Marcus's collected quotes

[marcus]

Stop loss orders are not 100 per cent guarantees of trading safety just as seat belts are not 100 per cent guarantees that one will not sustain injury in a road accident. This is hardly an argument against stop-loss orders or seat belts, however. The evidence supporting the use of both stop loss orders and seat belts is overwhelming!

Mr. Gann was adamant that stop-loss orders should be an integral part of a traders reason for taking a trade. He left no doubt about his views on this subject by saying:

Rule 2 Use stop loss orders. Always protect a trade when you make it with a stop loss order 3 to 5 points away.

feel that I cannot repeat too many times the value of using stop loss orders because it is the only safety valve to protect the investor and trader. An investor or trader will place a stop loss order and one time out of ten the stop will be caught at the exact top or bottom. After this he always remembers this and says, "If I place a stop loss order, they will just go down and catch it, or just go up and catch it and then the market will go the other way." So he does not use the stop loss order the next time. The trader forgets the nine times out of ten the stop loss order was right and would have prevented big losses by getting him out at a time when the market was going against him.

 

[marcus]

Rule 3 Never overtrade. This would be violating your capital rule.

There are two forms of overtrading. The first is when Rule 1 is violated that is, when more than 10 per cent of your trading capital is placed at risk in the market.

The second form of overtrading involves taking too many trades in a relatively short period of time. This form of overtrading can:

* Expose too much of one's account to the market;

* Result in excessive transaction costs;

* Result in the stress associated with making numerous decisions under pressure;

* Lead to excessive work for a reduced reward.

 

[Saint]

Thanx as always,Marcus......this thread,Ivan's and CV's Wisdom Dump,all a delight!

Saint

 

[marcus]

Rule 4 “ Never let a profit run into a loss. After you once have a profit of 3 points or more, raise your stop loss order so that you will have no loss of capital.

It is just as important to protect your profits as it is to protect your capital. Once you have a profit on a trade, you should never let it run into a loss. There are exceptions to this rule, and the amount of the profits should determine where stop loss orders should be placed. The following is about the safest rule that I can give you to use under average conditions. When a stock has moved 3 points in your favor, place a stop loss order where you will be even if it is caught. In very active high-priced stocks, it will even pay you to wait until the stock shows a profit of 4 to 5 points; then move your stop loss order up to where you will have no loss should the market reverse. In this way, you will have reduced your risk to a minimum and the possibility of profits will be unlimited. As the stock moves in your favour, continue to follow up with a stop loss order, thus protecting and increasing your profits.

Clearly, some common sense needs to be used when applying this rule. Active, higher-priced stocks need to be given more room to move than less volatile, lower-priced stocks.

 

[marcus]

Rule 5 Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts.

Mr. Gann defined an up trend as a market making higher swing tops and higher swing bottoms on a swing chart. Similarly, he defined a downtrend as a market making lower swing tops and lower swing bottoms.

 

[marcus]

Rule 6 When in doubt, get out, and don't get in when in doubt.

Just as it makes sense to trade only when a clear signal has been given, it also makes sense to get out when in doubt. A trend cannot be progressing well if there is real doubt.

 

[marcus]

Rule 7 Trade only in active stocks. Keep out of slow, dead ones.

This is one of the cardinal rules of Luivermore's system as well

 

[marcus]

Rule 8 Equal distribution of risk. Trade only 4 or 5 stocks, if possible. Avoid tying up all of your capital in any one stock.

I could go over the history of Scales, Livermore, Durant, Ryan and the balance of the great men of Wall Street, and in analyzing their trading, the one weak point would be found in all of them, they diversified too much. Did not speculate in one commodity or a few special stocks, but spread all over the board. The result was that they had too many irons in the fire and when one thing started to go wrong and begin to lose money, they would invariably get out of stocks and commodities in which they were making money and keep those that were going against them.

He also stated:

Tape reading requires patience, and the essence and value of it is concentration. There is no such thing as a man being born with a mind that can concentrate on 10 things at one time, much less 700. Then success depends upon selecting a few stocks and concentrating upon them.

Once again a common rule with Livermore's system there are many traders and investors who take this to the extreme and who accumulate 30 or more stocks. Such a large number of stocks can also be hazardous to the wealth creation process, as diversification over such a large number of stocks will make it impossible to focus on the strongest stocks, thus diluting the proportion of very strong stocks in the portfolio.

 

[marcus]

Rule 9 Never limit your orders or fix a buying or selling price. Trade at the market.

There is another type of investor who always gets out of the market too late, because when the big advance comes, he holds on and hopes that the stock will go higher than it ever does. It never reaches the price at which he wishes to sell. The first quick break comes, and he decides that if the stock advances again to its former high level, he will sell out. The stock does advance but fails to get as high, then declines still lower, and he again fixes a price in his mind at which he will sell, but this is only a "hope" price, and he sees the stock drift lower and lower until finally, in disgust, he sells out after the stock has had a big decline from the top.

Too many traders have missed excellent trades in strongly trending stocks, or have bought or sold at ridiculous prices, because they were inflexible about their buying or selling price. Strongly trending stocks, by definition, are moving quickly. Therefore, to limit a buying or selling price in such stocks can mean accepting a very poor trade entry or exit price after one has had to €˜chase€™ the market.

This rule applies more and more as the average length of ones trade increases. Limits can be of useful to very short-term traders, particularly those who exit their trades when targets are hit.

 

[marcus]

Rule 10 Dont close your trades without a good reason. Follow up with a stop loss order to protect your profits.

The best trader in a group will always be the trader who is the most skilled at exiting his or her trades. Amateur traders tend to let their losses run and cut their profits short. Clearly this is the opposite of what they should be doing.

It is the trades where we let our profits run which gives us our biggest profits. If one only trades in strongly trending markets, the traders aim should be to look for reasons to stay in the trade for as long as it continues to trend strongly. Sadly, too many traders search for, and inevitably find, many reasons why a market will stop at a particular price or on a particular day. They then over-tighten their stops or exit at these points, only to see the market power on to much greater heights.