) in the direction opposite of the curve pathway tends to be a good trend reversal signal.
Wide-ranging days (i.e., days with a range far exceeding the recent average range) with a close counter to the main trend usually tend to provide a reliable early signal of a trend change - particularly if they also trigger a reversal signal (e.g., filling of a runaway gap, complete penetration of prior consolidation).
Near-vertical, large price moves over a period of two to four days (coming off a relative high or low) tend to be extended in the following weeks.
Spikes are good short-term reversal signals. The extreme of the spike can be used as a stop point.
In spike situations, look at chart both ways - with and without spike. For example, if when a spike is removed a flag is evident, a penetration of that flag is a meaningful signal.
The filling-in of a runaway gap can be viewed as evidence of a possible trend reversal.
An island reversal followed shortly thereafter with a pullback into the most recent trading range or consolidation pattern represents a possible major top (or bottom) signal.
The ability of a stock or future to hold relatively firm when other related markets are under significant pressure can be viewed as a sign of intrinsic strength. Similarly, a market acting weak when related markets are strong can be viewed as a bearish sign.
If a market trades consistently higher for most of the daily trading session, anticipate a close in the same direction.
Two successive flags with little separation can be viewed as a probable continuation pattern.
View a curved bottom, followed by a shallower, same-direction curved consolidation near the top of this pattern, as a bullish formation (“cup-and-handle?. A similar pattern would apply to market tops.
Moderate sentiment in a market that is strongly trending may be a more reliable indicator of a probable continuation of the price move than a high or low sentiment reading is of a reversal. In other words, extreme sentiment readings can often occur in the absence of major tops and bottoms, but major tops and bottoms rarely occur in the absence of extreme sentiment readings (current or recent).
A failed signal is more reliable than the original signal. Go the other way, using the high (or low) before the failed signal as a stop. Some examples of such failure patterns are rule numbers 56, 57, 58, 62, 64 and 69.
The failure of a market to follow through on significant bullish or bearish news (e.g., an important earnings report or a major report) is often harbinger of an imminent trend reversal. Pay particular attention to such a development if you have existing position.

ANALYSIS AND REVIEW

Review charts every day.
Periodically review long-term charts.
Religiously maintain a trader’s diary.
Maintain a patterns chart book.
Review and update trading rules, trader’s diary, and patterns chart book on a regular basis.

THE PLANNING TRADING APPROACH

Define a trading philosophy
1. Fundamental analysis
2. Chart analysis
3. Technical trading systems
Choose markets to be traded
1. Suitability to trading approach
2. Diversification
3. Volatility
Specify risk control plan
1. Maximum risk per trade
2. Stop-loss strategy
3. Diversification
4. Reduced leverage for correlated markets
5. Market volatility adjustments
6. Adjusting leverage to equity changes
7. Losing period adjustments
Establish a planning time routine
1. Update trading systems and charts
2. Plan new trades
3. Update exit points for existing positions
Maintain a trader’s notebook
Maintain a trader’s diary
1. Reasons for trade
2. How the trade turned out
3. Lessons
Analyze personal trading
1. Analysis of segmented trades
2. Equity chart

Thursday, August 13, 2009

10 ESSENTIAL RULES FOR NOVICES WHO WANT TO BE FULL-TIME TRADERS

1. Don't get emotional. Adopt an objective view of wins and losses.

2. Build a trading plan. Put together some rules. A trading plan is similar to a business plan. Do's and don'ts are essential but most important are risk management.

3. Collect statistics for review. Record performance measurements in a diary. Put on the hat of an employer and ask yourself if you would fire or hire the person described in the diary.

4. Formalize your trading activity. If you find that you cannot resist breaking the rules, try to make the trading activity as formal as possible. Give it a business name and involve your spouse or best friend to manage your business so that you can't 'hide' your losses and destructive activity.

5. Don't over trade. Don't trade late into the night or for long hours. This is because fatigue can cloud judgment. As part of your trading plan, you can establish trading hours and keep to them as a routine. This will give you time to rest and maintain psychological well-being. It will also make your 'business plan' formal.

6. Walk away from bad deals. Trading is after all really a business so the trader has to look at reward to risk proposition.

7. Admit mistakes and terminate them. Conviction and determination may pay off in other professions but not trading. That's because the market is always right so staying in a bad trade doggedly is a bad idea.

8. Recite trading rules frequently. Remind yourself of the rules before the start of daily 'business' to recall do's and don'ts. This is useful for stubborn or people who refuse to quit.

9. Find a part-time job. It might make you feel more secure by meeting some daily needs. If nothing else, it keeps one from over-trading.

10. Set expectations right. Set realistic targets. Targets that are over-demanding compel the trader to over-trade or jump into bad deals.

Sunday, March 16, 2008

Trend Following Trading & Turtle Trading

An Introduction to The Best Trading Strategy

What is Trend Following trading? A good definition from Van Tharp:

Let's break down the term Trend Following into its components. The first part is "trend". Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices..."Following" is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then "follow" it.

Trend Following is reactive and systematic by nature. Trend Following does not forecast or predict markets or price levels. Prediction is impossible!

Trend Following demands that you have strong self-discipline to follow precise rules. It involves a risk management system that uses current market price, equity level in an account and current market volatility. Trend Followers use an initial risk rule that determines your position size at the time of entry. This means you know exactly how much to buy or sell based on how much money you have. Changes in price may lead to a gradual reduction or increase of your initial trade. On the other hand, adverse price movements may lead to an exit for your entire trade. Historically, Trend Following trader's average profit per trade is significantly higher than the average loss per trade.

Trend Following is not a Holy Grail. It is not some passing fad or hyped-up secret black box either. Beyond the mere rules, the human element is core to the strategy. It takes discipline and emotional control to stick with Trend Following through the inevitable market ups and downs. Keep in mind though, Trend Followers expect ups and downs. They are planned for in advance.

Trend Following Nuggets of Wisdom

Price: One of the first rules of Trend Following is that price is the main concern. If a market is at 60 and goes to 58, 57, 53 - the market is in a down trend. Despite what every technical indicator might predict, if the trend is down, stay with the trend. Indicators showing where price will go next or what it should be doing are useless. A trader need only be concerned with what the market is doing, not what the market might do. The price tells you what the market is doing.

Money Management: The most critical factor of Trend Following is not the timing of the trade or the indicator, but rather the determination of how much to trade over the course of the trend.

Risk Control: Trend Following is grounded in a system of risk control and money management. The math is straightforward and easy to learn. During periods of higher market volatility, your trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more favorable price trends reappear. Cutting losses is the way to stay in the game.

Rules Rule: Trend Following is nearly 100% systematic. Price and time are pivotal at all times. Trend Following is not based on an analysis of fundamental supply or demand factors. Trend Following does NOT involve seasonals, point and figure, Market Profile, triangles or day trading.

Trend Following answers these critical questions:

How and when to enter the market.

How many contracts or shares to trade at any time.

How much money to risk on each trade.

How to exit the trade if it becomes unprofitable.

How to exit the trade if it becomes profitable.

Conclusions
If you want in-and-out day trading, we can't help. Good Trend Following systems (including the Turtle trading system) average five or six trades per market per year. What do you need to get started?

An active mind, willingness to learn and passion to win.
No knowledge of what an Italian bond is worth or what companies comprise the S&P or FTSE index. The key is the price on the chart.
Discipline and common sense to do the right thing per all rules.
About an hour each day at the end of the day to check trades.
A PC and telephone line (or internet connection).
Some Turtles Won; Some Lost. Why?

Trading is a zero-sum game. For every winner, there is a loser. What's the difference between winners and losers? Smarts and strategy. For every loser in the NASDAQ implosion there was a winner. Does this mean that there are traders with neither strategy nor smarts actively losing, effectively shifting their funds to the winners, armed with strategy and smarts? Yes, absolutely.

General Rules for Trading Systems

Understand why you are trading in the markets. Are you seeking a gambling thrill or are you serious about making money?
Use a system and don't deviate from it.
Use money management at all times.
Establish your trading plan before the markets open.
Detail your plan for each trade.
Establish entry and exit points and understand risk reward ratios.
Accept small losses as part of the game if you want to win.
Trade markets from the short side.
Maintain a strong and honest relationship with your broker.
Develop a business plan. Speculation is a business.
Stay the course so you are around for the big moves.
Don't blame the market for your losses. You are the reason for your losses.
Develop a trading plan for each potential situation you may face.
Do not look at quotes during the day.
Do not concentrate on break-even levels when you are losing.
Remember that break-even levels do not impact on the future success of a position.
Don't liquidate a winner to keep a loser.
Develop and maintain an exit plan. Follow this plan with rigid discipline.
Remember that greed kills.
Never add to a losing position. A losing position means you were wrong.
Sustain your patience. Big movements take time to develop.
Remind yourself there is nothing new in the markets.
Don't predetermine your profits.
Avoid techniques you don't understand.
Don't be overly curious about the rationale behind a move.
The key to wealth in trading is simplicity.
Trade money not markets.
Bulls and bears make money, but pigs get slaughtered.

Trend Following Guidelines:

Trend Following is not anticipatory. Does the 60% drop in NASDAQ stocks mean the bull market has finally run its course? Who knows. Don't worry about what the markets are going to do, worry about what you are going to do in response to the markets today. You can't undo the past and you can't predict the future. No one can consistently predict anything. Prices, not investors, predict the future.
Meticulous risk management strategies are absolutely crucial. Everyone makes money in a bull, but if you don't have a money management plan and an exit plan, you are in trouble when the bull is replaced by the bear. Trend Followers plan when they will get out before they ever get in. They are interested in one variable: price. They forget forecasts, fundamental factors, and technological break throughs.
Successful trading systems adapt to change. Inefficiencies in a variety of financial markets around the world lead to sustained trends. Mechanical trading systems exploit these trends for profits. With global markets in various stages of expansion, retraction and equilibrium, your trading strategy adapts.
Know every day what your portfolio is worth. Calculate what your risks are on any given day for all positions.
Controlling risk is not the same thing as avoiding risk. If managing risk is an integral part of your philosophy, when your risk level goes up or down, you simply adjust.
Manage your risk. Position liquidations are triggered by significant adverse price action and are never pre-determined objectives. Concentrate on managing the risk. The returns will take care of themselves.
Large profits engender larger size ?thin profits engender cutting back. If you are flush with profits, you trade larger size. If you are thinly capitalized, you have to cut back.
Equalize risk. Allocate a fixed dollar amount of risk to each new position. For example a corn position will have the same initial dollar risk as a T-Bond position. By trading a system with the same parameters across the board you protect yourself from curve-fitting.
Enter and exist with rules. You can't expect to enter a market at the precise moment a bottom is hit, nor will you exit a market at the exact top. Capture the middle of the trend.
Seek profit opportunities in trending markets whether those markets are moving up or down.
Obtain profits from long-term volatility. View volatility as a cornerstone of your trading system. Volatility is the root of profit.
Do not attempt to buy lows and sell highs. Buy market strength (highs) and sell market weakness (lows).

Friday, March 14, 2008

Templeton's 10 Investment Principles

INVEST FOR REAL RETURNS
The main objective for any long term investor is to maximise total real returns after taxes and inflation. One of the biggest mistake people make is to put too much money into fixed interest investments. If inflation averages 4% per annum, it will reduce the buying power of a US$10,000 portfolio of shares to US$6,800 in just ten years. To put it another way, the same portfolio will have to grow by 47% to US$14,700 simply to preserve its value over 10 years.

KEEP AN OPEN MIND
Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded and sceptical. Long term top results are achieved only by changing from popular to unpopular the types of securities you favour and your methods of selection.

NEVER FOLLOW THE CROWD
If you buy the same securities as other people, you will have the same results as other people. It is impossible to produce a superior performance unless you do something different from the majority. To buy when others are despondently selling, and to sell when others are greedily buying requires the greatest fortitude, but it also pays the greatest rewards.

EVERYTHING CHANGES
Bear markets have always been temporary. And so have bull markets. Share prices usually turn upward from one to 12 months before the bottom of the business cycle and vice versa. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and, when lost, may not return for many years.

AVOID THE POPULAR
When any method for selecting stocks becomes popular, switch to unpopular methods. Too many investors can spoil any share selection method or any market timing formula.

LEARN FROM YOUR MISTAKES
The only way to avoid mistakes is not to invest, but that's the biggest mistake of all. Determine what went wrong and how you can avoid making the same mistake in the future. "This time is different" are among the most costly four words in market history.

BUY DURING TIMES OF PESSIMISM
Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

HUNT FOR VALUE AND BARGAINS
To many investors focus on outlook and trend. Therefore, more profit is made by focusing on value. In the stock market the only way to get a bargain is to buy what most investors are selling.

SEARCH WORLDWIDE
To avoid having all your eggs in the wrong basket at the wrong time, every investor should diversify. If you search worldwide, you will find more bargains and better bargains than by studying only one country. You also gain the safety of diversification.

NO ONE KNOWS EVERYTHING
An investor who has all the answers doesn't even understand the questions.

Sir John Templeton's 16 rules for investment success
(From the interview with Mark Mobius)

1. If you begin with a prayer, you can think more clearly and make fewer mistakes.

2. Outperforming the market is a difficult task.

3. Invest - don't trade or speculate.

4. Buy value, not market trends or the economic outlook.

5. When buying stocks search for quality stocks.

6. Buy low. So simple in concept, so difficult in execution.

7. There’s no free lunch. Never invest solely on a tip.

8. Do your homework, or hire wise experts to help you.

9. Diversify - by company, by industry.

10. Invest for maximum total real return.

11. Learn from your mistakes.

12. Aggressively monitor your investments. Remember, no investment is forever.

13. An investor who has all the answers doesn’t understand the questions.

14. Remain flexible and open-minded about the types of investment.

15. Don't panic.

16. Do not be fearful or negative too often.

Martin Pring's Trading Rules for Greater Profits

When in doubt, stay out

Never trade or invest based on hope

Act on your own judgement or else absolutely and entirely on the judgement of another

Buy low (into weakness), sell high (into strength)

Don't overtrade

After a successful and profitable campaign, take a trading vacation

Take a periodic mental inventory to see how you are doing

Constantly analyse your mistakes

Don't jump the gun

Don't try to call every market turn

Never enter into a position without first establishing a risk reward

Cut losses, let profits run

Place Numerous small bets on low-risk ideas

Look down, not up

Never trade or invest more than you can reasonably afford to lose

Don't fight the trend

Whenever Possible, trade liquid markets

Never meet a margin call.

If you are going to place a stop, put it at a logical, not convenient, place

The Ten Tips

Don’t trade at the edge of the pendulum.
Pring’s Law states that other things being equal, trading success is inversely related to emotional stimulation.
Only trade with a balanced mindset.
Patience and discipline ?required ingredients for successful trading.
Only trade when you feel good and there is an obvious opportunity; never purely because you want to.
If you get in for a reason get out when it’s no longer valid.
Do not penny pinch.
Trade smaller positions when things go wrong.
Not sure? Don’t trade.
Take time to learn.

Making a Plan and Sticking to It
o Setting up your personal investment objectives
- Investor
- Trader

o Adopting an investment or trading philosophy

o Establishing a plan to maximise objectivity and minimise emotion
1. Self-analysis
2. Mental rehearsal
3. Developing a low-risk idea
4. Stalking
5. Action
6. Monitoring
7. Getting out

o Establishing a review process

Gann's 24 Never Failing Rules

Divide your capital into ten equal parts, never risks more than 10% of your capital on any one trade.
Use stop loss orders. Always protect your trade with a stop loss order of 3 to 5 points away.
Never overtrade - that would be violating the first rule.
Never let a profit run into a loss. Raise your stop loss orders.
Do not buck the trend. Never buy or sell if you are not sure of the trend.
When in doubt get out.
Trade only in active stocks. Keep out of slow dead ones.
Equal distribution of risk. Avoid tying up all your capital in one stock.
Never limit your orders or fix a buying or selling price.
Don't close your trades without good reason.
Accumulate a surplus.
Never buy just to get a dividend.
Never average a loss.
Never get out of the market just because you have lost patience, or get into the market because you are anxious from waiting.
Avoid taking small profits and big losses.
Never cancel a stop loss after you have placed it.
Avoid getting in and out of the market too often.
Be just as willing to sell short as you are to buy.
Never buy just because the price is too low or sell short just because the price is high.
Be careful about pyramiding at the wrong time. Pyramid in reducing quantity.
Select stock with small volume of shares outstanding to pyramid on the buying side and stocks with the largest number of shares outstanding to sell short.
Never hedge. If you are long on one stock and it starts to go down, do not sell another stock to hedge it.
Never change your position in the market without a good reason.
Avoid increasing your trading after a long period of success.

Monday, March 10, 2008

Richard Rhodes' Trading Rules

I must admit, I am not smart enough to have devised these ridiculously simple trading rules. A great trader gave them to me some 15 years ago. However, I will tell you, they work. If you follow these rules, breaking them as infrequently as possible, you will make money year in and year out, some years better than others, some years worse - but you will make money. The rules are simple. Adherence to the rules is difficult.

"Old Rules...but Very Good Rules"

If I've learned anything in my 17 years of trading, I've learned that the simple methods work best.

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.
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.
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.
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.
Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.

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.
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.
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.
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.
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."
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 analyses, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
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.
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.
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.
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.
Markets form their tops in violence; markets form their lows in quiet conditions.
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. Apply simple system and clear methods and rules of analysis, avoiding complex methodologies concerning obscure technical systems and trade according to the major trends only.

Sunday, March 9, 2008

9 Deadly Trading Mistakes!

By Dr. Jeffrey Wilde

"You don't need to know everything about day trading to succeed as a day trader. You need only to find a few solid strategies that work for YOU - then master them." - Jens Clever

The following are a list of nine things you want to avoid at all costs. Anyone of them can literally destroy your financial dreams and goals!

1. Trading with money you can't afford to lose.

One of the greatest obstacles to successful trading is using money that you really can't afford to lose. Examples of this would be money that is supposed to be used to pay the mortgage, bills or your child's college tuition. This is sometimes referred to as "trading with scared money" and there is a very good reason for that. Ultimately what happens is that when someone knows in the back of their mind that they are risking the rent money, they trade out of fear and emotion versus logic and no emotion. If you are in this situation I highly recommend that you stop trading until you earn enough to put into an account that you truly can afford to lose without causing major financial setbacks. You can start with as little as $2000 and trade stocks under $30.

2. The need to be "certain".

We all have the need to make sure that the trade we want to make is going to be a good one. Therefore we look for signs that will give us a confirmation to enter. This can come in several forms, for example... Tuning into CNBC or the Wall Street Journal to give us news that our stock is on the move or waiting for a couple of extra days to make sure that the stock is really flying and just not on a false breakout. Other traders will get opinions from friends, family or broker. Others will wait for ten technical indicators to line up and give the "green light".

All of these are okay to a point, however the big mistake to avoid is taking so much time that you let the trade take off without you. Interestingly, what ends up happening as a result of waiting
too long is that you actually increase your risk. This is because as a stock moves higher and higher there are fewer buyers left in the market and it can come tumbling down until more buyers step in. It is like a game of musical chairs; eventually someone gets caught without a chair.

Traders who wait and wait and wait to make extra sure are usually the ones buying the top tick just before the stocks sells off. They then beat themselves up thinking they picked the wrong stock. Odds are it had nothing to do with their selection, just bad timing.

The thing to keep in mind is that there can be no absolute certainty in any given trade. All we ever can do is take a very educated risk along with a leap of faith!

3. Spending profits before you make them.

Nothing is more exciting then getting into a trade that blasts off and puts you into a highly profitable situation. This can cause major problems however, because this type of trade puts you in a highly euphoric state and leads to daydreaming about the huge profits still to come. You say "Wow I'm already up 15% in two days; I'll be up 50% in a week and probably double my money in no time!" Then the next thing that happens is you are deciding on the great new car you are going to buy or perhaps telling your boss that he can stick it... Well you get the idea!

The real problem occurs as you get caught up in the daydream and expectations. This causes you to not be prepared to get out as the market sells off and eats up your profits because you have convinced yourself of the eventual outcome and will deny the reality of the situation.

The simple remedy for this is to know where and how you will take profits once you enter the trade. Also, realize that the market will only go up as long as it wants and not how high you think it should go.

4. Forming an opinion.

I'm here to tell you that the market does not give a damn about you or your opinions. Even if they are based on painstaking research or from a "Wall Street Guru", it doesn't matter!

5. Three 4-letter words that will kill you!
HOPE---WISH---PRAY

If you ever find yourself doing one or more of the above while in a trade then you are in big trouble! As I have already said, the market doesn't give a damn. All the hoping, wishing and praying in the world is not going to turn a losing trade into a winning one.

When you are wrong just use a simple 4-letter word to correct the situation-SELL!

6. Not sticking to your plan

A big source of trouble arises when a trader starts to deviate from their strategy. Maybe for a week they will trade according to one set of rules and the next use something entirely different.

This flying by the seat of the pants always ends up backfiring. This is because the trader can never be certain what is working and what is not.

You must never deviate from your methodology once you start. As long as it is a good one statistically there is absolutely no reason to change it. The way to make money from it is to trade it over and over again to exploit the edge it gives you.

One thing to also be aware of is that a trader is most vulnerable to switching approaches after a few loses. So, pay special attention at these times.

7. Not knowing how to get out of a losing trade.

It's amazing how many people I have talked to who don't have any clear escape plan for getting out of a bad trade. Once again they hope, pray wish and rationalize their position. As I keep saying the market does not care what you think. It does what it does and when you are wrong you are wrong!

The easiest way to keep a bad trade from going really bad is to determine before you get in, where you will get out. You can use a dollar amount or at some target point such as the low of the previous 15-minute bar.

***Make sure you don't get the "stunned deer in the headlights syndrome". This is where you see the stock fall to your stop loss point, but you are unable to take action. Maybe this is due
to fear or disbelief that you are wrong, but unless you get out ASAP you could end up with a major financial trouble!

8. Having an ego.

I have seen a number of individuals enter the trading game that were extremely successful in other business ventures. Because of this they had a fairly big ego and thought they couldn't fail.
Their egos became their downfall because they couldn't except that they were wrong and refused to bail out of bad trades.

Once again, whoever or wherever you came from does not concern the markets. All the charm, powers of persuasion, number of diplomas on the wall or business savvy will not budge the market when you are wrong.

9. Falling in love with a stock or trade.

Let me give you an example of what I mean. Back in the spring of 1999 EFAX was a really hot stock. I waited to buy it on a dip and did so at $19/share. It started to move up strongly and life was great! After a while though, it started to come back to my entry point and then below it. Here's the problem. For some reason I really liked EFAX and sort of became attached to it. Ultimately I couldn't let go of it even though I knew I should. I justified and rationalized why my dear friend should bounce back, but it never did. I finally had to break off my love affair when the stock hit $9. (Ouch!)

The moral of this story is never fall in love, let alone get married to any stock. It can cost you dearly!

When to sell your stocks

Sell if the news cannot get any better.
Sell when your original scenario has been fulfilled.
Sell if things did not go as planned.
Sell on the rebound in the aftermath of material unexpected, discrete bad news.
Sell in certain cases when expected news is delayed.
Sell when you note general euphoria and unusually widespread public participation (strong final-stage indicators.)
Sell if the stock is lazy money and likely to stay that way.
Sell when the stock is unusually far above its moving average.
Sell if you would not buy the stock again at today’s quoted price.
Sell and step aside when experiencing a personal losing streak.
Sell if the stock falls to a level representing a loss of up to 10-20 per cent.
Sell if there are signs that business fundamentals are worsening.
Sell a stock when it has become the market's darling.
Sell when a stock or sector has too large a representation in your portfolio.
Sell when you see more potential for gains elsewhere - even if your sale means a loss.

Investors selling stocks in a disciplined manner using the preceding signals are likely to end up with a good deal of cash before the market moves into a bear cycle.

Read
Selling Strategy - Profiting from Euphoria

Tuesday, February 5, 2008

High Probability Trading Tactics

High Probability Trading Tactics Using the eSignal Market Scanner

The object of trading is to compound money over the shortest amount of time while controlling the risk. eSignal allows you to accomplish this by providing you with the tools for the trade. In this article, we will be examining high probability trading tactics using these tools.

The first step in any trading analysis is to determine what sectors are in trend (bullish or bearish) at any given point. To quickly accomplish this, you can use the eSignal Market Scanner, specifically, the Hot Groups Scan. (See the screen shot of the Hot Groups Scan.)

This tool gives you a real-time look at what is going on at the moment.

The top of the pyramid shows the most bullish sectors while the bottom shows the most bearish sectors. After you find which sectors are trending, you make note of them. Then, look at the markets. I would suggest examining the S&P 500 and the NASDAQ to see if they are trending in sync with each other.

Watching the markets is one of the things that helps you decide to go long or short when you select a stock. (See the screen shot of the S&P 500 and the NASDAQ in trend.)

Last, select the stocks you want to trade from the sectors that are in trend. Power Scan is an excellent way to screen for stocks that are trending. If you know, for example, that the auto sector is trending, you simply look at several stocks in that sector. (See the screen shot of Power Scan.)

Once you identify your individual stocks, plot a 7- and 17-period exponential moving average of the close. If the stock is trending long, simply stay long as it trends above the 7- and 17-period exponential moving average. Stay short until the price breaks out above the 7-period. (See the screen shot of the stock chart with the 7 and 17 EMA. The 7-period is colored red and the 17 is blue.)

Don't enter the trade unless the sector, market and stock are trending in the intended direction of your trade. The best entries long are oversold bottom reversals.

A good example would be a double bottom. The best shorts are overbought parabolic runs that are reversing down

Robert Deel
Trading Strategist, author of Trading The Plan and CEO of Tradingschool.com

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