On Trading Rules

[max momo]

Did a forum search for Trading Rules, and not one good hit!
So, here’s my thread:

1. Monetary Philosophy determines a Trading Philosophy
2. Trading Philosophy determines a Trading Focus (industry/sector)
3. Trading Focus determines the Trading System
4. Trading System determines Trading Rules

The trader eventually and constantly tweaks and adjusts these rules to fit their own predilection and experience. These rules morph into decision points, mechanically implemented yet continually back tested.

The underpinning philosophy may change over time, demanding a change in the focus (and in turn the systems and rules).

Here is a nice collection of various trading rules:

http://www.page88.co.za/cr/tradingrules_menu.shtml

Note that these rules generally flow from the two original trading rules list. The first appeared in 1923, based upon Jesse Livermore’s experience as published in Reminiscences of a Stock Operator by Edwin Lefevre:

Of all the speculative blunders, there are few greater than trying to average a losing game.
Always sell what shows you a loss and keep what shows you a profit.
You cannot try to force the market into giving you something it does not have to give.
The courage in a speculator is merely the confidence to act on the decision of his mind
A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.
The man who is right has two forces working in his favor – basic conditions and the men who are wrong.
The trend is evident to a man who has an open mind and reasonably clear sight. It is never wise for a speculator to fit his facts to his theories.
In a narrow market when price moves within a narrow range, the thing to do is to watch the market, read the tape to determine the limits of prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction.
You watch the market with one objective: to determine the direction of price tendency. Prices, like everything else, move along the line of least resistance.
In the long run, commodity prices are governed but by one law – the economic law of supply and demand.
It costs me one million to learn that a dangerous enemy to a trader is his susceptibility to the urging of magnetic personality combined with a brilliant mind.
Have a profit – forget it! Have a loss forget it even quicker!
It was never my thinking that made the big money for me. It was my sitting, my sitting tight.
There is only one side to the stock market and it is not the bull side or the bear side, but the right side.

The second major list was developed by W.D. Gann in 1942:

Never risk more than 1/10th of your capital in one speculation. ( * )
Use Stop Loss orders
Don't overtrade. ( * )
Never let a profit run to a loss.
Don't buck the trend.
When in doubt, get out.
Trade only in active stocks. ( * )
Spread risk among 4-5 issues - not just one.
Never fix your price, trade at market. ( * )
Don't close positions without a good reason.
Build an emergency fund.
Never buy to get a dividend.
Never average a loss.
Never get out because you've lost patience with a position.
Avoid taking small profits and big losses.
Never cancel a stop order once you make a trade.
Avoid getting in and out too often.
Be just as willing to go short as long.
Never buy because a price is low, or sell because a price is high.
Be careful about pyramiding at the wrong time.
Select stocks with a small volume of shares outstanding to pyramid on the buying side, and the ones with the largest volume of stock outstanding to sell short.
Never Hedge. Get out instead.
Never change a position without a good reason.
Avoid increasing your trading after a period of good trades.

Notice that these two canons of trading rules are actually rather different!

Why?

Different Philosophy and thus different Focus (Stocks vs. Commodities).

 

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