I noticed you said you "averaged" in. stupid. see below. Dennis Gartman has one of the most amazing newsletters. He has traded in every capacity. R U L E # 1 Never, ever, under any circumstance, should one add to a losing position ... not EVER! Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out. R U L E # 2 Never, ever, under any circumstance, should one add to a losing position ... not EVER! We trust our point is made. If "location, location, location" are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position. R U L E # 3 Learn to trade like a mercenary guerrilla. The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand. R U L E # 4 DON'T HOLD ON TO LOSING POSITIONS Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important. Holding on to losing positions costs real capital as one's account balance is depleted, but it can exhaust one's mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position. R U L E # 5 GO WHERE THE STRENGTH IS The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower. We can never know what price is really "low," nor what price is really "high." We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we've no idea how high high is, nor how low low is. R U L E # 6 Sell markets that show the greatest weakness; buy markets that show the greatest strength. Metaphorically, when bearish we need to throw our rocks into the wettest paper sack for it will break the most readily, while in bull markets we need to ride the strongest wind for it shall carry us farther than others. R U L E # 7 In a Bull Market we can only be long or neutral; in a bear market we can only be bearish or neutral. In a bull market we can be neutral, modestly long, or aggressively long--getting into the last position after a protracted bull run into which we've added to our winning position all along the way. Conversely, in a bear market we can be neutral, modestly short, or aggressively short, but never, ever can we--or should we--be the opposite way even so slightly. R U L E # 8 "Markets can remain illogical far longer than you or I can remain solvent." The University of Chicago "boys" have argued for decades that the markets are rational, but we in the markets every day know otherwise. We must learn to accept that irrationality, deal with it, and move on. R U L E # 9 Trading runs in cycles; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly. Thus, when things are going well, trade often, trade large, and try to maximize the good fortune that is being bestowed upon you. However, when trading poorly, trade infrequently, trade very small, and continue to get steadily smaller until the winds have changed and the trading "gods" have chosen to smile upon you once again. R U L E # 10 To trade/invest successfully, think like a fundamentalist; trade like a technician. It is obviously imperative that we understand the economic fundamentals that will drive a market higher or lower, but we must understand the technicals as well. When we do, then and only then can we, or should we, trade. R U L E # 11 Keep your technical systems simple. The greatest traders/investors we've had the honor to know over the years continue to employ the simplest trading schemes. They draw simple trend lines, they see and act on simple technical signals, they react swiftly, and they attribute it to their knowledge gained over the years that complexity is the home of the young and untested. R U L E # 12 In trading/investing, an understanding of mass psychology is often more important than an understanding of economics. Markets are, as we like to say, the sum total of the wisdom and stupidity of all who trade in them, and they are collectively given over to the most basic components of the collective psychology. The dot-com bubble was indeed a bubble, but it grew from a small group to a larger group to the largest group, collectively fed by mass mania, until it ended. The economists among us missed the bull-run entirely, but that proves only that markets can indeed remain irrational, and that economic fundamentals may eventually hold the day but in the interim, psychology holds the moment. And finally the most important rule of all: R U L E # 13 Do more of that which is working and do less of that which is not. This is a simple rule in writing; this is a difficult rule to act upon. However, it synthesizes all the modest wisdom we've accumulated over thirty years of watching and trading in markets. Adding to a winning trade while cutting back on losing trades is the one true rule that holds--and it holds in life as well as in trading/investing. > Dennis Gartman: This is what I have learned about the world of investing over three decades. I try each day to stand by my rules. I fail miserably at times, for I break them often, and when I do I lose money and mental capital, until such time as I return to my rules and try my very best to hold strongly to them. The losses incurred are the inevitable tithe I must make to the markets to atone for my trading sins. I accept them, and I move on, but only after vowing that "I'll never do that again."
If you were hot one day, why not keep going (unless your big day was just luck)? The market comes in cycles and some are much easier to make $$$ in than others.
I've noticed that some of my worst days seem to creep up just after some of my best days. Obviously, success on a single day affects my performance on the next day. I understand what you mean though; why stop a positive streak. Thanks
Thank you so much for this wonderful information. This is truly a great post. I've included some of my own comments below after each RULE in case you are interested. Thanks LTCM had the same problem that I have: they were using too much leverage and they were not flexible in even considering the possibility of the russians defaulting on their loans. They traded spreads which are supposed to be hedging strategies which minimize risk. I tend to average up (that is add to winning positions). However, I noticed that the treasury market tends to be a "Sticky" one where, if there is no news out or economic figures, you can expect support/resistance to hold more often than you can expect breakouts; I believe that in these types of markets, it is okay to average down as a strategy. That said, I only average down sometimes maybe a half a tick or a full tick away from my initial entry. I do this because I am not always exactly right on my entry. This may be a flaw in my strategy: perhaps I should just cut off my losing position rather than add to it. I don't really know how to reconcile, however, the bond market's "stickiness" with my averaging down strategy (for example, you buy 2 at 105 evens because it is support then it goes down to 104 31/32 and you add 2 more. Since the breakout to 104 31/32 was not with volume, you can expect it to head back up so that support at 105 will hold; in this case, averaging down seems feasible. My comment above discusses this. Perhaps this is a lesson I need to learn quickly and conclude that there really should be no exceptions to this rule. I sometimes come into the market with an idea of where it should go. I see green bars at the beginning of the day and I then conclude that the rest of the day will be a bull market. I must become more flexible in my trading so that my ideas change as rapidly as the markets tend to. Flexibility is supremely important to any trader. I realize this now. This is my major flaw. While I tend to hold on to winners and hold them for long periods of time, I also hold on to losers in the same way. I believe this has been my major flaw and has been the primary reason why I have been unsuccessful up to this time. I need to cut losers immediately. Letting losses mount is a recipe for disaster as I've found out the hard way. I've tried this in the bond market but it only seems to work when the bond market is experiencing momentum days (i.e. when there is major economic news or numbers out). If I told you how many times I've sold at the low and bought at the high you'd probably pity me. I learned the lesson that buying high and buying higher does not usually work in the bond market (neither does selling low and selling lower). In my case, I always seem to sell lows and buy highs; this probably means that I'm too late in my positions. I day trade. This comment seems to apply to position trading. Also, I trade only one future, ZB. I'd rather spend years trading this one security so that I can become an expert in it rather than be all over the market and spend years not knowing any single security too well. My goal is to be consistently profitable as a day trader of ZB. Sometimes, I buy lows and sell highs. This is another flaw in my trading strategy. I should never try to pick tops and bottoms. I think this strategy is warranted when there is no news out that affects the bond market. I've been watching the bond market for six or so months now and I see that bonds tend to stay in a range unless there is some kind of news or economic figure out that moves it. It is probably irrationality in the markets which allow traders to exist. Efficient market theory seems to be just that: a theory. efficient markets would preclude the existence of traders, I think. Markets are not perfect though they do seem to be coming closer and closer to perfect as time passes. This can be dangerous because some of my worst days came just after some of my best days. I think a great day should be followed by a day of cautious trading. I'm more of a fundamentalist in the sense that I trade based upon where economic figures and news tell me the bond market should go. I agree with this completely. The bond market is populated with professionals. The mass psychology argument may not apply here as professionals may be expected to do things differently from the mass population at large. However, I have already contemplated the possibility of mass psychology of professionals. I'm sure that hedge fund managers and mutual fund managers watch each others activities so that large buy orders of one hedge fund may result in buy orders from other hedge funds and mutual funds. So there is likely a mass psychology among the professionals as well. This may apply more to position traders since the bond market sometimes moves only 10 ticks in a day. Thanks so much for this post. It has been very helpful to me.
Clueless as ever I see. Still gambling and trading on superstition. Just a matter of time before you blow out. Practically a statistical fact.
You still don't get it. Every trade a trader makes is a gamble. Not realizing that, you obviously don't belong in this game!! Nonetheless, I wish you luck in whatever it is you do eventually wind up doing. Thanks
statistical odds (at least according to TraderDragon) notwithstanding, I am up $625.00 today on 24 contracts. at $1.92 per RT that's only $46 bucks in commissions. I'm so happy things seem to be going well now. I trade 6 lots and cut my losses at 2 half ticks and let my profits ride for 7-10 ticks. sold into that strong CPI report.
I'm so tempted to start trading bigger size. This is where the discipline comes in. I told myself I won't trade bigger size until I get back up to $20,000. I'll let you guys know how things turn out.
HAHAHAHA, the gambler is coming out. He is going to blow it.... Like I said from the start, he can't resist, he will blow it.