20 Simple Rules of Trading


Found this on the web this evening, a lot of it is common sense but its still good to be reminded.

Twenty simple Rules of Trading courtesy of First Securities & Trust Company SA

1 Trade like a guerilla warrior
You must learn to adapt quickly to changes. If the winning side is changing, don't hesitate to join the new party and to commit all your forces to this side (capital ,mental, emotional)...until the market conditions change. Don't get married to trades.

2 Be disciplined
Create a game plan then stick to it. A trade does not simply consist of a position. It consists of a position plus reasons for having the position plus a stop loss level plus profit taking levels. In the long run your discipline will save you when markets get rough.

3 Buy high...Sell higher - Sell Low...Buy Lower
Do not try to bottom fish or pick tops. When you think you know the trend then follow it.

4 Think big picture but trade like a technical analyst
You must understand the fundamentals behind your investment ideas but you need to understand the Technical Analysis too. When your fundamental and technical signals point to the same direction...you have a good chance to have a winning trade.

5 Do not use excessively tight stop losses
Spend more time identifying a good entry point. Be patient. Give some freedom to the market. Place your stop losses carefully.

6 Hit your stops
The first stop is the cheapest stop on a losing position. Do not follow the temptation to "hang onto" a losing position that has gone through your stop loss level. It might work a few times but one day you will be hammered if you trade without discipline.

7 In a Bull market...Be Long or Neutral - in a Bear market...Be Short or Neutral
A lot of people forget this rule and trade against the trend by calling for short term changes in market conditions. This usually causes psychological imbalance and frequently leads to losses.

8 Go for the most powerful market trend
Do not focus too much on markets where the trend is not strong enough or the market is range bound or choppy. Commit your forces to the stronger trend.

9 Accept losses they are part of the game
Prepare yourself mentally and emotionally for this eventuality. Take some time off and come back fresh if you have been hit hard. Do not fight with the trade, curse the market or make some bargain with yourself (...if the market goes to my initial level I will get out... ! ).

10 Resist the urge to trade against the trend too early
The trend is usually right (fundamentally). Be patient. Wait for the trend to turn. When the fundamentals and technicals are turning to the other direction, wait a bit longer then enter.

11 Never add to a losing position
This is a recipe for disaster. Just add to winning positions especially when the market is retracing.

12 Do not make a winning position lose
Use trailing stop losses. You must learn to take profits.

13 Bear markets are more violent than bull markets
You can trade bear markets with smaller positions. Expect violent retracements so get in the habit of taking profits.

14 Keep all your technical analysis simple
Use simple support and resistance, Fibonnaci retracement and reversal days. A good tip: When yesterday's daily trading range is the smallest of the previous last 11 days trading range...be ready for a big move and some volatility.

15 Be aware of market liquidity at all times
Assets do not just have prices. They have liquidity levels too, and just as prices change so too does liquidity. Illiquid assets do not trade in the same way as highly liquid assets. Only trade lower-liquidity assets if there is sufficient compensation for the lack of liquidity and you are a true expert in the asset class.

16 Be intellectually honest
When you are wrong admit it , learn from it and go on to the next trade. The market rewards intellectual arrogance with losses and pain. If you want to stick to your point of view no matter what the evidence may be to the contrary… become a politician.

17 Wall Street climbs on a wall of worry
Be aware that the most likely time for a bull market to end is when everyone is bullish and the bottom of a bear market occurs when everybody is bearish. When everyone is on the same bandwagon… be careful and get ready to get out.

18 Be aware of Psychological biases in the markets
Bond traders tend to make most money as economies slow and dip into recession. Stock traders tend to make most money when the economy booms. So many bond market participants are always pessimistic and many stock analysts are perpetual optimists. Try to remain objective and observe which market commentators appear objective too.

19 Be patient
The more profound your ideas the longer it will take for others to see them as well and thus the longer it will take for markets to move your way. Be patient and give yourself and your trades time.

The 20th rule
If you have to...break the rules.
Sharky great post this. Worth a daily read by all regardless of how long youve been inthe game.
This is the most useless set of trading principles I have seen yet. More traders getting miseducated means more money for the pro's.
The list probably isn't directly applicable to everyone. At the very least, though, it serves as a very good template for helping people devise a similar list for themselves.
The 20th rule
If you have to...break the rules.

Not quite I understand why you would have rules and then have one to break them...defeats the purpose surely. Additonally where is have a trading plan on the list?
Never add to a losing position? Recipe for disaster? Surely this would depend on the timescale of the incestment. The only disatster long term is a comapmy going under and if this is likely then I reckon you should gte out while you still can.

However I have bought and watched the price go down a further 30% three and four times. If I had bought MORE I would have made another 30%. Some of these bottoms have resulted in 100% profits!
I didnt have the extra cash or if I am honest the balls! But FTSE 100 are good for it, not going to go under and recovery will happen.

I bought Barclays at 98p, everyone thought I was daft, (falling stock, Toxic debts not known etc ). They went down to 48p the five days after I bought. If had had bought more look what that would have given (now 225p!) Others were Legal & General, bought @36 went to 22 now 51 and Aviva, bought at 201, went to 160 now 286!

And my favourite, Xstrata bought at 310 after a fall of 296 before 10am now 590!

You may be referring to Daytrading "never add to a losinbg postion" then I would agree.
Never add to a losing position? Recipe for disaster?

I am always doing this! and 90% of time come out winner
though will only do so if the signal is in the direction of the trade
and off cource use the stops - often the stops for the 2nd trade is much lower
use FIFO method

It works for me, always has!
Rules are - stick to what works for YOU!
I am always doing this! and 90% of time come out winner
though will only do so if the signal is in the direction of the trade
and off cource use the stops - often the stops for the 2nd trade is much lower
use FIFO method

One interpretation of the above post is that over 90% of your positions are net profitable when closed. Is that correct? Maybe I'm interpreting "always doing this" too literally.
Adding on to losing position?

Consider a taboo in trading (maybe not for those who invest for long term). Adding on to losing position in a trade means most of the trades you

1) Don't have a stop
Adding on to position often means you believe the trade "somehow" will come back and becomes a winner. Any experienced trader would stress that you MUST know at which price level to exit!

2) You don't have a plan
BEFORE you enter a trade, did you plan to average down if trade goes south? If you didn't you shouldn't even average down in the first place!

3) Your ego is more important
The most important point, you are playing on faith and your desire to be "right" is more important than control loss!

Still, I believe small number of traders still includes averaging down in their strategy. You CAN average down, but provided BEFORE the trade this is part of your plan. If you didn't, then you are truly playing on faith.

Dreaming in the market is a luxury a trader cannot afford to.