12 RULES FOR
SUCCESSFUL TRADING
“If you can
not follow a rule, do not begin speculating or
investing,
as you are sure to lose.” This is the
common sayings I heard from Professional Traders and Investors in Wallstreet , : “Its all
about following rules”; One must Learn to adhere strictly to a rule or do
not follow it at all. To
be successful in Trading and the
financial Markets one really requires
sheer determination, discipline , patience and the right knowledge and tools.
On my own
experience – “I do not made this rules but I have been following this rules in my years in trading, and I found it very effective”.- if I loose a trade, I am sure I have broken one of this rules.
The
following rules should be carefully studied and applied
in your
trading and I would recommend this following rules of thumb:
1ST: CAPITAL REQUIRED
You would
not try to run an automobile and start out
to travel
several hundred miles unless you knew how much
gasoline it
required to run a given number of miles. Yet,
you go into
speculation without knowing one of the most
important
things, -- the amount of capital required to succeed
and make
speculation a business.
Do not try
to get rich in a few months or a year. A man
certainly
should be satisfied if he can acquire a competent
fortune over
a period of ten to twenty years. Often we have
one year
when a man with nerve and knowledge and a small
amount of
capital can make a fortune. I have been able to
pile up
enormous profits in a short time by pyramiding, but
this can not
be done continuously and I do not claim to be
able to do
it. What I am trying to teach you is a safe, sure
way, which
will yield more profits than any other business
on earth if
you will only be conservative and not make speculation
a wild gamble.
A man may go
into business and lose all of his money
and then
years pass before he has another opportunity to
make a large
amount of money in that or any other business.
Yet, in the
speculative markets opportunities return every
year,
provided a man has studied enough to see them when
they appear.
The chances for gain are so unusual and so
many great
opportunities do come in Wall Street that the
average man
gets greedy, gambles and does not wait between
times for
the real opportunity.
People
expect more profits in speculation than in any
other
business. A man who would be satisfied with a return
of 25 per
cent per year in a business is not satisfied if he
doubles his
capital every month in Wall Street. Many people
are
satisfied with 4 per cent in a savings bank, but when they
come to Wall
Street and put up $1,000.00 they expect to
make
$1,000.00 in two or three weeks. They are the people
who buy on a
10-point margin and always lose.
Do not
expect the impossible in speculative markets.
Great and
unusual opportunities, when you can start at the
bottom or
top of a move, pyramid and make a fortune, occur
every few
years. Two or three times each year, when stocks
are at the
extreme high or low, there are opportunities for
making 10 to
40 points’ profit.
You may
think an average of 1/2 point a day, or 3 points
a week, is
too small a profit to bother with. Yet, in 52 weeks
it would
amount to 156 points, or $1,560.00 a year, on a
10-share
trade. Make speculation a business, not a gamble.
Go into it
to stay, not to gamble all on a few trades, lose and
quit. Be
patient. If you can double $1,000.00 the first year
and keep
doubling it for ten years, you would have over a
million
dollars.
Active
leading stocks make major moves of 10 to 40
points three
to four times a year. If you are able to catch
half of
these major moves on conservative trades, your
profits will
be enormous. Do not try to catch all the minor
fluctuations.
The inside manipulators themselves do not get
one-tenth of
the minor fluctuations. Why should you expect
to?
In beginning
to trade in stocks the most important thing
to know is
the amount of capital required. Many traders
make the
mistake of thinking that about 10 points margin
is enough.
Nothing is more erroneous. The man who starts
trading on
10 points’ margin is gambling, not even making
safe,
speculative ventures. When you start to trade use your
capital as
you would in a business, and in such a conservative
way that you
can continue.
For trading
in stocks selling at $100.00 per share or
over, you
should have $5,000.00 for each 100 shares you
trade in;
$2,500.00 for trading in stocks selling over $50.00;
$1,500.00
for stocks selling around $25.00; $1,000.00 for
stocks
selling at $10.00 to $15.00. This amount of capital
is not to
margin stocks and let them run against you 10 to 30
points. It
is to be used to make a large number of trades
and pay
small losses when they occur. You should always
limit your
loss on each trade to about 3 points and never
more than 5
points.
If you have
only $300.00 to start trading with, when you
buy or sell
a stock, place a 3-point stop loss order on it. This
will allow
you to make ten trades on your capital. Suppose
you make
five consecutive trades and lose, your capital will
be half
gone, but if on the next trade you are right and
make
15-points’ profit, you will regain all of your losses; or,
if you make
three trades with 5 points’ profit, they would
wipe out the
losses of five trades with 3 point losses on each.
2ND: LIMIT YOUR RISK
A strong
will power is just as essential as plenty of
capital. If
you have not the firmness, will power, and determination
to protect
every trade with a stop loss order, do not
start
trading, for you will fail.
I have often
heard traders say “If I place a stop loss
order at a
certain point the market is sure to catch it.” Yet
they realize
afterward that the stop loss order being caught
was the best
thing that could happen to them. There is
nothing
better than getting out quickly when you are wrong.
The man who
refuses to get out when he is wrong usually
stays until
his money is gone and the margin clerk sells him
out. A lot of people do not know how
to place a stop loss
order
on a trade when they make it. A stop loss order
is an
order given
to the broker that becomes a market order when
the stock
reaches the price at which it is placed. For
example:
We will
assume that you buy 100 shares of U. S. Steel
at 106. You
feel that 2 points is enough to risk on the trade
And that if
it declines to 104 you would sell it out. It is not
necessary
for you to sit in a broker's office and watch the
ticker until
Steel declines to 104 and then get up and tell
the broker
to sell 100 Steel at the market. When you buy
the stock
simply give your broker an order reading as follows:
Sell 100 U.
S. Steel at 104 Stop G. T. C.
which means “good
till cancelled.” Now, suppose that Steel
declines to
104. When it reaches this price, your broker
sells 100 at
the market. He may get 104 for it or he may
get 103 7/8
or 103 3/4, but you know that when it reaches this
price your
stock will be sold. A broker can not guarantee
to sell your
stock at the limit of your stop loss order, but he
does sell it
immediately at the next best price after your stop
loss order
price is reached.
Suppose that
you sell U. S. Steel short at 1o6 instead of
buying it,
and that you want to protect yourself against loss.
You give
your broker an order to buy 100 U. S. Steel at 108
stop G. T.
C. If it reaches this price, he buys in the stock.
If your stop
is not reached and the market goes in your
favor, you
must then cancel your stop loss order when you
close out
your trade with a profit. You can, of course, give
a stop loss
order good for one day, one week, or any specified
length of
time, but the best way to place the order is G. T. C.;
then you do
not have to worry about it.
3RD: OVERTRADING -- THE GREATEST EVIL
Overtrading
is the cause of more losses than anything
else in Wall
Street. The average man does not know how
much capital
is required to make a success and he buys or
sells more
than he should. Therefore he is forced to get out
of the
market when his capital is nearly exhausted and probably
misses
opportunities for making profits. Make up your
mind how
much loss you can afford before you make a trade
and not
afterward.
Stick to
small quantities. Be conservative. Do not overtrade,
especially
at the bottom or top of long moves. Fortunes
are lost
trying to catch the last 3 to 5 points in extreme
moves. Keep
cool. Avoid getting overconfident at tops
and bottoms.
Study your charts carefully and do not allow
your
judgment to be influenced by hope or fear.
Many a
trader has started out trading in 10 shares and
made a
success because he started near top or bottom; then
when the
market had reached extreme, he began trading in
100-share
lots and lost all of his profits and capital too,
because he
violated the conservative principle which helped
him to make
a success.
If you make one
trade and it starts to go
against you,
you
are wrong. Then why buy or sell more to average a
loss?
When things are getting worse, day by day in
every
way, why do
your best to make them get worse in every way?
Stop the
loss before it is eternally too late. Every trader
should
remember that the weakest point of all is overtrading,
and
the next, failing to place a stop loss order, and the third
fatal
mistake of all, averaging a loss. Eliminate these three
mistakes
and you will make a success. Cut short your losses,
let your
profits run, pyramid or increase your buying or selling
when the
market is moving in your favor, not when it is
going
against you.
Remember
that wild, active markets are brought about
by feverish
manipulation, and that they increase the imagination,
exaggerate
your hopes, and take away all sense of
reason and
proportion. Therefore, in extreme markets try
to keep a
cool head. Remember that all things come to an
end, and
that a train going 6o miles an hour will cause a
greater
smash-up if it leaves the track than one traveling
5 miles an
hour. Therefore, in a wild runaway market,
jump before
she bumps, for you will never be able to get
out once the
crash comes. When everybody wants to sell,
and no one
wants to buy, profits run into losses fast.
The great
bull market of 1919 shows plainly what happens
when
everybody gets crazy bullish, and can see no top
in sight.
This bull market reached a point where everybody
was bullish
and buying, and no one on the outside dared to
sell short.
It was one of the fastest markets in history. And
what
happened? When the “bubble busted” in the early
days of
November and the decline started, some stocks were
off 50 to 6o
points in two weeks’ time, and the profits made
during the
whole campaign that year were wiped out in ten
days. The
man who waited for a rally to get out on after
the move
started down never had a chance, because everybody
was trying
to get out, and the further prices declined,
the more
people there were forced to sell out, with the result
that the
market got weaker as it declined lower.
4TH
: NEVER LET A PROFIT RUN INTO A LOSS
More traders
are ruined by violating this rule than any
other,
except overtrading. When you buy or sell a stock
and it shows
you a profit of 3 to 4 points, what is the sense
or reason
for ever risking any more of your capital on it?
Place a stop
loss order where you will get out even or better;
then you
have all to win and nothing to lose. If the trade
continues to
move in your favor, you can follow it up with
a stop loss
order.
People often
buy or sell a stock and it shows them a good
profit, but
they are “hoggish,” expect more, hold on and
hope and let
it run into a loss, which is very poor business,
and the man
who follows it will not succeed in the end. Always
protect your
principal in every way possible.
5TH: DON’T BUCK THE TREND
The way to
make money is to determine the trend and
then follow
it. When you are in a Bear market and the
long trend
is down, it is always much safer to wait for rallies
and sell
short than to buy. If you are in a big Bear market
where stocks
are going to break from 50 to 200 points, you
can miss the
bottom several times on the way down and lose
all of your
capital.
The same
applies to a Bull market. You should never
sell short
on an advancing market. It is better to wait for
reactions
and buy than to try to pick tops for selling. Big
profits are
made by going with the trend and not against it.
One of the
most vital and important things for either an
investor or
a trader to learn is to take a loss and take it
quickly.
When you see that you are wrong there is no use
putting up
more margin and holding on and hoping. If you
take a small
loss quickly and get out of the market, your
judgment
will be much better and you can see an opportunity
to get in
again and make profits.
6TH: WHEN IN DOUBT GET OUT
When you buy
or sell a stock and it does not act right
immediately
or start to move in your favor within a reasonable
length of
time, get out of it. Your judgment gets worse
the longer
you hold on and hope for the market to go your
way, and at
extremes you always do the wrong thing. It is
much better
to take a quick loss of 2, 3, or 5 points than to
hold on and
hope and eventually take anywhere from a 10
to a 50-point
loss.
Stocks are
not going to stop going up or down once they
start just
for your benefit. Always remember what Jim
Keene said: “If
stocks won’t go your way, you must go their
way.” Always
go with the tide; never buck it. If you were
on a
railroad track and saw a train coming at 6o miles an
hour, would
you stand there and hope that the train would
stop before
it hit you, or would you hope that maybe you
could knock
it off the track? Of course you wouldn’t. You
would get
out of the way and do it quick. You should do
the same
thing in the stock market -- Get out; let them go
by, or get
aboard and ride with them.
7TH: TRADE IN ACTIVE STOCKS
Always
confine your trading to standard, active stocks
listed on
the New York Stock Exchange. Outside stocks
have spurts,
but the active leaders yield more profits in the
long run.
Stocks traded in on the New York Stock Exchange
always have
a good market and you can get in and out when
you want to.
Ninety per cent of the unlisted and curb stocks
disappear
sooner or later. Leave the pups, cats and dogs,
and mining
stocks alone.
The same
group of stocks over a long period of time do
not remain
leaders. Changing conditions in the country cause
certain
groups to lead for a time, then become laggards,
while new
groups become public favorites and leaders.
It is the
same thing with individual stocks of the different
groups. As a
rule, a stock that becomes a favorite and a
leader will
continue active anywhere from five to ten years.
After this
period of time, it will pass into the hands of
investors
and its activity will cease. Fluctuations will become
narrow
because investors do not jump in and out every day.
They hold
for a long time, and finally when they do start to sell
out for some
good reason, or get scared, then the old time
leaders
become active on the down side until liquidation has
been
completed.
Of course,
the big money is always made in trading in
stocks that
fluctuate over a wide range. For this reason,
you must
always be on the lookout for a new leader that
will give
opportunities for making big profits. Be up-to-date,
keep up with
the new stocks as they are listed, watch their
development,
and you will be able to pick the new live leaders
and discard
the old, inactive stocks. Big money is made, not
from
dividends but from fluctuations, if you know how to
trade
quickly. That is why it pays to trade in active stocks
that make a
wide range. If you have to take a loss in stocks
of this
kind, you can make it back very quickly, because
opportunities
occur often.
8TH: EQUAL DISTRIBUTION OF RISK
There is an
old saying, “Never put all of your eggs in
one basket.”
And in the stock market it is a very good rule
to follow.
If you are in position to do so, select as many as
four or five
stocks, one from each of the different groups.
Buy or sell
in equal amounts.
Divide your
capital up so that you can make seven to ten
trades with
it. Suppose you have $5,000.00. Trade in 100-
share lots
and limit risks to 3 to 5 points. You would be
able to
stand five or six consecutive losses and still have
capital to
work with. By letting your profits run one big
profit will
often wipe out four or five small losses. But, if
you take big
losses and small profits, you have no chance of
gaining in
the end.
If you can
only trade in 50 shares, take 10 shares each
of five
different stocks. Place stop loss orders on these
trades from
3 to 5 points away, according to the indications
on the
stocks you are trading in. Two of these stocks may
go against
you and catch your stop while the other three
may not.
This will leave you part of your holdings and if
they move in
your favor, will make back your losses on the
others and
show profits.
If you get
into the market right and with a reason,
records show
that it very seldom occurs that you would get
the stops
caught on all of your stocks. You may not always
make as much
profit as you would to trade in one or two
of the
active, fast moving stocks, but you will be safer. That
is my aim:
To teach you safety; help you protect yourself
and cut
short your losses in every possible way and let your
profits run.
9TH: FIXING A PRICE OR POINT TO BUY OR SELL
The majority
of people have a habit when they buy or
sell a
stock, of fixing in their minds a certain figure at which
they expect
to take profits. There is no reason or cause for
this. It is
simply a bad habit based on hope. When you
make a
trade, your object should be to make profits and there
is no way
that you can determine in advance how much profits
you can
expect on any one particular trade. The market
itself
determines the amount of your profit, and the thing
that you
must do is to be ready to get out and accept a profit
whenever the
trend changes and not before. Remember the
market is
not going to act to please you or go to certain
figures just
because you want to buy or sell at those figures.
Many traders
lose big profits by fixing the price at which
they intend
to sell. Stocks sometimes go within 2, 3 or 4
points of
their selling price and start to decline. They hold
on and hope.
Just because it does not reach the point that
they have
fixed in their minds, they often hold on and hope
until they
lose all the profits and take a loss, refusing to see
that the
trend has changed. Hope will ruin any man who
follows
it in the stock market. To succeed you must face
facts,
and facts are often cold and stubborn
and do not agree
with your hope,
but you must accept them for your own good.
In nearly
every bull or bear campaign in the market the
general
public gets certain fixed points in their heads where
stocks are
going to make tops or bottoms. The newspapers
talk about
certain favorite stocks going to 100, 125, 150 or
175.
Everybody gets the idea that these prices are going
to be made
and they become “hope” prices, but are never
realized.
To
illustrate this: During the fall of 1909, when the
bull
campaign in stocks was at its height and Steel common
had advanced
to around 90, the newspapers began to talk
of 100 for “little
Steel.” The public all got the idea in their
heads that
Steel was sure to make 100 and that was the place
they were
going to sell and take profits. The writer predicted
that Steel
would advance to 94 7/8 and no higher, which it
did, and he
sold out, while the “hope” crowd held on and
eventually
took losses, for U. S. Steel declined eventually to
38. Several
years later when it did reach 100, it was the
place to buy
and not to sell, for it immediately advanced to
129 3/4.
The man who
tries to get the last point or the top or
bottom
eighth generally loses all his profits. You do not
have to get
in at the bottom and out at the top to make big
money. All
you have to do is to look over the list of the active
leading
stocks and you will find that they make moves of from
50 to 150
points between bottom and top every few years.
Then, if you
can get in after the stock has advanced 10 points
from the
bottom, and sell out within 10 points of the top,
you
certainly will be able to accumulate plenty of profits.
Never get
the idea in your head
that you can or will hold
a stock
until it goes your way. This is nothing but pure
stubbornness
and is not based on
any sound logic or reasoning.
In case of
doubt, get out. Do not hesitate. Delays
are always
dangerous. Do as the insiders do: If they can
not get what
they want, they take what they can get; if the
market will
not take what they have to offer, they offer what
it will
take; if the market will not go their way, they go its
way. A wise
man changes his mind, a fool never.
10TH: WHEN TO TAKE PROFITS
Never close
a trade just because you have a profit. The
time to hold
on is when the tide is running in your favor.
When tempted
to close a trade just because you have a profit
ask yourself
the questions: “Do I need the money?” “Is the
move over?” “Do
I have to sell?” “Why should I take
profits?”
Look at your
charts; do what they tell you. If they do not
show a
change in trend, wait. Protect profits with stop
loss order,
but do not take a profit too soon. This is just
as bad as
taking a loss too late. Patience to hold on when
you are
right and nerve to get out quickly when you are
wrong will
make a success.
11TH: ACCUMULATE A SURPLUS
A surplus
must be accumulated before you increase your
trading
quantities. Margins are not to hold on with, only
“lambs” do
that. If big risks are required, do not make
the trade.
Wait for an opportunity when you can buy or
sell and
place a stop loss order 3 to 5 points away. It is
financial
suicide to take big losses when they can be prevented.
You must not
expand until after you have made profits.
Every
important business concern carefully creates a surplus
and is proud
to publish it. No business is run without a loss
at some time
and a speculator or investor must expect losses.
Therefore,
he must create a surplus out of which he can pay
losses and
still continue to trade.
In very
active markets, when trading in high priced
stocks, as a
rule it does not pay to take a loss amounting to
more than
two consecutive days’ fluctuations. If stocks go
against you
two days, they are likely to go more. Take your
loss out of
your surplus and leave your capital unimpaired
and wait for
another opportunity.
12TH: BUYING FOR DIVIDENDS
A great many
people make the mistake of always wanting
to buy
stocks that will pay dividends. Do not buy stocks
just because
they pay dividends, nor sell them because they
do not.
Often people hold stocks because they continue to
pay big
dividends, only to see their capital half or more
wiped out;
then the dividend is cut or passed altogether.
Look to the
protection of your capital, not for dividend
returns.
Trade for points of profit, not dividends. Fluctuations
yield more
money than dividends and you will be able
to tell when
stocks are being accumulated or distributed for
an advance
or a decline.
If a stock
is selling very low or out of line according to
the dividend
it pays, there is probably something wrong and
it is a
better short sale than a purchase. If a stock is selling
very high
and pays no dividend, there is a reason for it and
you should
not sell it short. Probably it is going to pay a
dividend or
it is in a very strong position. Otherwise it
would not be
selling at a high price.
Manipulation
for a time will force stocks above or below
their
intrinsic value, but in the end Supply and Demand
govern the
course of prices, and values are based on these
factors. I
intend to teach you how to tell when Supply and
Demand show
the place where you should buy or sell.
The word “dividend”
means a division of profits or earnings,
but often
when you buy Curb or mining stocks the word
means “divy,”
or that you divide up your capital with the
other fellow and later lose
all.
Except from the book - Truth of the stock tape. By W.D Gann
I hope this informations helps our Newbies, Amateurs and a refresher
to Professional Traders alike...Goodluck in your Trading!
-PinoyGtrader
