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My Ten Commandments of Trading

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1) Only the humble survive in this game. The best traders have been humbled by the game at some point. All of them. Arrogance comes with a price. That said, successful speculation is a curious cocktail of ego and humility. A great trader balances arrogance and confidence with humility and patience.

2) There are a lot of false adages on Wall Street. One is “price is truth.” Price is not truth. Persistency, momentum is truth. Any stock can rally 1 to 3 days without meaning anything. Fast moves come from false moves. Follow through is key.

3) Know yourself and your style. When you’ve had a string of wins, the natural tendency is to want to be larger and take on more risk. For some traders, this may be because they aren’t getting as big a rush from winning unless they are betting bigger or more often and taking on more risk. It is natural to get complacent at the top of your personal cycle and a market cycle. The art of the trade is to know when you are in your up cycle and you can press within the context of staying true to your style/process without self-destructing. In other words, don’t confuse brains with a bull market.

4) When you place your protective stop, have an Uncle Point for when you don’t adhere to your stop.

5) Pat yourself on the back for taking a loss and sticking to your discipline. Don’t get into a fight with the market. You will lose. It’s like getting into an argument with a crazy person. Onlookers will have trouble distinguishing between you.

6) People love price targets. They want to know where a stock is going before they put on a trade. While I have developed a few tools that often give pinpoint price projections, such as the Square of 9 and my Pocket Pivot Indicator, I am not trying to figure out where the market is going before the price action. Let the market tell you where it’s going. Allow the market to speak.

The reason I use price projections is two-fold. First, having them allows me to gauge a stock's behavior at an idealized objective. That way, a stock's behavior doesn’t just roll off you like water off a duck’s back. Second, having a price objective gives me the wherewithal to trim/exit a position if the behavior becomes suspect once the stock achieves a particular region.

Hit & Run, Trim & Trail.

7) This isn’t a game where the smartest are necessarily the best. If IQ were a ticket to riches in the market, there would be many more successful traders. Why? Because highly intelligent people not only want to be right, they want to be 100% right.

a) You have to decide if you want to make money or be right. You can be wrong 50% of the time trading and still get rich if you have the temperament and the discipline. Temperament means controlling your urges and not getting too exuberant in either direction. It means keeping an even keel, while at the same time being willing to go for the jugular when you see the whites of Mr. Market’s eyes.

b) As a trader, markets turn on a dime, most traders cannot. You have to admit you are wrong and cut and run. Your first loss is usually your best loss. As well, you have to be able to reload a trade once stopped out if it revalidates, retriggers. Oftentimes these are the very best winners I have had. But if I personalized getting stopped out and let my ego get in the way, I’d never get back in. As I like to say, the first mouse gets the squeeze; the second mouse gets the cheese.

In sum, your EQ, or Emotional Quotient, is more important than a superior IQ. Street smarts trump book smarts when it comes to trading. Some people are too smart for their own good and are their own worst enemies. In trading, I have found the best principle is to believe what you see until proven otherwise.

In sum, speculation is an emotional battle, not an intelligent battle.

8) All trading is contextual. Learn to read charts. Mark them up yourself. There is something indelible in printing out a chart and plotting the pivots and trendlines versus looking at a depiction of price action on your computer. When you look at charts always use multiple time frame analysis to pinpoint precise buy points. What may not look good on the daily chart often sets up nicely on the weeklies. Learn my 3 Week Chart Method, which is how I define the Line of Least Resistance.

Keep a journal of not just your big winners but also your big losers and, just as important, the big missed opportunities. We learn more from our mistakes than from the winners. We take those in stride.

9) Everyone needs a coach. Good judgment comes from experience. The best athletes and performers have coaches. My coach was my dad. He was the best instinctive tape-reader I ever met. Some of the words of wisdom he imparted to me:

a) The more you try to see, the more stocks you look at, the less you’ll see. It’s impossible to herd cats.

b) Stocks don’t move; they are moved.

c) The market doesn’t know where you got into a position. What’s important in trading is whether the stock is in a bullish or bearish position at the moment.

d) Relative strength begets relative strength. The biggest tell of a stock under accumulation is a stock that stays green in a red tape. It’s yelling “Damn the torpedoes, full steam ahead.”

10) Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets us in trouble.

After reading these, like The Dude, you might say, “Yeah, but that’s just your opinion man.”

True. But I’ve been trading for over 35 years on my own since leaving the famous Drexel Burnham office in Beverly Hills and I’ve traded through a lot of cycles. My Hit & Run Nightly Report has been providing traders with both long and short day trade and swing ideas every day since 1996 while navigating market volatility and timing in the morning report.

So my opinion counts a little.

You’ve just read some powerful trading principles.

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