Category: Trading Rule

By John Murphy

John Murphy’s ten laws of technical trading explain the main ideas to beginners and streamline the trading methodology for experienced practitioners. The precepts define the key tools of technical analysis and show how to use them to identify buying and selling opportunities.

1. Map the trends.

Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale ‘map of the market’ provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term view alone can often be deceptive. Even if you only trade the very short term, you will do better if you’re trading in the same direction as the intermediate and longer term trends.

2. Determine the trend and follow it.

Market trends come in many sizes – long-term, intermediate-term and short-term. First, determine which one you’re going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you’re trading the intermediate trend, use daily and weekly charts. If you’re day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term trend for timing.

3. Find the low and high of it.

The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words the old ‘high’ becomes the new ‘low’. In the same way, when a support level has been broken it will usually produce selling on subsequent rallies – the old ‘low’becomes the new ‘high’.

4. Know how far to backtrack.

Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.

5. Draw the line.

Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.

6. Follow that average.

Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4 and 9 day moving averages, 9 and 18 day, 5 and 20 day. Signals are given when the shorter average crosses the longer. Price crossings above and below a 40 day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.

7. Learn the turns.

Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for stochastics are 80 and 20. Most traders use 14 days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. Those tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used for intra-day charts.

8. Know the warning signs.

Trace MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It’s called a histogram because vertical bars are used to show the difference between the two lines on the chart.

9. Trend or not a trend?

Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX line favors oscillators. By plotting the direction of the ADX line, one is able to determine which trading style and which set of indicators are most suitable for the current market environment.

10. Know the confirming signs.

Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It’s important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.

By Larry Williams

No platitudes here, speculating is very dangerous business. It is not about winning or losing, it is about surviving the lows and the highs. If you don’t survive, you can’t win.

The first requirement of survival is that you must have a premise to speculate upon. Rumors, tips, full moons and feelings are not a premise. A premise suggests there is an underlying truth to what you are taking action upon. A short-term trader’s premise may be different from a long-term player’s but they both need to have proven logic and tools. Most investors and traders spend more time figuring out which laptop to buy than they do before plunking down tens of thousands of dollars on a snap decision, or one based upon totally fallacious reasoning.

There is some rhyme and reason to how, why and when markets move – not enough – but it is there. The problem is that there are more techniques that don’t work, than there are techniques that do. I suggest you spend an immense and inordinate amount of time and effort learning these critical elements before entering the foray of financial frolics.

So, you have money management under control, have a valid system, approach or premise to act upon – you still need control of yourself.

2. Ultimately this is an emotional game – always has been, always will be.

Anytime money is involved – your money – blood boils, sweaty hands prevail, and mental processes are short circuited by illogical emotions. Just when most traders buy, they should have sold! Or, fear, a major emotion, scares them away from a great trade/investment. Or, their bet is way too big. The money management decision becomes an emotional one, not one of logic.

3. Greed prevails – proving you are more motivated by greed than fear and understanding the difference.

The mere fact you are a speculator means you have less fear than a ‘normal’ person does. You are more motivated by making money. Other people are more motivated by not losing.

Greed is the trader’s Achilles’ heel. Greed will keep hopes alive, encourage you to hold on to losing trades and nail down winners too soon. Hope is your worst enemy because it causes you to dream of great profits, to enter an unreal world. Trust me, the world of speculating is very real, people lose all they have, marriages are broken up, families tossed asunder by either enormous gains or losses.

My approach to this is to not take any of it very seriously; the winnings may be fleeting, always pursued by the taxman, lawyers and nefarious investment schemes.

How you handle greed is different than I do, so I cannot give an absolute maxim here, but I can tell you this, you must get it in control or you will not survive.

4. Fear inhibits risk taking – just when you should take risk.

Fear causes you to not do what you should do. You frighten yourself out of trades that are winners in deference to trades that lose or go nowhere. Succinctly stated, greed causes you to do what we should not do, fear causes us to not do what we should do.

Fear, psychologists say, causes you to freeze up. Speculators act like a deer caught in the headlights of a car. They can see the car – a losing trade, coming at them – at 120 miles per hour – but they fail to take the action they should.

Worse yet, they take a pass on the winning trades. Why, I do not know. But I do know this: the more frightened I am of taking a trade the greater the probabilities are it will be a winning trade. Most investors scare themselves out of greatness.

5. Money management is the creation of wealth.

Sure, you can make money as a trader or investor, have a good time, and get some great stories to tell. But, the extrapolation of profits will not come as much from your trading and investing skills as how you manage your money.

I’m probably best known for winning the Robbins World Cup Trading Championship, turning $10,000 into $1,100,000.00 in 12 months. That was real money, real trades, and real time performance. For years people have asked for my trades to figure out how I did it. I gladly oblige them, they will learn little there – what created the gargantuan gain was not great trading ability nearly as much as the very aggressive form of money management I used. The approach was to buy more contracts when I had more equity in my account, cut back when I had less. That’s what made the cool million smackers – not some great trading skill.

Ten years later my 16-year-old daughter won the same trading contest taking $10,000 to $110,000.00 (The second best performance in the 20-year history of the championship). Did she have any trading secret, any magical chart, line, and formula? No. She simply followed a decent system of trading, backed with a superior form of money management.

6. Big money does not make big bets.

You have probably read the stories of what I call the swashbuckler traders, like Jesse Livermore, John ‘bet a millions’ Gates, Niederhoffer, Frankie Joe and the like. They all ultimately made big bets and lost big time.

Smart money never bets big. Why should it? You can win big on small bets, see #5 above, but eventually if you bet big you will lose – and you will lose big.

It’s like Russian Roulette. You may well spin the chamber holding the bullet many times and never lose. But spin it often enough and there can be only one result: death. If you make big bets you are destined to be a big loser. Plunging is a loser’s game; it can only set you up for failure. I never bet big (I used to – been there and done that and trust me, it is no way to live). I bet a small percent of my account, bankroll if you will. That way I have controlled loss. There can be no survival without damage control.

7. God may delay but God does not deny.

I never know when during a year I will make my money. It may be on the first trade of the year, or the last (though I hope not). Victory is there to be grasped, but you must be prepared to do battle for a long period of time.

Additionally, while far from a religious person, I think the belief in a much higher power, God, is critical to success as a trader. It helps puts wins and losses into perspective, enables you to persevere through lots of pain and punishment when you know that ultimately all will be right or rewarded in some fashion.

God and the markets is not a fashionable concept – I would never abuse what little connection I have with God to pray for profits. Yet that connection is what keeps people going in times of strife, in fox holes and commodity pits.

8. I believe the trade I’m in right now will be a loser.

This is my most powerful belief and asset as a trader. Most would be wannabes are certain they will make a killing on their next trade. These folks have been to some ‘Pump ’em up, plastic coat their lives’ motivational meeting where they were told to think positive thoughts. They took lessons in affirming their future would be great. They believe their next trade will be a winner.

Not me! I believe at the bottom of my core it will be a loser. I ask you this question – who will have their stops in and take right action, me or the fellow pumped up on an irrational belief he’s figured out the market? Who will plunge, the positive affirmer or me?

If you have not figured that one out – I’ll tell you; I will succeed simply because I am under no delusion that I will win. Accordingly, my action will be that of an impeccable warrior. I will protect myself in all fashion, at all times – I will not become run away with hope and unreality.

9. Your fortune will come from your focus – focus on one market or one technique.

A jack of all trades will never become a winning tradee. Why? Because a trader must zero in on the markets, paying attention to the details of trading without allowing his emotions to intervene.

A moment of distraction is costly in this business. Lack of attention may mean you don’t take the trade you should, or neglect a trade that leads to great cost.

Focus, to me, means not only focusing on the task at hand but also narrowing your scope of trading to either one or two markets or to the specific approach of a trading technique.

Have you ever tried juggling? It’s pretty hard to learn to keep three balls in the area at one time. Most people can learn to watch those ‘details’ after about 3 hours or practice. Add one ball, one more detail to the mess, and few, very few, people can make it as a juggler. It’s precisely that difficult to keep your eyes on just one more ‘chunk’ of data.

Look at the great athletes – they focus on one sport. Artists work on one primary business, musicians don’t sing country & western and opera and become stars. The better your focus, in whatever you do, the greater your success will become.

10. When in doubt, or all else fails – go back to Rule One.

By Linda Bradford Raschke

2. Keep records of your trading results.

3. Keep a positive attitude, no matter how much you lose.

4. Don’t take the market home.

5. Continually set higher trading goals.

6. Successful traders buy into bad news and sell into good news.

7. Successful traders are not afraid to buy high and sell low.

8. Successful traders have a well-scheduled planned time for studying the markets.

9. Successful traders isolate themselves from the opinions of others.

10. Continually strive for patience, perseverance, determination, and rational action.

11. Limit your losses – use stops!

12. Never cancel a stop loss order after you have placed it!

13. Place the stop at the time you make your trade.

14. Never get into the market because you are anxious because of waiting.

15. Avoid getting in or out of the market too often.

16. Losses make the trader studious – not profits. Take advantage of every loss to improve your knowledge of market action.

17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.

18. Always discipline yourself by following a pre-determined set of rules.

19. Remember that a bear market will give back in one month what a bull market has taken three months to build.

20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.

21. You must have a program, you must know your program, and you must follow your program.

22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.

23. Split your profits right down the middle and never risk more than 50% of them again in the market.

24. The key to successful trading is knowing yourself and your stress point.

25. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes. 26. In trading as in fencing there are the quick and the dead.

27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.

28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.

29. Accept failure as a step towards victory.

30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work.

31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.

32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.

33. It’s much easier to put on a trade than to take it off.

34. If a market doesn’t do what you think it should do, get out.

35. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.

36. Never add to a losing position.

37. Beware of trying to pick tops or bottoms.

38. You must believe in yourself and your judgement if you expect to make a living at this game.

39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be – up or down.

40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss – that is what does the damage to the pocket book and to the soul.

41. Never volunteer advice and never brag of your winnings.

42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.

43. Standing aside is a position.

44. It is better to be more interested in the market’s reaction to new information than in the piece of news itself.

45. If you don’t know who you are, the markets are an expensive place to find out.

46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.

47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.

48. When the ship starts to sink, don’t pray – jump!

49. Lose your opinion – not your money.

50. Assimilate into your very bones a set of trading rules that works for you.

Source: page 43 of the original edition of WD GANN’S “How to make Profits in commodities” Published by Lambert , 1942

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.

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%.