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[dc]E[/dc]veryone has a list of trading rules, and I’ve seen some great ones over the years. (I just published Taleb’s risk management rules yesterday.) I think lists are useful as memory cues—if you understand the essence of trading and markets (not a trivial task to understand that, by the way), then lists can be compact expressions of truth—perhaps the market equivalent of the koan? I think it makes sense to have a list for yourself and to update that list as your style changes and your focus shifts to different markets or styles of trading. I think a list like this is very personal, and might not be that useful for someone else, but I offer mine here as food for thought:

The Market

  • What we call the market is the end result of uncountable conflicting influences. It is highly competitive and very nearly completely efficient.
  • It is very difficult to make money trading. To do so, you absolutely must have an edge. (If you don’t know what your edge is, you don’t have one.)
  • Knowledge is not enough. It is one thing to know what to do in the market, but correct trading often flies in the face of human nature. Iron discipline is absolutely critical.
  • Most of the things people think work actually do not work in the market.
  • Simple things work.

Trade Management

  • Let winners run. While momentum is in phase, the market can run much further than might be expected. Do not exit winners without reason!
  • Be quick to admit when wrong and get flat.
  • Sometimes a time stop is the right solution. If a position is entered, but the anticipated scenario does not develop, then get out.
  • Remember: if one thing isn’t happening the other thing probably is.
  • Flat is a legitimate position.
  • Be careful of correlations. Several positions can often equal one large position bearing unacceptable risk. Respect the potential for correlations to change—you have to deal with today’s correlation, not the correlation that existed when you put on the position.

Other Thoughts

  • I am responsible for risk management, money management, trade management, doing the analytical work and putting on every trade that comes.
  • I am not responsible for the outcome of any one trade. Markets are highly random. I do not have a crystal ball. The future is only predictable within the bounds of probability, over a large sample size.
  • Risk management is the most important part of the job. I can make nearly any mistake and be ok as long as I do not violate my risk management parameters.
  • Opportunity comes every day. Do not neglect the work. Must do analysis every day.
  • Opportunity comes every day. Get out of bad positions. Move on.
  • The less you want to review your performance, the more you need to do so. This is a part of trading discipline.
  • You can be a countertrend or a with trend trader. Ideally, be both, but have the fluidity and the control to switch.

Psychology

  • The crowd is not always wrong.
  • Most trading problems come from an incorrect perception of risk. If you’re trading with an edge, the “risk” of any trade being a loser is not actually a risk at all.
  • Intuition is real, but all traders develop it. Intuition, alone, is not an edge.
  • Intuition must be trained properly. It is very easy to develop incorrect intuition due to cognitive biases and the nature of the market.
  • Mental capital is just as important as financial capital. Protect both.