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Taleb’s Rules

This is an old list, but it may be old enough that it is new again—the internet works like that. Nassim Taleb wrote this list in early 1997; a year later LTCM blew up, almost taking the entire world financial system with it. (Again, it’s good to know your market history, for several reasons. This book should be on everyone’s reading list. Read it if you haven’t already.) Though it is presented as a list of rules for risk management, they are also fantastic rules for trading in general. I used to have these hanging over my desk when I was at the Nymex, and they proved to be a good guide during the 2008-2009 meltdown as well. If you find his work interesting, Taleb’s books (especially this one and this one) are great reads and they will challenge much of your thinking and nearly all of your assumptions about trading and markets. Anyway, here’s a short list as food for thought at the beginning of the week:


Nassim Taleb’s Risk Management Rules of Thumb

Rule No. 1- Do not venture in markets and products you do not understand. You will be a sitting duck.

Rule No. 2- The large hit you will take next will not resemble the one you took last. Do not listen to the consensus as to where the risks are (that is, risks shown by VAR). What will hurt you is what you expect the least.

Rule No. 3- Believe half of what you read, none of what you hear. Never study a theory before doing your own observation and thinking. Read every piece of theoretical research you can-but stay a trader. An unguarded study of lower quantitative methods will rob you of your insight.

Rule No. 4- Beware of the nonmarket-making traders who make a steady income-they tend to blow up. Traders with frequent losses might hurt you, but they are not likely to blow you up. Long volatility traders lose money most days of the week.

Rule No. 5- The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you alone put on.

Rule No. 6- Never let a day go by without studying the changes in the prices of all available trading instruments. You will build an instinctive inference that is more powerful than conventional statistics.

Rule No. 7- The greatest inferential mistake: “This event never happens in my market.” Most of what never happened before in one market has happened in another. The fact that someone never died before does not make him immortal

Rule No. 8- Never cross a river because it is on average 4 feet deep.

Rule No. 9- Read every book by traders to study where they lost money. You will learn nothing relevant from their profits (the markets adjust). You will learn from their losses.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 4 Comments

  1. CoffeyTime

    Nice read. I was already familiar with most of them but I picked up two here that I will definitely keep in mind:
    – study traders to see how they lost money.
    – long vol traders lose money most days of the week. There’s a deeper meaning here – those are antifragile positions which thrive on shock and randomness but it costs to be on that side of the trade, which is where the small losses occur continuously. It is also an opportunistic position of limited downside and a very large upside (opportunity), (but of low probability).

    Here are some lessons I extracted from his Fooled by Randomness book:
    – “affirming the consequent” fallacy. p -> q does not mean that q -> p. This one forces you to constantly think whether a statement is not accounting for all factors.
    – evolution: short-term fitness is different from long-term fitness.
    At any point in time, the most-fit specimen is only most-fit in current environment.
    – survivorship bias – seeing only a subset of a given population and inferring that is the only one existent. Seeming end result of the “affirming the consequent” problem.
    – evolutionary vs behavioral psychology: “our brains are made for fitness, not for truth”

    1. Adam Grimes

      Thank you and you make excellent points here too. “our brains are made for fitness, not for truth” <= such a good point to always keep in mind.

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