1) Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.
2) Use stop loss orders. Always protect a trade when you make it with a stop loss order.
3) Never overtrade. This would be violating your capital rules.
4) Never let a profit run into a loss. After you once have a profit (...), raise your stop loss so that you will have no loss of capital.
5) Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts and rules.
6) When in doubt, get out, and don't get in when in doubt.
7) Trade only in active markets. Keep out of slow, dead ones.
8) Equal distribution of risk. Trade in 2 or 3 different commodities, if possible. Avoid tying up all your capital in any one commodity.
9) Never limit your orders or fix a buying or selling price. Trade at the market.
10) Don't close your trades without a good reason. Follow up with a stop loss order to protect your profits.
11) Accumulate a surplus. After you have made a series of successful trades put some money into a surplus account to be used only in emergency or in time of panic.
12) Never buy or sell just to get a scalping profit.
13) Never average a loss. This is one of the worst mistakes a trader can make.
14) Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting
15) Avoid taking small profits and big losses.
16) Never cancel a stop loss order after you have placed it at the time you make a trade.
17) Avoid getting in and out of the market too often.
18) Be just as willing to sell short as you are to buy. Let your object be to keep with the trend and make money.
19) Never buy just because the price of a commodity is low or sell short because the price is high.
20) Be careful about pyramiding at the wrong time. Wait until the commodity is very active and has crossed resistance levels before buying more and until it has broken out the zone of distribution before selling more.
21) Select the commodities that show strong uptrend to pyramid on the buying side and the ones that shows definite downtrend to sell short.
22) Never hedge. If you are long of one commodity and it starts to go down, do not sell another commodity short to hedge it. Get out of the market; take your losses and wait for another opportunity.
23) Never change your position in the market without a good reason. When you make a trade, let it be for some good reason or according to some definite rule; then do not get out without a definite indication of a change in trend.
24) Avoid increasing your trading after a long period of success or a period of profitable trades
25) Don't guess when the market is top. Let the market prove it is top. Don't guess when market is bottom. Let the market prove it is bottom. By following definite rules, you can do this.
26) Do not follow another man's advice unless you know that he knows more than you do.
27) Reduce trading after the first loss; never increase.
28) Avoid getting in wrong and out wrong; getting in right and out wrong; this is making double mistakes.
When you decide to make a trade be sure that you are not violating any of these 28 rules which are vital and important to your success. When you close a trade with a loss, go over these rules and see which rule you have violated; then do not make the same mistake the second time. Experience and investigation will convince you of the value of these rules, and observation and study will lead you to a correct and practical theory for successful Trading in Commodities.
1. Emotional control is at the heart of good trading. Controlling yourself allows the ability to think clearly at each moment, resulting in success as a trader.
2. Cut losses with the most strict discipline. We must preserve capital at all times. Losing is part of trading, but opportunity cost is to be considered when hoping for a losing position to reverse course. If your trade reverses and violates the trend line, get out and be willing to re-enter. Do not take home an overnight trade unless it shows you a profit by the close on the day you entered the trade. This will save you from big losses and you can always re-enter if the stock crosses the entry price again.
3. Make good decisions and winning will take care of itself. Focus on how you play the game and not on the scoreboard. Trade with discipline and follow your game plan.
4. When you lose, don't lose the lesson! Forget the names but remember the events. Those who don't remember the past are doomed to repeat it. Make mistakes with composure and character, without blaming others, and don't dwell on mistakes.
5. When in doubt, get out. Scrutinize your positions at all times, each day, and you will not be left holding a stock without reason. Be willing to change direction at any time.
6. Keep your risk/reward profile in check. Profits can exceed losses even if the number of losing trades is greater than the number of winning trades. Always properly manage money, size positions accordingly, obey stops, and protect profits.
7. Avoid scheduled news. We are unable to foresee breaking news, but scheduled news we can step aside from. Scheduled news includes interest rate announcements, corporate earnings announcements, and various daily economic releases. Remember to trade only when you've got the best of conditions.
8. Consider your account size for appropriate trading. An account that is too small magnifies each trade, which keeps us from thinking rationally. Trade with the attitude that the next trade will simply be 1 of the next 1000 trades you will make.
9. Get a charting program that allows you to build watch lists, sort stocks, and draw trendlines. This is essential to learning. Price action and volume are vitally important in finding good chart patterns.
10. Scale out of winning positions as they work for you. This achieves two goals: taking some off the table and keeping you in the game. If your trade reverses, you took some profit at good spots. If the move continues, you are still on board for the ride.
11. Don't dig yourself into a hole early in the day or in your career. Be willing to observe the market and make an informed decision. Missed money is better than lost money.
12. Trade with a blend of anticipation and confirmation. Balancing these two will mean that you adopt a system of "if this happens, I will do that." Wait for your pitch!
13. Beware of your trading process following a winning streak. After a win streak, be extra disciplined! Many will make money in the market, but discipline is required to KEEP it. Stay on your guard at all times!
14. Evaluate your results at least monthly. Monitor your P&L, your win/loss ratio, and the relationship between your biggest wins and worst losses. Reviewing these results helps you continually improve your understanding of the markets and yourself.
15. Finally (perhaps most important), always be patient. Long-term patience will keep your confidence and optimism high, and short-term patience will help you wait for the best trades. Success doesn't come easy, and rarely are fortunes made overnight. Be willing to pay your dues and put in the work in order to achieve your goals.
1. Adopt a definite trading plan. Because of the emotional stress that is inherent in any speculative situation, you must have a predetermined method of operation, which includes a set of rules by which you operate and adhere to, thus protecting you from yourself. Very often, your emotions will tell you to do something totally foreign or negative to what your market trading plan should be. It is only by adhering to a preconceived formula that you can resist the emotional temptations and stresses that are constantly present in a speculative situation.
2. If you're not sure, don't trade. If you're in a trade and feel unsure of yourself, take your loss or protect your profit with a stop. If you are unsure of a position, you will be influenced by a multitude of extraneous and unimportant details and will probably end up taking a loss.
3. You should be able to be right 40% of the time and still show handsome profits. In speculating, it would be folly to expect to be right every time. An individual with the proper trading techniques should be able to cut his losses short and let his profits run so that even being right less than half the time will show excellent profits. This point is re-emphasized in Rule Four.
4. Cut your losses and let your profits ride. The basic failing of most speculators is that they put a limit on their profits and no limit on their losses. A man hates to admit he's wrong. Therefore, an individual will often let his loss ride, becoming larger and larger in hopes that eventually the market will turn around and prove him correct. Then after a while, he begins hoping for a small loss and gives up hoping for a profit. Human nature also dictates that an individual wants to take his profit right away and thus prove himself correct. There is an old saying, "You never go broke taking a small profit." But you'll certainly never get rich that way. Being satisfied with small profits is the wrong mental approach for making money in speculation. If you are correct when entering a speculative situation, you will know it almost immediately and will show a profit quickly. However, if you are wrong, you will show a loss and you should remove yourself from the situation quickly. Taking a small loss does not necessarily mean you were wrong in your thinking. It simply means that your timing was perhaps incorrect and that you should wait for the correct timing and situation to allow you to reenter the market. Remember, in any speculative situation, the market is the final judge. An individual must let the market tell him when he is wrong and when he is right. If you show a profit, ride it until the market turns around and tells you that you are no longer right, and, at that time, you should get out...but not before! On the other hand, the market will also tell you if you are wrong and it would be a serious mistake to argue with what it is saying.
5. If you cannot afford to lose, you cannot afford to win. As we have stated in Rule Four, losing is a natural part of trading. If you are not in a position to accept losses, either psychologically or financially, you have no business trading. In addition, trading should be done only with surplus funds that are not vital to daily expenses.
6. Don't trade too many markets. It is difficult to successfully trade and understand a specific market. It is next to impossible for an individual, especially a beginner, to be successful in several markets at the same time. The fundamental, technical, and psychological information necessary to trade successfully in more than a few markets is more than the individual has either the time or ability to accumulate.
7. Don't trade in a market that is too thin. A lack of public participation in a market will make it difficult, if not impossible, to liquidate a position at anywhere near the price you want.
8. Be aware of the trend. ("The Trend is your friend") It is vitally important that a trader be aware of a strong force in the market, either bullish or bearish. When this force is at its height, it would be folly to attempt to buck it. However, one must learn to recognize when a trend is about to run its course or is near a period of exhaustion. By an ability to recognize the early signs of exhaustion, the trader will protect himself from staying in the market too long and will be able to change direction when the trend changes.
9. Don't attempt to buy the bottom or sell the top. It simply can't be done unless you have the aid of a crystal ball or some other tool which could be peculiar to the mystic. Be content to wait for the trend to develop and then take advantage of it once it has been established.
10. Never answer a margin call. This rule acts as a stop loss when your position has weakened considerably. By dogmatically and arbitrarily adhering to this rule, you will be forced to get out of the market before disaster sets it. It is often difficult to admit you're wrong and get out of the market (which you probably should have done well before you received a margin call). However, the presence of a margin call should act as a final warning that you have let your position go as far as you conceivably can (unless the initial margin is out of line with the volatility of the contract).
11. You can usually sell the first rally or buy the first break. Generally, a market which has just established a trend either up or down will have a reaction and good interim profits can be made by recognizing this reaction and taking advantage of it. For example, in a bull market, the first reaction will generally be met by investors waiting to buy the break. This support generally causes the market to rally. The reverse is true of a bear market.
12. Never straddle a loss. A loss by itself is difficult enough to accept. However, to lock in this loss, thus making it necessary for you to be right twice rather than the once (which you previously found impossible) is sheer absurdity.
1. Get in on a 20-bar breakout
2. Before reversing the trend using the 20-bar breakout, there must be a losing trade in the opposite direction.
3. Always enter on a 55 bar breakout
4. (subjective) If the market is sideways, use a 55 bar breakout
5. Once there is a profit in one direction, you can continue to trade in that direction, but to trade in the opposite direction, there must first be a loss.
1. On the day of entry, use a 1/2 (Average True Range) ATR stop. If the trade gets stopped out during the intraday trading, then get back in if the intraday market gives a new signal (makes new lows or highs).
2. Use a 10 day trailing stop
3. The day after the entry, use a 2 ATR protective stop. Sometimes the 10 day trailing stop is too far away. The 10 day trailing stop assures you will not be risking more than 2-ATR on a trade (except when there is a gap open against your trade).
4. When the trade is at a 2.5 ATR profit, move the protective stop to breakeven.
5. Once the 10 day trailing stop or the 2.5 ATR rule moves the stop to breakeven, start using a wider trailing stop of 20 bars.
6. Once you are ahead by 10 ATR, use a 3 bar pivot as a trailing stop and the 20 bar breakout as a trailing stop.
1. Enter additional positions at a 55 day breakout, provided the protective stop on the first positions have been moved to breakeven.
2. After a big profit of 10 ATR or more, do not trade in the opposite direction for 45 bars using the 20 bar breakout method. Use the 55 bar breakout instead.
3. Wait for a sideways market to start trading and get in on a 55 bar breakout.
Money Management Rules
1. Do not risk more than 1% of your account per trade.
2. Do not expose your account to more than a 2 ATR risk at any time.
3. Use fractional entry technique
4. If in one trade, wait for that trade to be moved to breakeven before adding any new trades.
5. Trade the strongest commodity within a complex, such as grains and currencies.
6. Trade when the volatility shrinks. When the volatility shrinks by 50%, it allows more contracts to be used for the same dollar risk.
Frequently Asked Questions
Q. How many periods for ATR?
A. The ATR is based on a 10 day average of the ATR
Q. Explain fractional entry technique.
A. Enter 1/2 to 1/3 of all contracts initially. Once the trade moves to breakeven, buy/sell the next 1/2 or 1/3 of the contracts. Most losing trades are losers from the start. This method reduces risk and allows for maximum profits in a long term trade.
The Obvious Rules
Always do your homework. Have a position (bullish, bearish, or neutral) before you take a position.
Anticipate and plan rather than react; think of all the "what-ifs".
Be disciplined and rational. Work hard.
Make your own luck through hard work and perseverance.
Risk < 5% (1 to 2 %) of your capital on a single trade.
Ride winners; cut losses; trade small.
Pay attention to what other markets are doing.
Don’t be concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day.
Don’t trade until an opportunity presents itself. Wait for a trade you feel most confident about.
Be patient. Avoid impulses. (There is nothing wrong with doing nothing. Wait for your number.)
Scale in and scale out of positions to spread risk.
The Not-So-Obvious Rules
Identify and commit to an exit point before every trade.
Don’t trade too much or trade to play. This detracts from finding real winners.
Never add to a losing position.
Don’t get complacent with profits. The toughest thing to do is hold on to them.
Place your stop at a point that is difficult to reach (above resistance, below support). If this implies an uncomfortably large loss, trade smaller. Scale the stop.
Never play macho man. Never over-trade. (Organizations need to guard against trading "junkies".)
Don’t cast too wide a net. There isn’t a "best" commodity or stock to trade. Narrow your scope to commodities or stocks you are comfortable with and you will have more time to focus on good trades.
Follow your ideas, but be flexible enough to recognize when you have made a mistake.
Adopt the key characteristics of successful traders: discipline, patience to wait for the right trade and stick with a winner, adequate capitalization, a strong desire to win, and a noble goal.
Guard against making the worst mistake. The worst mistake is to miss a major profit opportunity.
Separate your ego from trading. Making money is most important. Learn to accept mistakes and limit losses --- quickly.
Moderate your emotions. Don’t try too hard, and don’t be arrogant. When you get arrogant, you forsake risk control.
Don’t place blind trust in anyone; be self-reliant. "Experts" are not traders. More money is lost listening to brokers than any other way.
Be strong and independent. Think against the herd.
Be a good risk manager, be a successful trader.
1. The first and most important rule is - in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I'll do it again at some point in the future. Thus, we've not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
2. Buy that which is showing strength - sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to "buy low, sell high", but to "buy higher and sell higher". Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don't enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
7. Be patient. The old adage that "you never go broke taking a profit" is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
10. Never, ever under any condition, add to a losing trade, or "average" into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
11. Do more of what is working for you, and less of what's not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, "let your profits run."
12. Don't trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don't care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge "to get the money back" is extreme, and should not be given in to.
14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial "hay" when the sun does shine.
15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don't need to fight at all.
17. Markets form their tops in violence; markets form their lows in quiet conditions.
18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.
1. Don't trust others opinions -
It's your money at stake, not theirs. Do your own analysis, regardless of the information source.
2. Don't believe in a company -
Trading is not investment. Remember the numbers and forget the press releases. Leave the American Dream to Peter Lynch.
3. Don't break your rules -
You made them for tough situations, just like the one you're probably in right now.
4. Don't try to get even -
Trading is never a game of catch-up. Every position must stand on its merits. Take your loss with composure, and take the next trade with absolute discipline.
5. Don't trade over your head -
If your last name isn't Buffett or Cramer, don't trade like them. Concentrate on playing the game well, and don't worry about making money.
6. Don't seek the Holy Grail -
There is no secret trading formula, other than solid risk management. So stop looking for it.
7. Don't forget your discipline -
Learning the basics is easy. Most traders fail due to a lack of discipline, not a lack of knowledge.
8. Don't chase the crowd -
Listen to the beat of your own drummer. By the time the crowd acts, you're probably too late…or too early.
9. Don't trade the obvious -
The prettiest patterns set up the most painful losses. If it looks too good to be true, it probably is.
10. Don't ignore the warning signs -
Big losses rarely come without warning. Don't wait for a lifeboat to abandon a sinking ship.
11. Don't count your chickens -
Profits aren't booked until the trade is closed. The market gives and the market takes away with great fury.
12. Don't forget the plan -
Remember the reasons you took the trade in the first place, and don't get blinded by volatility.
13. Don't have a paycheck mentality -
You don't deserve anything for all of your hard work. The market only pays off when you're right, and your timing is really, really good.
14. Don't join a group -
Trading is not a team sport. Avoid stock boards, chatrooms and financial TV. You want the truth, not blind support from others with your point of view.
15. Don't ignore your intuition -
Respect the little voice that tells you what to do, and what to avoid. That's the voice of the winner trying to get into your thick head.
16. Don't hate losing -
Expect to win and lose with great regularity. Expect the losing to teach you more about winning, than the winning itself.
17. Don't fall into the complexity trap -
A well-trained eye is more effective than a stack of indicators. Common sense is more valuable than a backtested system.
18. Don't confuse execution with opportunity -
Overpriced software won't help you trade like a pro. Pretty colors and flashing lights make you a faster trader, not a better one.
19. Don't project your personal life -
Trading gives you the perfect opportunity to discover just how screwed up your life really is. Get your own house in order before playing the markets.
20. Don't think its entertainment -
Trading should be boring most of the time, just like the real job you have right now.