Dennis Gartman’s 22 “Rules of Trading

1. Never, under any circumstance add to a losing position.... ever!

otherwise will eventually lead to ruin!

2. 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.
3.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.

4.In bull markets we can only be long or in cash,and in bear markets

we can only be short or in cash

5."Markets can remain illogical longer than you

6.Sell markets that show the greatest weakness, and buy those that
show the greatest strength.

7.Try to trade the first day of a gap, for gaps usually indicate violent
new action. when they happen (especially in stocks) they are usually
very important.

8.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.

9.To trade successfully, think like a fundamentalist; trade like a

technician. 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, should we, trade.
10. 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.

11. Keep your technical systems simple. Complicated systems

breed confusion; simplicity breeds elegance.

12. 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.

13. 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.

14. Establish initial positions on strength 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 the 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; new 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!

GOLDEN RULES FOR SUCCESSFUL TRADING

In order to make a success in trading in stock market, the trader must have
definiterules and follow them. The rules given below are based upon
my personal experienceand anyone who follows them will make a
success.

1. Amount of capital to use: Divide your risk capital into 20 equal parts

and never risk more than onepart of your capital on any trade.2. Use
stop loss orders. Always protect a trade when you make it with
a stoploss order 3 to 5 pointsaway.3. Never over trade. This would
be violating your capital rule.4. Never let a profit run into a loss. After
once you have a profit of 1:3 or more, book partial profit so thatyou 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.6. When
in doubt, get out, and don't get in when in doubt.7. Trade only in
active stocks. Keep out of slow, dead ones.8. Equal distribution of risk.
Trade in 4 or 5 stocks. If possible, avoid tying up all your capital
 in anyonestock.9. Never be rigid in your orders or fix a buying or
selling price. Trade as market moves.10. Don't close your trades
without a good reason. Follow up with a stop loss order to protect
yourprofits.11. Accumulate a surplus. After you have made a series of
successful trades, put some money intosurplus account to be used only
in emergency or in times of panic.12. Never buy just to get
a dividend.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 youare 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 trade. Put stop loss inthe system not in mind.17. Be just as
willing to sell short as you are to buy. Your objective is to keep with the
trend and makemoney.18. Never buy just because the price of a stock
is low or sell short just because the price is high.19. Be careful about
pyramiding at the wrong time. Wait until the stock is very active and
has crossedResistance Levels before buying more and until it has
broken out of the zone of distribution beforeselling more.20. Never
hedge. If you are long in one stock and it starts to go down. Do not
sell another stock tohedge it. Get out at the market; take your loss and
wait for another opportunity.21. Avoid increasing your trading after
a long period of success or a period of profitable trades.22. Never
change your position in the market without a good reason. When you
make a trade, let it befor some good reason or according to some
definite plan; then do not get out without a definiteindication of a
change in trend.23. Select the stocks with small volume of shares
outstanding to pyramid on the buying side and theones with the largest
volume of stock outstanding to sell short.24. Avoid getting in and out of
the market too often.

When you decide to make a trade be sure that you are not violating any of
these24 rules which are vital and important to your success. When you
close a trade with aloss, go over these rules and see which rule you
have violated; then do not make thesame mistake the second time.
Experience and investigation will convince you of thevalue of these
rules, and observation and study will lead you to a correct and
practicaltheory for success in stock market
50 Golden Rules for Traders

1. Follow the trends. This is probably some of the hardest advice for a trader to
follow because the personality of the typical futures trader is not 'one of the
crowd.' Futures traders (and futures brokers) are highly individualistic; the
markets seem to attract those who are. Very simply, it takes a special kind of
person, not 'one of the crowd,' to earn enough risk capital to get involved in
the futures markets. So the typical trader and the typical broker must guard
against their natural instincts to be highly individualistic, to buck the trend.

2. Know why you are in the markets. To relieve boredom? To hit it big? When you
can honestly answer this question, you may be on your way to successful
futures trading. 3. Use a system, any system, and stick to it. 4. Apply money
management techniques to your trading. 5. Do not overtrade. 6. Take a
position only when you know where your profit goal is and where you are
going to get out if the market goes against you. 7. Trade with the trends, rather
than trying to pick tops and bottoms. 8. Don't trade many markets with little
capital. 9. Don't just trade the volatile contracts. 10. Calculate the risk/reward
ratio before putting a trade on, then guard against holding it too long. 11.
Establish your trading plans before the market opening to eliminate emotional
reactions. Decide on entry points, exit points, and objectives. Subject your
decisions to only minor changes during the session. Profits are for those who
act, not react. Don't change during the session unless you have a very good
reason.

12. Follow your plan. Once a position is established and stops are selected, do not
get out unless the stop is reached or the fundamental reason for taking the position
changes.

13. Use technical signals (charts) to maintain discipline - the vast majority of
traders are not emotionally equipped to stay disciplined without some technical
tools

. 14. Have a disciplined, detailed trading plan for each trade; i.e., entry, objective,
exit, with no changes unless hard data changes. Disciplined money
management means intelligent trading allocation and risk management. The
overall objective is end-of-year bottom line, not each individual trade.

15. When you have a successful trade, fight the natural tendency to give some
of it back.

16.Use a disciplined trade selection system...an organized, systematic process

to eliminate impulse or emotional trading.

17. Trade with a plan-not with hope, greed, or fear. Plan where you will get in
the market, how much you will risk on the trade, and where you will take your
profits.
18. Most importantly, cut your losses short and let your profits run. It sounds
simple, but it isn't. Let's look at some of the reasons many traders have a hard
time 'cutting losses short.' First, it's hard for any of us to admit we've made a
mistake. Let's say a position starts going against you, and all your 'good'
reasons for putting the position on are still there. You say to yourself, 'it's only
a temporary setback. After all (you reason), the more the position goes against
me, the better chance it has to come back-the odds will catch up.' Also, the
reasons for entering the trade are still there. By now you've lost quite a bit; you
sell yourself on giving it 'one more day.' It's easy to convince yourself because,
by this time, you probably aren't thinking very clearly about the position.
Besides, you've lost so much already, what's a little more? Panic sets in, and
then comes the worst, the most devastating, the most fallacious reasoning of
all, when you figure: 'That contract doesn't expire for a few more months;
things are bound to turn around in the meantime.' So it goes; so cut those
losses short. In fact, many experienced traders say if a position still goes
against you the third day in, get out. Cut those losses fast, before the losing
position starts to infect you, before you 'fall in love' with it. The easiest way is
to inscribe across the front of your brain, 'Cut my losses fast.' Use stop loss
orders, aim for a $500 per contract loss limit...or whatever works for you, but
do it. Now to the 'letting profits run' side of the equation. This is even harder
because who knows when those profits will stop running? Well, of course, no
one does, but there are some things to consider. First of all, be aware that there
is an urge in all of us to want to win...even if it's only by a narrow margin.
Most of us were raised that way. Win-even if it's only by one touchdown, one
point, or one run. Following that philosophy almost assures you of losing in
the futures markets because the nature of trading futures usually means that
there are more losers than winners. The winners are often big, big, big
winners, not 'one run' winners. Here again, you have to fight human nature.
Let's say you've had several losses (like most traders), and now one of your
positions is developing into a pretty good winner. The temptation to close it
out is universally overwhelming. You're sick about all those losses, and here's
a chance to cash in on a pretty good winner. You don't want it to get away.
Besides, it gives you a nice warm feeling to close out a winning position and
tell yourself (and maybe even your friends) how smart you were (particularly
if you're beginning to doubt yourself because of all those past losers). That
kind of reasoning and emotionalism have no place in futures trading;
therefore, the next time you are about to close out a winning position, ask
yourself why. If the cold, calculating, sound reasons you used to put on the
position are still there, you should strongly consider staying. Of course, you
can use trailing stops to protect your profits, but if you are exiting a winning
position out of fear...don't; out of greed...don't; out of ego... don't; out of
impatience...don't; out of anxiety...don't; out of sound fundamental and/or
technical reasoning...do. 19. You can avoid the emotionalism, the second
guessing, the wondering, the agonizing, if you have a sound trading plan
(including price objectives, entry points, exit points, risk-reward ratios, stops,
information about historical price levels, seasonal influences, government
reports, prices of related markets, chart analysis, etc.) and follow it. Most
traders don't want to bother, they like to 'wing it.' Perhaps they think a plan
might take the fun out of it for them. If you're like that and trade futures for the
fun of it, fine. If you're trying to make money without a plan-forget it. Trading
a sound, smart plan is the answer to cutting your losses short and letting your
profits run. 20. Do not overstay a good market. If you do, you are bound to
overstay a bad one also.

21. Take your lumps, just be sure they are little lumps. Very successful traders
generally have more losing trades than winning trades. They don't have any
hang-ups about admitting they're wrong, and have the ability to close out
losing positions quickly. 22. Trade all positions in futures on a performance
basis. The position must give a profit by the end of the third day after the
position is taken, or else get out. 23. Program your mind to accept many small
losses. Program your mind to 'sit still' for a few large gains. 24. Most people
would rather own something (go long) than owe something (go short).
Markets can (and should) also be traded from the short side. 25. Watch for
divergences in related markets-is one market making a new high and another
not following? 26. Recognize that fear, greed. ignorance, generosity, stupidity,
impatience. self-delusion, etc., can cost you a lot more money than the
market(s) going against you, and that there is no fundamental method to
recognize these factors. 27. Don't blindly follow computer trading. A
computer trading plan is only as good as the program. As the old saying goes,
'Garbage in, garbage out.' 28. Learn the basics of futures trading. It's amazing
how many people simply don't know what they're doing. They're bound to
lose, unless they have a strong broker to guide them and keep them out of
trouble. 29. Standing aside is a position. 30. Client and broker must have
rapport. Chemistry between account executive and client is very important; the
odds of picking the right AE the first time are remote. Pick a broker who will
protect you from yourself...greed, ego, fear, subconscious desire to lose
(actually true with some traders). Ask someone who trades if they know a
good futures broker. If you find one who has room for you, give him your
account. 31. Sometimes, when things aren't going well and you're thinking
about changing brokerage firms, think about just changing AEs instead. Phone
the manager of the local office, let him describe some of the other AEs in the
office, and see if any of them seem right enough to have a first meeting with.
Don't worry about getting your account executive in trouble; the office
certainly would rather have you switch AEs than to lose your business
altogether. 32. Broker/client psychology must be in tune, or else the broker
and client should part company early in the program. Client and broker should
be in touch repeatedly, so when the time comes, both parties are mentally
programmed to take the necessary action without delay. 33. Most people do
not have the time or the experience to trade futures profitably, so choosing a
broker is the most important step to profitable futures trading. 34. When you
go stale, get out of the markets for a while. Trading futures is demanding, and
can be draining-especially when you're losing. Step back; get away from it all
to recharge your batteries. 35. If you're in futures simply for the thrill of
gambling, you'll probably lose because, chances are, the money does not mean
as much to you as the excitement. Just knowing this about yourself may cause
you to be more prudent, which could improve your trading record. Have a
business-like approach to the markets. Anyone who is inclined to speculate in
futures should look at speculation as

a business, and treat it as such. Do not regard it as a pure gamble, as so many

people do. If speculation is a business, anyone in that business should learn
and understand it to the best of his/her ability. 36. When you open an account
with a broker, don't just decide on the amount of money, decide on the length
of time you should trade. This approach helps you conserve your equity, and
helps avoid the Las Vegas approach of 'Well, I'll trade till my stake runs out.'
Experience shows that many who have been at it over a long period of time
end up making money. 37. Don't trade on rumors. If you have, ask yourself
this: 'Over the long run, have I made money or lost money trading on rumors?'
O.K. then, stop it. 38. Beware of all tips and inside information. Wait for the
market's action to tell you if the information you've obtained is accurate, then
take a position with the developing trend. 39. Don't trade unless you're well
financed...so that market action, not financial condition, dictates your entry
and exit from the market. If you don't start with enough money, you may not
be able to hang in there if the market temporarily turns against you. 40. Be
more careful if you're extra smart. Smart people very often put on a position a
little too early. They see the potential for a price movement before it becomes
actual. They become worn out or 'tapped out,' and aren't around when a big
move finally gets underway. They were too busy trading to make money. 41.
Stay out of trouble, your first loss is your smallest loss. 42. Analyze your
losses. Learn from your losses. They're expensive lessons; you paid for them.
Most traders don't learn from their mistakes because they don't like to think
about them. 43. Survive! In futures trading, the ones who stay around long
enough to be there when those 'big moves' come along are often successful.
44. If you're just getting into the markets, be a small trader for at least a year,
then analyze your good trades and your bad ones. You can really learn more
from your bad ones. 45. Carry a notebook with you, and jot down interesting
market information. Write down the market openings, price ranges, your fills,
stop orders, and your own personal observations. Re-read your notes from
time to time; use them to help analyze your performance. 46. 'Rome was not
built in a day,' and no real movement of importance takes place in one day. A
speculator should have enough excess margin in his account to provide staying
power so he can participate in big moves. 47. Take windfall profits (profits
that have no sound reasons for occurring). 48. Periodically redefine the kind of
capital you have in the markets. If your personal financial situation changes
and the risk capital becomes necessary capital, don't wait for 'just one more
day' or 'one more price tick,' get out right away. If you don't, you'll most likely
start trading with your heart instead of your head, and then you'll surely lose.
49. Always use stop orders, always...always...always. 50. Don't use the
markets to feed your need for excitement

Peter Lynch's 25 Golden Rules for Investing

Rule 1: Investing is fun and exciting, but dangerous if you don't do any work.
Rule 2: Your investor's edge is not something you get from Wall Street
experts.
It's something you already have. You can outperform the experts if you use
your edge by investing in companies or industries you already understand.
Rule 3: Over the past 3 decades, the stock market has come to be
dominated
by a herd of professional investors. Contrary to popular belief, this makes it
easier for the amateur investor. You can beat the market by ignoring the
herd.
Rule 4: Behind every stock is a company. Find out what it's doing.
Rule 5: Often, there is no correlation between the success of a company's
operations and the success of its stock over a few months or even a few
years.
In the long term, there is a 100% correlation between the success of the
company and the success of its stock. This disparity is the key to making
money; it pays to be patient, and to own successful companies.
Rule 6: You have to know what you own, and why you own it. "This baby is a
cinch to go up" doesn't count.
Rule 7: Long shots almost always miss the mark.
Rule 8: Owning stocks is like having children — don't get involved with more
than you can handle. The part-time stockpicker probably has time to follow
8-12
companies, and to buy and sell shares as conditions warrant. There don't
have
to be more than 5 companies in the portfolio at any one time.
Rule 9: If you can't find any companies that you think are attractive, put
your
 money in the bank until you discover some.
Rule 10: Never invest in a company without understanding its finances. The
biggest losses in stocks come from companies with poor balance sheets.
Always
look at the balance sheet to see if a company is solvent before you risk your
money on it.
Rule 11: Avoid hot stocks in hot industries. Great companies in cold, non-
growth industries are consistent big winners.
Rule 12: With small companies, you are better off to wait until they turn a
profit before you invest.
Rule 13: If you are thinking of investing in a troubled industry, buy the
companies with staying power. Also, wait for the industry to show signs of
revival. Buggy whips and radio tubes were troubled industries that never came
back.
Rule 14: If you invest $1000 in a stock, all you can lose is $1000, but you
stand to gain $10,000 or even $50,000 over time if you are patient. The
average person can concentrate on a few good companies, while the fund
manager is forced to diversify. By owning too many stocks, you lose this
advantage of concentration. It only takes a handful of big winners to make a
lifetime of investing worthwhile.
Rule 15: In every industry and every region of the country, the observant
amateur can find great growth companies long before the professionals have
discovered them.
Rule 16: A stock market decline is as routine as a January blizzard in Colorado.
If you are prepared, it can't hurt you. A decline is a great opportunity to pick up
the bargains left behind by investors who are fleeing the storm in panic.
Rule 17: Everyone has the brainpower to make money in stocks. Not everyone
has the stomach. If you are susceptible to selling everything in a panic, you
ought to avoid stocks and stock mutual funds altogether.
Rule 18: There is always something to worry about. Avoid weekend thinking
and ignore the latest dire predictions of the newscasters. Sell a stock because
the company's fundamentals deteriorate, not because the sky is falling.
Rule 19: Nobody can predict interest rates, the future direction of the
economy, or the stock market, Dismiss all such forecasts and concentrate on
what's actually happening to the companies in which you have invested.
Rule 20: If you study 10 companies, you will find 1 for which the story is better
than expected. If you study 50, you'll find 5. There are always pleasant
surprises to be found in the stock market — companies whose achievements
are
being overlooked on Wall Street.
Rule 21: If you don't study any companies, you have the same success buying
stocks as you do in a poker game if you bet without looking at your cards.
Rule 22: Time is on your side when you own shares of superior companies. You
can afford to be patient — even if you missed Wal-Mart in the first five years, it
was a great stock to own in the next five years. Time is against you when you
own options.
Rule 23: If you have the stomach for stocks, but neither the time nor the
inclination to do the homework, invest in equity mutual funds. Here, it's a good
idea to diversify. You should own a few different kinds of funds, with managers
who pursue different styles of investing: growth, value small companies, large
companies etc. Investing the six of the same kind of fund is not diversification.
Rule 24: Among the major stock markets of the world, the U.S. market ranks
8th in total return over the past decade. You can take advantage of the faster-
growing economies by investing some portion of your assets in an overseas
fund with a good record.
Rule 25: In the long run, a portfolio of well-chosen stocks and/or equity mutual
funds will always outperform a portfolio of bonds or a money-market account.
In the long run, a portfolio of poorly chosen stocks won't outperform the money
left under the mattress.
10 Steps to Building a Winning Trading Plan
There is an old expression in business that, if you fail to plan, you plan to fail. It may sound glib,
but people that are serious about being successful, including traders, should follow those words
as if they are written in stone. Ask any trader who makes money on a consistent basis and they
will probably tell you that you have two choices: 1) methodically follow a written plan or 2) fail.
If you already have a written trading or investment plan, congratulations, you are in the
minority. It takes time, effort, and research to develop an approach or methodology that works
in financial markets. While there are never any guarantees of success, you have eliminated one
major roadblock by creating a detailed trading plan.
KEY TAKEAWAYS
 Having a plan is essential for achieving trading success.
 A trading plan should be written in stone, but is subject to reevaluation and can
be adjusted along with changing market conditions.
 A solid trading plan considers the trader's personal style and goals.
 Knowing when to exit a trade is just as important as knowing when to enter the
position.
 Stop-loss prices and profit targets should be added to the trading plan to
identify specific exit points for each trade.
If your plan uses flawed techniques or lacks preparation, your success won't come immediately,
but at least you are in a position to chart and modify your course. By documenting the process,
you learn what works and how to avoid the costly mistakes that newbie traders sometimes face.
Whether or not you have a plan now, here are some ideas to help with the process.
Disaster Avoidance 101
Trading is a business, so you have to treat it as such if you want to succeed. Reading a few
books, buying a charting program, opening a brokerage account, and starting to trade with real
money is not a business plan—it is more like a recipe for disaster.
A plan should be written—with clear signals that are not subject to change—while you are
trading, but subject to reevaluation when the markets are closed. The plan can change with
market conditions and might see adjustments as the trader's skill level improves. Each trader
should write their own plan, taking into account personal trading styles and goals. Using
someone else's plan does not reflect your trading characteristics.
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Investing After the Golden Age
Building the Perfect Master Plan
No two trading plans are the same because no two traders are exactly alike. Each approach will
reflect important factors like trading style as well as risk tolerance. What are the other essential
components of a solid trading plan? Here are 10 that every plan should include:
1. Skill Assessment
Are you ready to trade? Have you tested your system by paper trading it, and do you have
confidence that it will work in a live trading environment? Can you follow your signals without
hesitation? Trading the markets is a battle of give and take. The real pros are prepared and take
profits from the rest of the crowd who, lacking a plan, generally give money away after costly
mistakes.
2. Mental Preparation
How do you feel? Did you get enough sleep? Do you feel up to the challenge ahead? If you are
not emotionally and psychologically ready to do battle in the market, take the day off—
otherwise, you risk losing your shirt. This is almost guaranteed to happen if you are angry,
preoccupied, or otherwise distracted from the task at hand.
Many traders have a market mantra they repeat before the day begins to get them ready. Create
one that puts you in the trading zone. Additionally, your trading area should be free of
distractions. Remember, this is a business and distractions can be costly.
3. Set Risk Level
How much of your portfolio should you risk on one trade? This will depend on your trading
style and tolerance for risk. The amount of risk can vary, but should probably range from around
1% to 5% of your portfolio on a given trading day. That means if you lose that amount at any
point in the day, you get out of the market and stay out. It's better to take a break, and then fight
another day, if things aren't going your way.
4. Set Goals
Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum
risk/reward you will accept? Many traders will not take a trade unless the potential profit is at
least three times greater than the risk. For example, if your stop loss is $1 per share, your goal
should be a $3 per share in profit. Set weekly, monthly, and annual profit goals in dollars or as a
percentage of your portfolio, and reassess them regularly.
5. Do Your Homework
Before the market opens, do you check what is going on around the world? Are overseas
markets up or down? Are S&P 500 index futures up or down in pre-market? Index futures are a
good way of gauging the mood before the market opens because futures contracts trade day and
night.
What are the economic or earnings data that are due out and when? Post a list on the wall in
front of you and decide whether you want to trade ahead of an important report. For most
traders, it is better to wait until the report is released rather than taking unnecessary risks
associated with trading during the volatile reactions to reports. Pros trade based on probabilities.
They don't gamble. Trading ahead of an important report is often a gamble because it is
impossible to know how markets will react.
6. Trade Preparation
Whatever trading system and program you use, label major and minor support and
resistance levels on the charts, set alerts for entry and exit signals and make sure all signals can
be easily seen or detected with a clear visual or auditory signal.
7. Set Exit Rules
Most traders make the mistake of concentrating most of their efforts on looking for buy signals,
but pay very little attention to when and where to exit. Many traders cannot sell if they are down
because they don't want to take a loss. Get over it, learn to accept losses, or you will not make it
as a trader. If your stop gets hit, it means you were wrong. Don't take it personally. Professional
traders lose more trades than they win, but by managing money and limiting losses, they still
make profits.
Before you enter a trade, you should know your exits. There are at least two possible exits for
every trade. First, what is your stop loss if the trade goes against you? It must be written down.
Mental stops don't count. Second, each trade should have a profit target. Once you get there, sell
a portion of your position and you can move your stop loss on the rest of your position to
the breakeven point if you wish.
8. Set Entry Rules
This comes after the tips for exit rules for a reason: Exits are far more important than entries. A
typical entry rule could be worded like this: "If signal A fires and there is a minimum target at
least three times as great as my stop loss and we are at support, then buy X contracts or shares
here."
Your system should be complicated enough to be effective, but simple enough to facilitate snap
decisions. If you have 20 conditions that must be met and many are subjective, you will find it
difficult (if not impossible) to actually make trades. In fact, computers often make better traders
than people, which may explain why most of the trades that now occur on major stock
exchanges are generated by computer programs.
Computers don't have to think or feel good to make a trade. If conditions are met, they enter.
When the trade goes the wrong way or hits a profit target, they exit. They don't get angry at the
market or feel invincible after making a few good trades. Each decision is based on
probabilities, not emotion.
9. Keep Excellent Records
Many experienced and successful traders are also excellent at keeping records. If they win a
trade, they want to know exactly why and how. More importantly, they want to know the same
when they lose, so they don't repeat unnecessary mistakes. Write down details such as targets,
the entry and exit of each trade, the time, support and resistance levels, daily opening range,
market open and close for the day, and record comments about why you made the trade as well
as the lessons learned.
You should also save your trading records so that you can go back and analyze the profit or loss
for a particular system, drawdowns (which are amounts lost per trade using a trading system),
average time per trade (which is necessary to calculate trade efficiency), and other important
factors. Also, compare these factors to a buy-and-hold strategy. Remember, this is a business
and you are the accountant. You want your business to be as successful and profitable as
possible.
75%
The percentage of day traders that quit within two years, according to a 2017 paper titled "Do
Day Traders Rationally Learn About Their Abilities" by Barber, Lee, Liu, Odean, and Zhang.1
10. Analyze Performance
After each trading day, adding up the profit or loss is secondary to knowing the why and how.
Write down your conclusions in your trading journal so you can reference them later.
Remember, there will always be losing trades. What you want is a trading plan that wins over
the longer term.
The Bottom Line
Successful practice trading does not guarantee that you will find success when you begin trading
real money. That's when emotions come into play. But successful practice trading does give the
trader confidence in the system they are using, if the system is generating positive results in a
practice environment. Deciding on a system is less important than gaining enough skill to make
trades without second-guessing or doubting the decision. Confidence is key.
There is no way to guarantee a trade will make money. The trader's chances are based on their
skill and system of winning and losing. There is no such thing as winning without losing.
Professional traders know before they enter a trade that the odds are in their favor or they
wouldn't be there. By letting their profits ride and cutting losses short, a trader may lose some
battles, but they will win the war. Most traders and investors do the opposite, which is why they
don't consistently make money.
Traders who win consistently treat trading as a business. While there is no guarantee that you
will make money, having a plan is crucial if you want to be consistently successful and survive
in the trading game.

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The complete guide to trading
strategies
A trading strategy is different from a trading style. There are four high-
level trading strategies that every trader should know. Discover the
main trading strategies in this article.

S
ource: Bloomberg

Forex   Price   Arbitrage   Trend following   Technical analysis   Market sentiment





 Sibulele Sikuni | Financial Writer, Johannesburg

What’s on this page?

1. What is a trading strategy?2. Best trading strategies

3. What’s the best trading strategy for you?4. What to know before you put
your trading strategy in action

What is a trading strategy?

A trading strategy is a plan that employs analysis to identify specific market conditions
and price levels. While fundamental analysis can be used to predict price movements,
most strategies focus on specific technical indicators.

What is the difference between trading strategy and trading style?

Although there is a lot of confusion between ‘style’ and ‘strategy’, there are some
important differences that every trader should know. While a trading style is an
overarching plan for how often you’ll trade, and how long you’ll keep positions open for,
a strategy is a very specific methodology for defining at which price points you’ll enter
and exit trades.

A trading style is your preferences while trading the market or instrument, such as how
frequently and how long or short-term to trade. A trading style can change based
on how the market behaves but this is dependent on whether you want to adapt or
withdraw your trade until the conditions are favourable.

Best trading strategies

We’ve looked at some of the most popular top-level strategies, which include:

1. Trend trading

2. Range trading

3. Breakout trading
 4. Reversal trading

5. Gap trading

6. Pairs trading

7. Arbitrage

8. Momentum trading

Trend trading

A trend trading strategy relies on using technical analysis to identify the direction of

market momentum. This is usually considered a medium-term strategy, best suited to
the trading styles of position traders or swing traders, as each position will remain open
for as long as the trend continues.

The price of an asset can trend up or down. If you were going to take a long position,
you’d do so when you believe the market is going to reach higher highs. If you were
going to take a short position, you’d do so if you thought the market would reach lower
lows.

Derivative and leveraged products – such as CFDs – are popular choices for trend-
following strategies, because they enable traders to go both long and short. Here, you
would put up a small initial deposit (called margin) to open a larger position. Note that
leveraged trading is high risk and you could lose more than your initial deposit amount,
because your total profit or loss is based on the total position size. Make sure you have
adequate risk management steps in place.

Trend traders will use indicators throughout the trend to identify potential retracements,
which are temporary moves against the prevailing trend. Trend traders will often take
little notice of retracements, but it’s important to confirm it’s a temporary move rather
than a complete reversal – which is often a signal to close a trade.
Some of the most popular technical analysis tools included in trend-following strategies
include moving averages, the relative strength index (RSI) and the average directional
index (ADX).

Learn more about trend trading strategies

Range trading

Range trading is a strategy that seeks to take advantage of consolidating markets – the
term to describe a market price that remains within lines of support and resistance.
Range trading is popular among very short-term traders (known as scalpers), as it
focusses on short-term profit taking, however it can be seen across all timeframes and
styles.

While trend traders focus on the overall trend, range traders will focus on the short-term
oscillations in price. They will open long positions when the price is moving between
two clear levels and is not breaking above or below either.

This is a popular forex trading strategy, as many traders work off the idea that the very
liquid currencies market remains in a tight trading range, with significant volatility in
between these levels. This means that short-term traders can seek to take advantage
of these fluctuations between known support and resistance levels.
There are a range of other indicators that range traders will use, such as the stochastic
oscillator or RSI, which identify overbought and oversold signals. Range traders will
also use tools, such as the Bollinger band or fractals indicators, to identify when the
market price might break from this range – indicating it is time to close the position.

Learn more about range trading

Breakout trading

Breakout trading is the strategy of entering a given trend as early as possible, ready for
the price to ‘break out’ of its range. Breakout trading is commonly used by day traders
and swing traders, as it takes advantage of short to medium-term market movements.

Traders who use this strategy will look for price points that indicate the start of a period
of volatility or a change in market sentiment – by entering the market at the correct
level, these breakout traders can ride the movement from start to finish. It is common to
place a limit-entry order around the levels of support or resistance, so that any breakout
executes a trade automatically.

Most breakout trading strategies are based on volume levels, as the theory assumes
that when volume levels start to increase, there will soon be a breakout from a support
or resistance level. As such, popular indicators include the money flow index (MFI), on-
balance volume and the volume-weighted moving average.
Reversal trading

The reversal trading strategy is based on identifying when a current trend is going to
change direction. Once the reversal has happened, the strategy will take on a lot of the
characteristics of a trend trading strategy – as it can last for varying amounts of time.

A reversal can occur in both directions, as it is simply a turning point in market

sentiment. A ‘bullish reversal’ indicates that the market is at the bottom of a downtrend
and will soon turn into an uptrend. While a ‘bearish reversal’ indicates that the market is
at the top of an uptrend and will likely become a downtrend.

When trading reversals, it is important to make sure that the market is not simply
retracing. The Fibonacci retracement is a common tool, used to confirm whether the
market surpasses known retracement levels. It is worth noting that some consider
Fibonacci retracements to be a self-fulfilling prophecy, as many orders will congregate
around these levels and push the price in the desired direction.

It is important to combine technical indicators with other forms of analysis, whether this
is other technical tools or fundamental analysis.
Gap trading

A gap occurs when where no trading activity has taken place. This happens when an
asset’s price moves sharply high or low with nothing in between, implying the market
has opened at a different price to its previous close.

If you’re a gap trader, you are likely a day trader that watches these price gaps from a
previous day and seek opportunities between this and the opening range of trading for
the next day. An opening range that rises above the previous day’s close is a ‘gap’ that
usually signifies going long, while an opening range that is below the previous day’s
close signifies an opportunity to go short.

Pairs trading

Pairs trading is finding the correlated pair of instruments where the valuation
relationship has gone out of whack, buying under-priced instruments and the selling the
overpriced ones. The aim is to make a profit irrespective of market conditions such as
downtrends, uptrends and so on.

Arbitrage

Arbitrage is a transaction or a series of transactions in which you generate profit without

taking any risk. An example of this would be spotting an opportunity in two equivalent
assets where one is priced higher than the other and taking advantage of buying the
lower priced one while it is still undervalued. There are few arbitrage opportunities
because many traders may also be on the lookout and so they are often found quickly.
In this case, the arbitrage edge disappears quickly as more traders flood the market to
try and trade the opportunity.

Momentum

Momentum trading strategy is based on price trends and the direction they're taking.
This happens where there is heavy price movement (or momentum) and traders are
selling and buying assets for a period of time. Once there is a price change, the
momentum changes in a different direction.
What’s the best trading strategy for you?

There’s no one-size-fits-all approach when it comes to trading, and no one person’s

strategy will be exactly the same. The strategy that’s going to work best for you will
depend on your appetite for risk, your trading style, your level of motivation and more.