Author: forexgoodies

Extract: S. Schulmeister working paper (Dec 2005)

Which properties of technical trading systems account for their popularity among currency traders? The analysis is based on the performance of 1024 moving average and momentum models in the single most active foreign exchange market, the DM/$ market between 1973 and 1999. An out-of-sample test of the performance of all 1024 models between 2000 and 2004 (euro/US dollar) completes this part of the study. The main results are as follows:

• Each of these models would have been profitable over the entire sample period, 91.7% would have remained profitable between 2000 and 2004.
• The number of profitable trades is lower than the number of unprofitable trades.
• The average return per day during profitable positions is smaller than the average loss per day during unprofitable positions.
• Profitable positions last 3 to 5 times longer than unprofitable positions. Hence, the overall profitability of technical currency trading is exclusively due to the exploitation of persistent exchange rate trends.
• The best performing models optimize the duration of profitable positions relative to the duration of unprofitable positions.

This pattern reflects the general property of technical trading models: The profits from the exploitation of relatively few persistent price trends exceed the losses from many but small price fluctuations (“cut losses short and let profits run”).

Source: WLTtrading.com

The Obvious Rules

1. Always do your homework. Have a position (bullish, bearish, or neutral) before you take a position.
2. Anticipate and plan rather than react; think of all the “what-ifs”.
3. Be disciplined and rational. Work hard.
4. Make your own luck through hard work and perseverance.
5. Risk < 5% (1 to 2 %) of your capital on a single trade.
6. Ride winners; cut losses; trade small.
7. Pay attention to what other markets are doing.
8. 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.
9. Don’t trade until an opportunity presents itself. Wait for a trade you feel most confident about.
10. Be patient. Avoid impulses. (There is nothing wrong with doing nothing. Wait for your number.)
11. Scale in and scale out of positions to spread risk.

The Not-So-Obvious Rules

1. Identify and commit to an exit point before every trade.
2. Don’t trade too much or trade to play. This detracts from finding real winners.
3. Never add to a losing position.
4. Don’t get complacent with profits. The toughest thing to do is hold on to them.
5. 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.
6. Never play macho man. Never over-trade. (Organizations need to guard against trading “junkies”.)
7. 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.
8. Follow your ideas, but be flexible enough to recognize when you have made a mistake.
9. 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.
10. Guard against making the worst mistake. The worst mistake is to miss a major profit opportunity.
11. Separate your ego from trading. Making money is most important. Learn to accept mistakes and limit losses — quickly.
12. Moderate your emotions. Don’t try too hard, and don’t be arrogant. When you get arrogant, you forsake risk control.
13. 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.
14. Be strong and independent. Think against the herd.
15. Be a good risk manager, be a successful trader.

Source: USAfutures.com

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.

Source: The Stock Bandit, Inc.

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.

Source: http://daytrading.about.com

1. Do not expect to become an expert day trader right away. It takes considerable time, practice and effort to learn the ropes.

2. Paper trade or use a simulated trading Web site to practice your trading techniques before you use your own “real” money.

3. Eliminate the fear of losing because “scared” money rarely profits.

4. Always limit your losses – use stop orders.

5. Learn from your losses – take advantage of each loss to improve your knowledge of the market.

6. Never allow large profits to turn into losses. Consider selling if the market moves against you by about 25% or so from your peak profit point.

7. If the markets on a given day are not performing or reacting the way you expected, it is best to simply get out.

8. Never add to a losing position. It is a prescription for disaster.

9. Try to predict the general direction of a stock price but do not try to pick tops and bottoms. You will rarely succeed in accomplishing this.

10. Remember that standing aside is a position and often the best one to take if you cannot form an opinion as to where the market is heading on a given day.

11. The key difference between winning and losing day traders is the ability to exercise discipline to avoid mistakes or bad trading tactics.

12. You must subordinate your will to the will of the market. The market is always right.

13. Always keep records of your trading results and analyse the results.

14. Good day traders generally sell into good news and buy on bad news.

15. Patience, perseverance, determination and a rational trading plan are the key attributes of a successful day trader.

16. Never get emotionally involved with your trades as emotions often work against you.

17. Do not try to profit on every trade. It is the total profit you make that matters not the number of individual wins.

18. Learn when you can rely on instinct as opposed to analysis.

19. Don’t chase momentum if you are unsure as to the exit point. Assume the market will reverse itself as soon as you open a position.

20. Be flexible. Remember that different strategies suit different days and different stocks.

21. Decide each day how much risk you are willing to take and stick to your decision.

22. Access to timely information and fast execution of trades is essential to day trade successfully. Subscribe to a good financial information service and open an account with a Direct Access Trading firm or an online broker that caters to day traders.

23. Do not try to focus on too many stocks at once. Limit your focus to a manageable number.

24. Always think positive no matter how much you lose. Accept your losses gracefully, try to learn from them and move on.

25. If you do not find day trading fun or find it too stressful you will not likely be successful. Try some other activity.

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. Forget the news, remember the chart. You’re not smart enough to know how news will affect price. The chart already knows the news is coming.

2. Buy the first pullback from a new high. Sell the first pullback from a new low. There’s always a crowd that missed the first boat.

3. Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.

4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.

5. Don’t buy up into a major moving average or sell down into one. See #3.

6. Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don’t. The old traders’ wisdom is a lie. Trade in the direction of gap support whenever you can.

8. Trends test the point of last support/resistance. Enter here even if it hurts.

9. Trade with the TICK not against it. Don’t be a hero. Go with the money flow.

10. If you have to look, it isn’t there. Forget your college degree and trust your instincts.

11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.

12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don’t expect anyone to change the channel.

13. Avoid the open. They see YOU coming sucker.

14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.

15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.

16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.

17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.

18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.

19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.

20. Beat the crowd in and out the door. You have to take their money before they take yours, period.

1. Everything flows from this first rule and this is the only rule you really need to know. The Federal Reserve ALWAYS wins. The Fed can make the rules, change the rules or simply choose to ignore the rules and you can’t do this. The game we’re playing is a Zero Sum game and the object of this game is simply for the Fed to take more money away from the cows than the cows take away from the Fed. You can either bet like the Federal Reserve does and be a winner or be a cow. These are your only choices. The Federal Reserve takes trillions away from cows each and every year and if you just take a small piece of that action the Federal Reserve certainly isn’t going to miss it. It is the Fed’s job to make you think the Fed is doing something they clearly aren’t doing and it’s your job to figure out what the Federal Reserve is truly up to and place your bets like they do.

2. Yes, Virginia, you can time the market, in fact if you want to take some of what the Fed is taking that’s the ONLY way to make money. Being diversified ONLY guarantees that you’re going to be a loser. Some things go up, some things go down and some things go sideways. You can profit from the market going up or down and conserve your assets by the market going sideways. These are the only directions the market is going to go, betting up when the market is heading down is why the Fed spends billions of dollars on misleading advertising called editorial to make sure cows are betting the wrong direction. Remember the Fed is making Trillions and spending tens of billions on misleading advertisement is a good investment for them.
Two easy cow timing formulas both have over a 90% chance of working each year.

• 1. Sell in May and go away is the best timing rule a cow should follow, meaning come May you sell your positions and revert to cash. Come October you take your cash and start buying stocks again. Had you followed this one simple rule this year you’d probably be up about 6%-10% right now instead of down about 3%-5%.
• 2. Never buy in December, December is historically a 90% up month. If your need to sell some stock December is a very good month to do so. This requires that you do your tax planning in October or November but it is well worth doing so. Resume buying in January.

3. Don’t sweat getting in a little early or getting out a little early this is better than getting in too late or out too late. What this means is at the beginning of your investment cycle you should be prepared to take some loses and by getting out a little early you should be prepared to be happy with the profits you made and not worry about what you could have made. Set targets and if you exit after you made your target of 40% and the stock goes up 50% who gives a shit. Set a loss target and be prepared to say you got in too early or you misread the direction all together. Get out at a 2 or 3% loss before it turns into 10 or 20%.

4. Limit your investment choices, there is too much out there to choose from and trying to follow them all will only screw you up. Don’t buy penny stocks or funds; the definition I follow is if it’s not selling for at least $15 don’t buy it. This makes things a lot easier, because it removes a lot of the noise and distraction from your investment choices. I’ve recently added funds to this $15 limit and in the past I violated this rule. I used to buy BEARX which is a short fund I used when I felt the market was heading lower that sells for about $6. In the future I’ll be using one of the Rydex funds to short the market.

5. Everything that you read in a newspaper or magazine, everything you listen to on the radio and everything you watch on TV is either an advertisement or a paid for editorial. There is no investment advice to follow in the newspaper; your 50 cent investment for knowledge is not going to get you any. Every outlet of mass media is a set-up to get you to invest the wrong way with your money. Certainly there are short-term opportunities, Buffett says to do something and maybe for a few weeks there can be some gain to be made. There is nothing I have read from Buffett for over the last five years that I’ve been paying attention that it wasn’t abundantly clear six months later that Buffett was unloading at the time whatever it was he wanted you to purchase. There is NO other way to read a paper than with a contrarian point of view. If the paper says buy, you should sell and if the paper says sell, you most certainly should buy. If they’re hyping it you should be getting ready to sell it and if they’re trashing it you should be getting yourself ready to purchase. In a zero sum game this is the ONLY way for the big money to make money, they don’t steal a billion from each other to make a billion they steal $10 from hundred million cows in order to make a billion.

6. Make sure to keep all your eggs in one basket and make sure to keep a very close eye on that basket. The brokers and the financial advisors will preach diversification and diversification just means more fees for the brokers and smaller returns if any for you. Currently I have only three things going on, cash, one stock and a bond fund, I try to always have cash, because who knows when a real bargain is going to present itself. If I’m in the process of a rotation I might have up to eight different things going on. I know my company’s 401K advisor recommends having eight to ten different funds going all the time, I know of no one making much of a return with eight to ten funds.

7. Know what you are going to do in many different types of environments. You should have a plan if you believe the market is heading lower, direction is all you need to know and there is just as much money to be gained in a falling market as there is a rising market, maybe more so. Do you have an inflationary strategy? A deflationary strategy? Rising or falling interest rates you should have a plan for as well. If the market is going sideways you should have a plan. Everything is an opportunity and the trick is recognizing which environment the market is in. Typically if you asked ten cows what they thought was going on eight of them will tell you the same answer, from this you know to do the opposite. Have a financial plan and always work and refine your plan.

8. ALWAYS play with somebody else’s money and never create a lot of money for somebody else. If you’re a cow there is only one way to play with somebody else’s money, your trading account needs to be in your tax deferred savings account. If you have a 401K plan check with the plan administrator to see if there is a brokerage option for your plan. Why make 40% on something only to pay the government back about 40% of that gain in income tax? A 40% gain in a 401K plan costs you nothing and on top of that your gains should be compounding at a much higher rate. Make sure to check and understand fees, if you’re the one doing the work you certainly shouldn’t be paying a full service charge. Having someone taking 2% of your action in fees is insane, especially when the advice they’re peddling is bad to begin with.

9. Never buy stock or bonds over the fifty day moving average, just as you should never short a stock when it is selling below it’s fifty day moving average. Once again the banksters will tell you to cost average your investments, this is a guaranteed method to lower your returns and help your broker earn more fees. Your 401K contributions should be set-up to flow 100% into cash and you purchase the investment options when they are a good deal for you, not a good deal for whose selling them to you. When you realize that the cows money is flowing into these funds on the 1st and 15th of each month and on Fridays as well you know that buying when all the cows are buying will only get you ripped off. This also means you should never buy anything that can’t be charted. If the 401K plan that you’re in doesn’t offer funds that can be charted talk to the plan administrator to find out which chartable fund the one you’re buying is trying to emulate and chart that. The best choice still is to have a trading account in your 401K so that you can purchase anything you want to, not what they are making you purchase. Buy low and sell high is what you’re trying to accomplish and you certainly can�t do that when you’re paying too much for something from the get go.

10. Don’t get caught up in either the doomsayer’s advice or the market only goes up super bullish advice, because this will only lead to heartache. As far as the doomsayer’s go there is nothing going on in the economy that real money can’t fix. History teaches us that when things get bad enough, real money has always been created and added to the economy, over 50 times in our nations history this has occurred with the last time being 1973 and surprisingly the president wasn’t shot for doing this. Sorry but once again the world is not going to end and even our adversaries have no desires to crash the US economy. On the other side of the coin the super bullish crowd is just plain silly. One need only look at a long-term chart of the market to see that this is not going to happen. The Jim Cramer’s of the world will only end up costing you money and the reality of the situation is that if you would have followed Cramer’s advice for the last four years you would have lost money. Once again, up, down and sideways are the only directions the market can go and there’s money to be made from any of these directions.

Entry rules

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.

Stop rules

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.

Additional Techniques

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.

1. Never, under any circumstance add to a losing position … ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercanary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positionss costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is “low”. Nor can we know what price is “high”. Always remember that sugar once fell from 1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. “Markets can remain illogical longer than you or I can remain solvent,” according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds … they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect “gaps” in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and agressively when trading well; trade small and modestly when trading poorly. In “good times” even errors are profitable; in “bad times” even the most well researched trades go away. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technican. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then and only then, can we or should we, trade.

11. Respect “outside reversals” after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more “weekly” and “monthly” reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen …. just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven be human beings making human errors and also making super-human insights.

15. Establish initial positions in bull markets and on weakness in bear markets. The first “addition” should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom …. and the ignorance … of all of those who deal in it; and we dare not argue with the market’s wisdom. If we learn nothing more than this we’ve learned much indeed.

19. Do more of that which is working and less of that which is not: if a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; now lows sold.

20. The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy don’t. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach! This is the “winning” new rule submitted by our friend Tom Powell.

22. All rules are meant to be broken: the trick is knowing when … and how infrequently this rule may be invoked!