Rules from the Masters

Discussion in 'Words of Wisdom' started by ivanboesky, Sep 5, 2006.

  1. ivanboesky

    ivanboesky Active Member

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    Next: John Piper

    Trading and the second marshmallow

    Introduction
    One of the difficulties with trading is that the rules change as you progress. The novice must learn to cut losses and not much else matters at this stage. Once that rule is ingrained, it is down to running profits. But if you try and run profits at the 'cut losses' stage you will have a lot of problems.

    Another of the difficulties is that many traders break the rules and win! But this can be disastrous, because the market is bound to catch you out if you follow the wrong rules. Trading has a logic of its own. If you allow losses to run, the logic is you will be wiped out. Over many different trades the market will exploit any weaknesses in either the trader or his/her system. Statistically a few 'bad' traders will do well for a while - but not in the long run.

    1. Reduce position size to the point where you are comfortable.

    It may seem odd that reducing position size is my number one idea for making more money, but it is so. Many traders put themselves under excess pressure, by doing so they are prone to make bad decisions and they lose money. So reduce position size and make more money!

    2. Consider using option strategies - don't limit your options!

    Options have a lot of plus points, and have a part to play in your strategy.

    3. Find a trading mentor.

    Trading is a very difficult business. Not least because it is a zero sum game. NO, cancel that - it is a negative sum game, because every time you enter the game you pay commission, not to mention all the other expenses involved, price feeds, computers, software, etc, etc. With futures, the amount every winner wins is paid for by all the losers, but all participants pay commissions and the other costs. So in aggregate it's a negative pot. It's no surprise so many lose.

    If you need help with your trading, find someone who has experience to help you. Ideally a local trader - many are prepared to help because trading is a fairly dry business with little meaningful human contact. Otherwise you may need to find a professional who is willing to help but he may well expect to charge a fee. I do this myself, but your best bet is to try and find someone who is local to you.

    4. Use stops which have some meaning.

    Not all traders use stops and by not using stops everything becomes a lot simpler because you get wiped out fairly quickly. Actually that is not totally true but it is true for some, if not many. But if you are using an approach which does utilize stops then try and ensure your stops have some significance, otherwise you tend to be throwing money away.

    5. Understand the logic of your trading approach.

    Every approach to the market involves risk. As a trader, you must control risk, just as a tightrope walker learns to live with imbalance. Understand the logic of your approach and the risks you are taking, because that risk will come home to roost. In one sense the market is a generator of random sequences, especially if you follow a precise algorithm. If you or your approach has a weakness the market will find it in one of those random sequences.

    6. Let profits run - wait for the second marshmallow!

    Unless you let your profits run you will never cover your losses, let alone come out on top. You must also cut your losses. Most traders learn to cut losses quite easily but have trouble learning to run profits. This is not surprising. Cutting losses is an active function requiring careful monitoring of what is happening - it requires action. Running profits, in contrast, requires inaction, and doing nothing can be tough. In modern society we are used to quick gratification. We want our goodies and we want them now. The same goes for trading profits: once you see them, you want them - but you cannot have them if you want to let profits run.

    The book Emotional Intelligence describes an experiment in which a child is left in a room with a marshmallow and told that if he does not eat it, he will receive a second marhshmallow. Apparently this simple test is a far better guide to success than any number of intelligence tests. It is also exactly what traders must do if they want to let profits run, so don't eat that marshmallow and you will get two!

    7. Be selective

    There are so many keys to success but I feel this is the one that separates those who make lots of money from those who just get by.

    8. Don't predict.

    Market action is not predictable. A trader does not predict action - he takes calculated risks. He risks a little to make a lot.

    9. Don't panic.

    This is critical. Panic is mother to losses. Part of this is not putting yourself under undue pressure. The more relaxed you are, the less likely you are to panic.

    10. Be humble - big egos cost a lot to run!

    A person who is full of himself has no room for anything else: he will not listen, or learn. A trader who is not humble may not listen to the market and will get wiped out. I suspect we have all heard stories of macho traders who take on the market and get turned into mincemeat. I believe humility is an essential for trading success.
     
  2. ivanboesky

    ivanboesky Active Member

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    For today: Lewis J. Borsellino

    The 'ten commandments' of trading

    Introduction
    In the 20 years I've been trading, I've discovered one truism that is valid whether you're trading stocks, fixed income or futures: trading is 90% psychological. All the rest technical analysis, trade execution, etc. is the other 10%.

    That's not to say that technical analysis of the markets isn't important. It's vital. You can't trade without a plan based on technical analysis that encompasses support and resistance, trend lines, moving averages, momentum, volatility and the like. But you can't possibly execute that plan consistently if your mental game is off. That's where the 'ten commandments' of trading come in.

    1. Trade for success, not for money.

    Your motivation should be first and foremost to make a well-executed trade. If money alone is your motivation you will severely limit your chance of success. Why? Because focusing on money will raise all kinds of emotional issues, from fear to greed. It will make you afraid of losses to the point that you will abandon your discipline. It will tempt you to trade too often, too large and with too much risk. Whereas if you focus on making solid, well-executed trades - even if the result is a losing trade that you exit quickly - you will reinforce your discipline and increase your trading potential.

    2. Discipline is the one quality that all traders must possess above all others.

    The ability to master your mind, your body and your emotions is the key to trading. The disciplined trader - regardless of profit or loss - comes back to trade another day. A great intellect, the ability to take on risk, or even a sense that you're somehow 'lucky' mean nothing without discipline. For a trader, discipline means the ability to devise a trading plan, execute according to that plan, and to never deviate from that plan.

    3. Know yourself.

    Do you break out in a cold sweat at the mere thought of risking something - such as your own capital? Do you think of trading like 'gambling,' a long shot to make a million? Or can you handle risk in a disciplined fashion, knowing how much is 'too much' for both your capital and your constitution?

    Trading is not for everyone. If risk makes you ill, on the one hand, or if taking a risk brings out the recklessness in you, then trading is probably not for you. But if you can handle risk with discipline, then perhaps you can find a vocation or avocation as a trader. Only you can answer that question.

    4. Lose your ego.

    No matter how much success you enjoy as a trader, you'll never outsmart the market. If you think you can, you're in for a very humbling experience. The market rules, always, and for everyone.

    You need to silence your ego in order to listen to the market, to follow what your technical analysis is indicating - and not what your intellect (and your ego) think should happen. To trade effectively, you need to put yourself aside. At the same time, you cannot be so emotionally fragile that unprofitable trades shatter your confidence. Don't be crushed by the market, but don't ever think you've mastered it, either.

    5. There's no such thing as hoping, wishing or praying.

    I've seen too many traders staring panic-stricken at the computer screen and begging the market to move their way. Why? Because they have lost their discipline and allowed what was a small loss to turn into a much bigger one. They keep hanging on, hoping, wishing and praying for things to turn around. The reality is on the screen. When the market hits your stop-loss level (the price at which you'll cut your losses at a pre-determined level), get out.

    6. Let your profits run and cut your losses quickly.

    When the market goes against you and you hit your pre-determined stop, exit the trade. Period. Exit when the loss is a small one. Then reevaluate your strategy and execute a new trade. Keeping your losses small will keep you in the game. Profits take care of themselves, as long as you execute according to your plan. When you place a trade, know in advance where you'll exit for a profit. When the market reaches that level, exit the position. If your technical analysis tells you the market still has some room to move, then scale out of the position. But execute according to your plan. Remember, you'll never go broke taking a profit.

    7. Know when to trade and when to wait.

    Trade when your analysis, your system and your strategy say that you have a buy or sell to execute. If the market doesn't have a clear direction, then wait on the sidelines until it does. Keep your mind on the market, but keep your money out of it.

    8. Love your losers like you love your winners.

    Losing trades will be your best teachers. When you have a losing trade, it's because of some flaw in your analysis or your judgment. Or perhaps the market simply didn't do what you thought it would. When you have a losing trade, something is out of sync with the market. Examine what went wrong - objectively - then adjust your thinking, if necessary, and enter the trade again.

    9. After three losing trades in a row, take a break.

    This is not the time to take on more risk, but rather to become extremely disciplined. Sit on the sidelines for a while. Watch the market. Clear your head. Re-evaluate your strategy, and then put on another trade. Losses can shake your confidence and tempt you to become emotional (fear/greed) But if you take a break, you can gather your wits and regain your composure more quickly than if you become very emotional and angry at yourself and the market.

    10. The unbreakable rule.

    You can break a rule and get away with it once in a while. But one day, the rules will break you. If you continually violate these 'commandments' of trading, you will eventually pay for it with your profits. That's the unbreakable rule. If you have trouble with any of them, come back and read this one. Then read it again.
     
    amitrandive and ManiGandan like this.
  3. kumar_b_s_99

    kumar_b_s_99 Active Member

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    Superb Collections. Well Done
     
  4. ivanboesky

    ivanboesky Active Member

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    Thanks Kumar.
     
  5. anilpalan

    anilpalan New Member

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    Dear Ivan,

    Please advise which master's rules do you prefer if given a priority


    anilpalan
     
  6. ivanboesky

    ivanboesky Active Member

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    Anil,
    Tough choice!! There are a lot of overlaps between the rules of different masters. But if I have to pick just one, I would go with Larry Williams. Trading is very very emotional.... so my preferred trading methodology is to design mechanical trading systems, backtest them rigourously, and then trade them, thus eliminating greed and fear.
     

  7. anilpalan

    anilpalan New Member

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    I agree with you and I also found Larry Williams advise appropriate.
    Thanks for your active interest in parting knowledge with other members. Please keep it up.

    anil palan
     
  8. scorpio155

    scorpio155 Member

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    10. Don't kid yourself.

    Do not be fooled by your own excuses. Measure your investment performance honestly and regularly and if, over a year or so, you find that you are not consistently beating the market, delegate to an expert manager or invest in a unit trust or tracker fund and use your surplus time and energy elsewhere.


    -- this one was really nice. I guess very difficult to follow by me. We always want to trade even if we know we are not above the market.
     
  9. Saint

    Saint Banned

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    Hi Ivan,

    Really great thread,my friend......I hope you keep it going as and when you come across more wisdom.

    Wish this thread was in the Wisdom section though,.....sad to see it getting buried over here.

    And also surprised that it's yet to be rated......glad to be the first.Excellent work,Ivan,and keep 'em coming.

    Saint
     
  10. pranayd

    pranayd Member

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    Hi Saint,

    Good to see you back. Hope you have sorted out everything pending.

    Didn't know these threads are supposed to be rated:eek: ...have searched and rated it. BTW, I dont look at the ratings while reading the threads (I dont think anyone here does). I just read and assimilate all the wealth of knowledge that is poured in here:D :D

    Ivan, do keep them coming for the benefit of people like us who are in dire need of such words of wisdom.

    Cheers,

    Pranay
     
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