***Trading rules****. Haven't read them in depth yet. Perhaps they could help somebody.
Having rules is one thing and complying with those rules is another.
tradingtactics.com
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Rule 1.
If you are a beginner or have no market profits to your credit, trade only in an imaginary way rather than with actual money; if after reading this book, you think that you have learned a great deal, prove it to yourself by buying and selling stocks but without money. Enter every purchase in a ledger, as though you had given an order to your broker. Add a half point for commission and taxes. Execute your buying and selling at a time you think most appropriate, as though you were playing for real money. Neither fool yourself nor your ledger. “Know thyself and unto thyself be true.” After a few months of this type of trading, strike a balance sheet. Learn how many times you were right and how many times wrong. If the times right exceed the times wrong (not how much money you won or lost), go ahead and trade with money, but not with very much at the beginning. Ten shares are quite sufficient and if you profit, confidence in yourself will be built up. Thereafter you may increase your trading within your means.
Rule 2.
Should you trade without first laying the foundation by a few years study of the scientific aspects of the market, you might as well set your mind to the inevitable result that a good part of your capital will be lost before you succeed. (That is Wall Street's usual charge for “breaking” you in.) It is either by practice or study that you will learn how to trade. Naturally, in angling for experience, you will make plenty of mistakes, especially so if you are inadequately prepared. Therefore, if you have, let us say $10,000 at the time of your initiation; figure that you may lose a good part of it before you will make much headway. That is why I strongly urge preparatory study and training and to trade only in ten share lots in the beginning. Learn the market at the lowest possible tuition fee. You have time to play in 100 or 1,000 share lots after you have learned how to trade; and that may mean a few years. Should you start with 100 or 1,000 share lots, you may not have enough money left after you have learned. So start low and grow as you go along. Still better study first and trade later.
Rule 3.
Do not deal in inactive stocks. Trade in live ones.
Rule 4.
Do not hold on to a stock if the trend is against you. You may be able to buy more stock later for the same money.
Rule 5.
Do not be overly enthusiastic about your prospective profits. They may never come, or when they do may disappear because of “pride of opinion” or “hope.” Hope is your worst enemy in the market.
The public usually observes its stocks dropping, hoping against hope that they will advance or make a comeback. But this rarely happens soon enough.
Rule 6.
Do not trade constantly in low-priced shares. On higher-priced stocks like U. S. Steel or Chrysler, the chances of profiting quickly are enhanced. Low-priced stocks at times allow for a greater percentage on investment, but higher-priced stocks have a faster turnover.
Rule 7.
Never cover a margin call. Why put good money after bad? You are not saving anything by putting up “good” money on “bad”
margin. In the final analysis the value of your stock at your broker's is what it can be sold for at market, at the present moment. You are not helping your situation any, because, if your stock dropped 40% or 50% it may drop still more. You must admit that if you are called upon to put up more margin money, it means either that you have bought poor stock, or that you bought at the wrong time. In either case, the additional mistake of “hanging on” until the margin bugle blows is fatal. You should have liquidated your purchase before then. Start trading anew by buying the right stock at the right time.
(If someone owed you money and you could not collect, would you lend him more money?)
Rule 8.
If you have been “unlucky” in the market, do not attempt to trade with the thought of making up your losses. Forget about them. As a matter of fact, if you have been unlucky for any length of time, the best thing to do is to get away from the market for a while. Think over what you have done which caused these losses. Perform a post-mortem. When your mind feels rested, and you have forgotten about your losses, you can begin again, but not with the view of making up your losses. Trade with the view of making money.
Rule 9.
If you sustain losses on, let us say, 100 shares, do not trade in 200 or 300 share lots in order to make up your previous losses in a hurry. You may have another and bigger loss on your hands than before. Just continue trading in 100 shares as you did on the losing side. Never try to take revenge on the market. You will never succeed in that frame of mind. Let me repeat: trade in the market to make money and because it is ripe for a trade. Otherwise, it will lead you into taking undue chances and cause additional losses.
Rule 10.
Do not jump around from one stock to another thinking the grass is greener in the next pasture. It is not. It is better to trade in a few stocks, learning their habits well in the meanwhile.
Rule 11.
Remember that it takes years to learn how to trade properly and to learn how to interpret market action. Do not expect to show good results in one week or one year. It takes practice to become perfect.
Rule 12.
Do not rely exclusively on the opinion of any one advisory service. Learn to be guided by your own opinions, based on knowledge and study.
Rule 13.
Do not ask your broker to give you advice. A good broker takes instructions arrived at by your own judgement.
Rule 14.
Do not rush in to buy when the market has advanced. You will be buying at top prices. Wait until a reaction sets in then buy.
(Those who buy on reactions sell out on advances. Those who buy on advances sell out on reactions.)
Rule 15.
Never ask advice of anyone. Do not assume that some other trader knows more than you do. If you follow his advice you may as well give him your money to trade with, which, of course, you would not do. Then why ask for advice? Learn to do your own thinking through study. Develop sufficient confidence in yourself to rely on your own judgement. Solve your own problems first and in time, you will be solving other peoples' problems too.
Rule 16.
Do not let anyone influence you once you have made a decision to buy or get out. Act according to your convictions.
Rule 17.
Do not trade on “tips” given by friends, your broker, or by rumours flying around broken' offices.
Rule 18.
Change your position quickly if you see that you are wrong. It is better to take a small loss than to let your losses increase. When you buy for a ten point rise, and the stock does not do well, close out at a small profit or loss. Do not hold on to a stock just because you bought it for a profit. Be proud of your ability to catch mistakes in time.
Rule 19.
Do not buy a stock because the price seems low. It is only “cheap” if you sell it at a higher price. Profits are not the result of price, but of the time element. There are times when a stock at $75 is “cheap” and other times when the same stock at $25 is “dear.” To be successful
it is important to know when to buy. The price you pay at the “right” time is no criterion so long as you can sell at a higher price.
Rule 20.
Do not gamble. Speculation is not gambling. A gambler is one who does not know what will follow, and therefore takes chances. A speculator is one who knows what is ahead. A gambler possesses little knowledge and bases his trading on luck. A speculator, trading according to laws and rules, succeeds three times out of five, and therefore needs no luck.
(If you must satisfy your gambling instincts, play solitaire; it is much cheaper.)
Rule 21.
Do not over-trade your capital. Always trade with sufficient margin so that your broker cannot sell you out. Do not take advantage of more than half the legal margin allowance. During uncertain trends, do not utilise margin privileges, and use only part of your capital.
Rule 22.
Do not trade with someone else's money, whether your broker's or your friend's. Do not trade with money which you can ill-afford to lose. Before attempting to trade, make certain that all your obligations are taken care of.
Rule 23.
If you attempt to make money in a hurry, you will not succeed. There is money in Wall Street for you. If you do not get it to-day, it is there for you a week or month hence. You have a better chance to get it, however, if you wait. Trade when the TIME is ripe. (Patience is a prime requisite for successful trading.)
Rule 24.
Do not be discouraged if you made mistakes. The best traders make them. But learn to profit from those mistakes and try not to repeat them. Attempt to find out the underlying cause. When you have thoroughly reasoned out what you did or failed to do, resolve not to repeat the same error again. Do not place faith in luck. If you think it is luck that makes the market fluctuate, you will never be a successful trader. There are reasons why the market goes up and down, and it is up to you to find them out. (We all make mistakes but only a fool or a weakling repeats them.)
Rule 25.
Be sceptical about any trade that appears to be a dead-sure winner. When you are one hundred per cent certain that you will come out ahead, that is just the time to look about with a critical eye. The market may have many surprises in store for you. (More people get stung by “sure things” than by bees.)
Rule 26.
Do not attempt to “guess” the market. Trade only after you have come to definite conclusions by an analysis of the situation. Do not arrive at these conclusions hastily. Measure every possible angle first, such as fundamental economic and political conditions-the trend, Dow Theory, and the signals from your charts. When these are in your favour, determine if it is the psychological moment to act.
Rule 27.
Bear in mind that the market is in the strongest technical position when it is “weak” with prices down and news gloomy. It is in an extremely weak position when it appears to be strongest, as when prices are up, business booming, and newspapers full of prosperity psychology. Following the theory of cycles, it works out thus: the strong factors have potential weaknesses which must assert themselves sooner or later; forces which are momentarily weak possess potential strength. Following logic, it works out thus: When the market is strong, and the press is filled with rosy prospects (indicating prosperity), the news or happenings which influenced the market to go up has already materialised. Therefore it is most unlikely that the market will go higher. On the other hand, when the market is weak, from the standpoint of price, it is in a position to discount good news which may be in the making.
Remember then that when good news is out, and the market high, the combination of “cause and effect” has completed its mission. Because the news was good the market went up. Likewise, when the market is down the combination of “cause and effect” has reached the end of the effect. Because news was bad the market went down. To profit by stock market action you should buy before the “cause” is known-that is, before news is out. You will then be in a position to realise on the effect to come-namely, higher prices. (Remember what Jesus said about the strength of those who are weak and about the weakness of those who are strong.)
Rule 28.
If you want to come out ahead, do not repeat your mistakes. In that way you will eventually succeed. Remember, also, that the market always gives you a thousand and one opportunities for new errors. So be on guard!
Rule 29.
It is advisable to trade in not more than ten stocks. Study these stocks painstakingly, their actions for months back, their resistance points, and their behaviour, so that you may know exactly what they are capable of doing. Ordinarily, what holds good for the entire market, will hold true for your particular stock. The issues you trade in should be among the best sellers on the Exchange. It is advisable to deal only in those which have a wide market and move rapidly. Select any of the fast leaders for a particular period. At times some stocks have advantages over others, but they are all subject to the same law of supply and demand. There is no reason to trade and keep complete records of a whole series of stocks. Trade in a few which you know intimately. (Remember that the devil you know is better than the devil you do not know.)
Rule 30.
Do not “average” your stock if it goes against you. Do not buy more of the same stock at a lower price if it has already dropped. Close it out instead. (A dried up cow is fit for the butcher.)
Rule 31.
Place your “stops” so that they will be 14 below even figures on a “long” buy, and ¾ above even figures on a “short.” Place your stops below resistance points on a “long” buy and above resistance points on a “short” sale. The study of resistance points on individual stocks and on the Averages is of utmost importance. That mastered, the shore becomes visible from a distance. (Even then they may “gun” for you.) It is therefore more advisable to have “mental” stop-loss orders, and not place them with your broker. Reason it out for yourself. If you trade Chrysler short at 70, and place a stop-loss order at 72¾, why shouldn't Wall Street pick up your stop-loss at 72¾? To them it is equivalent to selling you 100 shares of Chrysler at 72¾. That is certain good business in a declining market. Obviously, you are trading on the short-side because you think that the market will go down. You must therefore assume that your calculations are correct. Otherwise, you would not have traded short. Why then give Wall Street the opportunity of selling you 100 shares at 72%? Certainly you would not buy if you had your choice.
The same reasoning in reverse holds true on a stop-loss placed with your broker in an advancing market. If you are willing to place a stop-loss on a long buy (purchased at 70) at 67%, why shouldn't Wall Street take the stock from you if the market is going up, as you had assumed? Therefore, have a mental picture as to just how much risk you wish to take on each purchase or short sale. When that point is reached, simply sell out. In all probability you would be doing better than “'they.” Do not confuse this procedure with stop-losses placed to protect profits on a stock purchased or shorted. In such cases, place your stop-loss orders with your broker and move them up gradually as the stock advances so as to protect the additional profits which have accrued.
Rule 32.
Success in speculative operations on the Exchange is based on the following: First, on your ability to determine economic and political conditions, not as they are today, but as they will be three to six months hence. Second, on your ability to determine what “they” in Wall Street are doing or intend to do with the stocks they have on hand or with the stocks in the hands of the public.
If, after a thorough study of the situation, you decide that they are interested in buying, then do the same. If you suspect that they are disposing of their holdings, do likewise. Go short if you detect the move at the top. Follow them and you will succeed. Buck them and you wilt fail.
Rule 33.
Begin a trade with the expectation that your profits shall be four or five times your risk. If you anticipate only a two point rise, do not buy. Wait until your analysis shows a possible advance of 8 to 10 points. Then risk two points on a five to one shot. This is much better than a one to one chance. Theoretically, it means that you should trade only on intermediate trends and not on minor trends.
Rule 34.
Money can best be made when buying on the down of a move and then selling close to the top. If you have predetermined by analysis the resistance points on the particular stock you are dealing in, and on the Averages, the possibility of error is limited.
Rule 35. Purchase stocks in the strongest groups only. As a general rule some groups are stronger than others. At times, copper may be strong and foods weak. Trade in the strongest group for a rise. This you determine from the action of the market itself. Stronger groups will advance further or offer more resistance to decline than weaker groups. In each group there are always one or two stocks that do better than the group as a whole. That is the stock you should buy for an upward pull. On the other hand, if you wish to trade the market short, choose a weak group, one that has not been doing well. Select the weakest stock in that group, the one most sensitive to decline.
Rule 36. Trade evenly. Do not buy 100 shares today and 1,000 shares tomorrow. Do not buy more than usual unless you decide to advance your scope of trading. Your percentage of winners or losers will not work out if you vary the amounts continually. For example: If out of ten trades in 100 share lots you are accustomed to have seven winners, and then you sustain a loss on a 1,000 share lot, this will wipe out all your seven winnings. However, if you continue trading in 100 share lots and you have a loss, you still have six winners and only one loser. (Always be in balance.)
Rule 37.
The most important thing to know about the market 15 the “trend.” Do not attempt to trade until you are certain of the direction of the trend by a thorough analysis. Always trade with the trend and not against the trend. If the trend is doubtful, stay out of the market entirely until it is visible, even if it should take weeks or months. You will be well compensated by not trading in a market of which you are in doubt. Money is not made by being in the market on all turns. (In fact that is a good way of losing it.) One or two trades a month by thoroughgoing analysis will net you more than trading day in and day out by guesswork in other stocks, which are in their technical up-move. The study of “technical” positions of individual issues is both vital and interesting.
Rule 38.
Learn to be patient. Guard against hurry-skurry. If you have calculated that your stock will move up a certain number of points and you think that you are cdtrect in your analysis, have the patience to wait. Your opportunity may arrive a few days after you have sold out your stocks at a lower figure. The test of a good trader is the degree of PATIENCE he can muster. (The world might very well have been destroyed in the days of Lot if the good Lord were without Patience. So says the Book of Books.)
Rule 39.
Do not permit your opinions about political matters to influence your market judgment. You may have a soft spot for the underdog and sympathize with the New Deal. But during market hours consider President Roosevelt's speeches and actions objectively so that you may gauge every possibility and reaction. Learn to exercise professional judgment. Do not allow political wish-fulfillment to interfere with your stock market trading. ("When in Rome, do as the Romans do.")
Rule 40.
When the tape has been going in a certain direction, either up, or down, and it comes to a stop for a few seconds, that usually signifies that a new chapter is starting. Sometimes it may be a stronger continuation in the same direction. More often, however, it indicates that the market may soon turn in the opposite direction. (For "tape readers" only.)
Rule 41.
Remember that the reason stocks go up and down is basically because of supply and demand. If there are more buyers than sellers, stocks will go up, even though they were heading downward. Some may wish to sell, but if those who buy are more numerous or have more purchasing power, stocks naturally will go up. When stocks do go up, it is because people want to pay the higher price. In other words, the demand is greater than the supply. When a point is reached where there are no more buyers at the prices asked, then the demand has diminished. From that point on a decline will take place. With this in mind, act accordingly. When you notice that the supply is greater than the demand, sell. You cannot be certain how far they will go down, because you cannot measure how great the supply is and whether the demand will be strong enough to stop this supply. The time to replace your stocks is when you are certain that demand has overcome supply. (For "tape readers" only.)
Rule 42.
Do not ride up and down with a stock indefinitely. You may have bought with the idea that it will go up ten points. But that is no reason why you should not take profits beforehand, if they are available. If you bought at 100 with the object of selling at 1 10 and followed-up to 105, (half way) a corrective reaction may be in order, as it may wish to test the 102-103 level. Is there any reason why you should let it ride down on you? Since the commissions are, approximately, only a half point, the wisest thing then to do is to sell at 105, buy back at 102-103-104 or even 105. Do not stay on while it is reacting as it may go below
100. This gives the in-and-out trader the following advantages:
1. An opportunity to buy for less, thereby making additional profits.
2. Taking no chances while it is slipping on the way down.
3. If the stock should react to 103-104 and then shoots up to 106, it is a safer buy at 106. It has already gone through the reaction and consequently has a clear road ahead. (Remember, you do not marry a stock on buying, nor do you pay alimony on parting.)
Rule 43.
Watch commodity prices, especially wheat and cotton. Take particular note of bank issues. If they go down, most likely all other stocks will go down. A sharp drop in commodity prices usually foretells a drop in stock prices. Another item to watch is foreign selling. During 1937 there was considerable foreign buying and selling. The buying was during the beginning of the year and the selling during the latter part. Many breaks in the market were attributed to foreign selling.
Rule 44.
It is advisable to place a time limit on stocks. If a stock does not come up to your expectations within a certain time, sell, even at a loss. You cannot afford to have your capital tied up for too long a period. Meanwhile you may be losing out on opportunities if you had invested
Rule 45.
Do not take money out of your business for trading on the market unless your business can unquestionably do without it. Do not trade if it will cause you too great anxiety. You will never succeed in that state of mind.
Rule 46.
Do not try to squeeze your stock for the last quarter or half point. If you have made a substantial profit, it is best to cash it.
When the market reaches the stage where you think it is forming a top, it is then advisable to actually place a stop-loss order with your broker fractionally below the last sale. In this way you take no chances. Should it happen that the stock moves higher-a procedure most likely, since at that level the public usually enters the market to give the stock a further push-up-you will gain the additional point or two that the stock may make. At the same time your paper profits will be protected.
Paper profits do not mean anything; it is the liquid funds you have after you have sold your stocks that count.
Rule 47.
When you decide to take profits by selling, do it on the up-move, while the stock is climbing. Do not wait until the movement exhausts itself, as you will then have to sell for one-half or one point less. (Strike while the iron is hot.)
Rule 48.
When the market is in an up-trend and you wish to take advantage of a little shake-out to come, trade short, but only with % of the capital used on the long-side. If you usually purchase 300 shares on the up-side, trade only 100 shares short. The reverse is true of a downtrend market.
Rule 49.
When buying on a reaction, it is best to place orders at stipulated prices under the market instead of “at market.” When buying while market is advancing, it is best to buy “at market,” as otherwise you may not get stocks at your price and an opportunity may be lost.
Rule 50.
It is very important that you know before buying or selling where the resistance point is on the Averages (Dow-Jones or others) and on the stock you are trading in. For instance: if your records show that there was a good deal of resistance at 102 on Steel, you should not buy Steel at 101, as it may sell off at 102. You should buy at 95; by following it up to 102 and then selling, you can make a profit. The same is true for the Dow-Jones Averages. If on previous occasions there was a resistance at 190 on the Dow-Jones Averages, sell at 189.
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