3SOF

Good morning !

I have a book for 7 or 8 years now that has 50 trading rules that I found very valuable through my trading career. I want to share those rules with you and maybe we can discuss some of them. Across the 50 rules, I find some that are essential and some others not so important.

Here they are:

1) Divide your trading capital into ten equal risk segments
2) Use a two step order process
3) Don't overtrade
4) Never let a profit turn into a loss
5) Trade with the trend
6) If you don't know what's going on, don't do anything
7) Tips don't make you any money
Use the right orders to get into the markets
9) Don't be whimsical about closing out your trades
10) Withdraw a portion of your profits
11) Don't buy a stock only to obtain a dividend
12) Don't average your losses
13) Take big profits and small losses
14) Go for the long pull as an outside speculator
15) Sell short as often as you go long
16) Don't buy something because it is low priced
17) Pyramid correctly, if at all
18) Decrease your trading after a series of successes
19) Don't formulate new opinions during market hours
20) Don't follow the crowd, they're usually wrong
21) Don't watch or trade too many markets at once
22) Buy the rumor, sell the fact
23) Take windfall profits when you get them
24) Keep charts current
25) Preserve your capital
26) Nothing new ever occurs in the markets
27) Money cannot be made every day from the markets
28) Back your opinions with cash when they're confirmed by market action
29) Markets are never wrong, opinions often are
30) A good trade is profitable right from the start
31) As long as a market is acting right, don't rush to take profits
32) Never permit speculative ventures to turn into investments
33) Don't try to predetermine your profits
34) Never buy a stock because it has a big decline from its previous high, nor sell a stock because it is high priced
35) Become a buyer as soon as a stock makes new highs after a normal reaction
36) The human side of every person is the greatest enemy to successful trading
37) Ban wishful thinking in the markets
38) Big movements take time to develop
39) Don't be too curious about the reasons behind the moves
40) Look for reasonable profits
41) If you can't make money trading the leading issues, you aren't going to make it trading the overall markets
42) Leaders of today may not be the leaders of tomorrow
43) Trade the active stocks and futures
44) Avoid discretionary accounts and partnership trading accounts
45) Bear markets have no supports and bulls markets have no resistance
46) The smarter you are, the longer it takes
47) It is harder to get out of a trade than to get into one
48) Don't talk about what you're doing in the markets
49) When time is up, markets must reverse
50) Control what you can, manage what you cannot

I hope you find these Trading Rules interesting and useful 

Good list, David!

I printet it out, and will look at what I know I do wrong...

You'll make a better trader out of me, for sure.

(Not that it would really be that hard to do... )

Thanks.

David --

Excuse my ignorance, but what's a "two-step" order process?

twodachsiemom

Quote from: twodachsiemom on August 03, 2005, 10:10:51 AM
David --

Excuse my ignorance, but what's a "two-step" order process?

twodachsiemom

Good question twodachsiemom, thanks 

Two step order process means you put an order to buy (be it at market or limit) and then put a stop loss order, that is, with every buying order you attach a stop loss order.

I usually don't do this since this conflits with my thinking and experience on false intraday technical signals.

1) Divide your trading capital into ten equal risk segments

Dont we have 15 on 3SF?

While 10 on penny board?

Quote from: David Randolph on August 03, 2005, 07:09:28 PM

Quote from: twodachsiemom on August 03, 2005, 10:10:51 AM
David --

Excuse my ignorance, but what's a "two-step" order process?

twodachsiemom

Good question twodachsiemom, thanks

Two step order process means you put an order to buy (be it at market or limit) and then put a stop loss order, that is, with every buying order you attach a stop loss order.

I usually don't do this since this conflits with my thinking and experience on false intraday technical signals.

Thanks for the clarification, David. Obviously the goal is to limit risk. And what you said about the false intraday signals makes sense too. Seems like if you're not going to set a stop loss order, you really have to be watching buy and sell volume intraday, news releases, upcoming events, and price relative to moving averages for each of your holdings. Thus, rule #1, to limit the number of stocks you need to keep tabs on.

Quote from: stocky on August 03, 2005, 08:16:47 PM
1) Divide your trading capital into ten equal risk segments

Dont we have 15 on 3SF?

While 10 on penny board?

Excellent observation stocky  You're right, probably 15 stocks is too much on the 3 SOF Portfolio. Perhaps we will change that to just 10 stocks in the future. The 15 stocks came from another book I've read (the best book on the stock market I've ever read, by the way - well, the best after Reminiscences of a Stock Operator  )

QuoteThanks for the clarification, David. Obviously the goal is to limit risk. And what you said about the false intraday signals makes sense too. Seems like if you're not going to set a stop loss order, you really have to be watching buy and sell volume intraday, news releases, upcoming events, and price relative to moving averages for each of your holdings. Thus, rule #1, to limit the number of stocks you need to keep tabs on.

Some confusion here twodachsiemom.

Exactly because there are so many intraday false signals you shouldn't consider it, don't even watch it (I don't, after 7 years day trading futures I have no patience).

Analyze your holdings after the close, consider technical signal on close only.

Perhaps just 10 stocks is a bit risky, because that implies you have 10% of capital in each. Currently I have just 6.66%. This way, even if a stock I own gets delisted overnight or something, I just lose 6.66%.

More important than the number of holdings is the percentage of capital in each holding. Don't go more than 6.66% or 10% maximum on a diversified portfolio. If you have just 3 stocks you have just 19% or 30% invested, don't put 33% in each to get to the 100%, that is too risky.

I find a fixed maximum percentage of capital in each stock a sound money management rule to trade stocks with safety.

Hi David
I try dollar cost average on trading and that was one of the fifty that it said not to do.What is you're opinoin with it.I thought it sounded ok when I first heard of doing this because it lowers the amount you would have to trade you're stock to at least break even or make a gain.

life is good
wrangler

Hello wrangler, good question 

I consider RULE 12: Don't average your losses one of the most important, if not the most important.

You see, stocks move in trends, up and down. If you buy a stock and it goes down, probably that happened because the trend is down or is turning down. And trends usually persist, and persist and persist, and the limit for a down move can be zero.

So, when you average down your price you're probably fighting the trend, instead of going with it.

But, another more philosophical approach can tell you this: if you bought the shares and they went down, you were wrong on your analysis, plain and simple. Knowing that you are wrong, what are you going to do, buy more, continuing and amplifying your mistake, or stop being wrong by selling at a small loss?

Imagine you buy a stock at $10. It goes down to $9. You figure «if it was good at $10, at $9 it is better», and buy more. Then it goes down to $8, you buy more ... then to $7 and you buy more, and so on, and on, until the stock trades at $1, because of some fundamental development you were not aware of, or simply because the general market was very bearish at that time.

You've turned your initial loss into a much bigger one, possibly a devastating one.

Why not play safe and sell at $9, losing just $1 a share, and look for another stock, more promising on the short term, with an uptrend? This way you keep yourself in the game and available to participate in the winning stocks outthere.

Don't forget RULE 4: A good trade is profitable right from the start.

There is a lot more to say about this ... some people like to average down, but either they are very inexperienced traders or they are very large fund managers that have the resources to wait years for a stock price to show its intrinsic value (provided they believe the fundamentals, and many times they are wrong too).

Good luck wrangler 

More excellent info.

I keep discovering more things I'm doing wrong while trading...keep them coming!

Is it correct to say that everytime you buy a stock it will be going up when you buy it? 


Thanks...Jody

Quote from: 422fwhp on August 30, 2005, 11:38:03 PM
Is it correct to say that everytime you buy a stock it will be going up when you buy it? 

Thanks...Jody

Hi Jody,

Only when you place a market order, and only if the trade before was made on the bid price

best regards,

I was referring to what David said regarding rule 4..."a good trade is profitable right from the start"

Maybe I should have said, "Is it correct to say that everytime you buy a stock it should be trending up when you buy it?"

Thank you,
Jody

Hello 

Here are trading rules from 51 to 100:

51) Learn to be a good loser, but keep your name in the hat
52) Trade on probabilities, but guard against the possibilities
53) Choosing convenience means that you have to pay for it
54) Trading success is a slow climb uphill, but trading failure coasts quickly downhill
55) Break away from the markets, market letter or the newspaper - and do something as simple as thinking
56) Market manipulators may play on a rule of speculation after it has become established
57) A stock is not always a great bargain because its yield is high; a high yield often indicates price instability
58) You need purse, pluck and patience; your broker needs conservatism, common sense and conscience
59) There is less pressure to sell at the top than 10 points down from the top; there is less inclination to buy at the bottom than 10 points up from the bottom
60) Beware of shorting worthless stocks: do not forget that dust and straw and feathers, things with neither weight nor value in them, rise soonest and most easily !
61) A short interest slows a decline and a long interest slows an advance, but neither will permanently prevent a movement when intrinsic conditions are radically changing
62) Fools can take profits but wise traders knows when to take a loss
63) Traders, speculators and investors view markets differently
64) narrowness always follows a violent market move; thus, when stocks "mark time", you do the same
65) A person who waits to eliminate uncertainty will keep waiting
66) Those who consider Wall Street as strictly a business proposition are the only ones who meet success. What is marketed to the public is something less than a business but more of a speculation
67) Beware of stock splits that can create strange price charts and opportunities that never existed
68) Behind the obvious success of one trader lie the invisible failures of a hundred traders
69) A broker who can make money for you deserves not only lunch but dinner from you
70) Never break a sound rule (if you feel you are breaking one, reduce your commitment)
71) Never overtrade; trading correctly is more important than you think
72) All numeric relations lead to 0.618
73) The alternation between hope and despondency is an underlying cause of market cycles: movements both up and down are overdone
74) Judge corporate officials on company performance, not on how they treat employees or the public
75) The long term trend of the market is always bullish because losers fade away
76) Newer mechanical timing or trading formulas no longer preclude selling at the top or buying at the bottom
77) Dollar cost averaging works best with stocks that fluctuate widely; if the stock is not always in a declining trend you should come out ahead
78) Analyze your strong points and convert them into even stronger ones
79) There is no room in the marketplace for generosity or sentiment
80) Stocks need sponsors to bolster their prices; stocks do not go up by themselves
81) Whatever is hard to do in the market is generally the right thing; Whatever is easy is usually the wrong thing to do
82) A reaction in a bull market and a decline in a bear market are not one and the same
83) The three key words for successful long term investment reducing risk are: 1) Management, 2) Management, 3) Management
84) Set realistic expectations of the market; Do not anticipate more than the market can give - you will avoid disappointment
85) Define market action first, then take appropriate action
86) You can make greater and more rapid profits in a bull market by trading in stocks of small capitalization, but watch out for the risks
87) Liquid stocks can be covered more expeditiously than small caps
88) There is no substitute for quality experience in the marketplace
89) Both long and short term trades start off as short term trades but winning trades are long term
90) Arbitrage plays are everywhere
91) We all make mistakes, but we mustn't allow our emotions to obstruct our learning process
92) Those who lose money lose much, those who lose a friend lose more, but those who keep their spirit keep all
93) To come out ahead, do not keep repeating your mistakes
94) Trade evenly and consistently
95) Intermediate movements of stock prices can be discerned profitably
96) Trade countertrend with a portion of your original commitment
97) If there are large amounts of capital, employ hedging
98) Stop loss orders are most effective at certain stages of market action
99) Ignore statistical reports in bear markets
100) Don't forget what procedures were designed for

These Trading Rules were written by William F. End on «Trading Rules 2», Dearborn Financial Publishing, Inc