As we enter the half way point of the week of the European summit and the market struggles to find a direction we need to maintain our discipline and follow our trading plan and trade our method. We should not start trading randomly if the markets start to become confusing, stick to your proven plan so that when the market once again trends or trades off of technicals or fundamentals instead of the latest headline or rumor from Europe you will be ready to capitalize on it. Here are some rules from one of the most famous trading letter writers in the world to consider adding to your own.
Dennis Gartman writes the famed Gartman Letter widely read by investors and traders worldwide. “The Gartman Letter is a daily commentary on the global capital markets subscribed to by leading banks, brokerage firms, hedge funds, mutual funds, along with energy and grain trading companies around the world. He also talks about his trades and walks you through his thought-process. For many traders his letter is the daily must-read in the morning to get a handle on what is going on in the world.
Each year on the Friday after Thanksgiving, he publishes his “Rules of Trading,” adding to them as wisdom increases. Below are the ten that I think are the most powerful.
DENNIS GARTMAN’S NOT-SO-EASY TO FOLLOW RULES OF TRADING
- 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!
- Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
- 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.
- Trading runs in cycles: some good; most bad. Trade large and aggressively 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 awry. This is the nature of trading; accept it.
- Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.
- 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 the time, as long as our losses are small and our profits are large.
- 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.
- 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; new lows sold.
- 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.
- An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.
