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The Ten Trading Commandments

Posted By Barry Ritholtz On May 22, 2005 @ 8:30 pm In Psychology,Trading | Comments Disabled

Ok, enough real estate for a given weekend (or lifetime) — we now return to our originally scheduled programming:

I seem to have fallen into the habit of posting a list of "trading rules" from different sources on Sundays. I like the rhythm of that, and I expect this will be a regular feature.

Despite our RE fest, today is no different: These rules come from Todd Harrison. I credit Toddo as bing the first true market/stock related blogger (more on this later) when he was writing the Trading Diary for TheStreet.com. Todd was previously Jim Cramer’s head trader at Cramer Berkowitz, and has an excellent feel for market conditions.

He now runs an edu-tainment market site called Minyanville [1].  His 10 trading rules are straightforward and uncommonly common sensical:

With the red seas yesterday, I thought it might be helpful to
walk through my ten trading commandments:

Respect the price action but never defer to it.
The action is an important element when trading but if you
defer to the flickering ticks, stocks would be “better” up and “worse” down—and
that’s a losing proposition.

Discipline trumps conviction.

No matter how strongly you feel on a given position, you
must defer to the principles of discipline when trading. It will differentiate
your performance over the course of time.

Opportunities are made up easier than losses.

It’s not necessary to play every move, it’s only necessary
to have a high winning percentage on the trades you choose to make.

Minyanville_menagerie [1]
Emotion is the enemy when trading.    
Emotional decisions always have a way of coming back to
haunt you. It’s that simple.

Zig when others Zag
Sell hope and buy despair. In other words, take the other
side of emotional disconnects in the market.

Adapt your style to the market

At various junctures, different approaches to the market are
warranted. Applying the right trading methodology is half the battle.

Maximize your reward relative to your risk
If you’re patient and pick your spots, edges will emerge
that provide a more advantageous risk/reward profile.

Perception is reality in the marketplace.
Identifying the prevalent psychology is a necessary process
when trading.  It’s not what is, it’s
what’s perceived to be that matters.

When unsure, trade “in between”
Your risk profile should always be a reflection of your
thought process. Take what the Minx will give you and don’t press.

Don’t let your bad trades turn into investments.
Rationalization has no place in trading. If you put a
position on for a catalyst and it passes, take the trade—win or lose.


There are obviously many more trading rules of thumb, but
I’ve found these to be the most helpful. Each of you has a unique risk profile
and time horizon, so some (or all) of these commandments may not apply. As
always, my goal is to share my thoughts with the hopes that it adds value to
your process. Find an approach that works for you and always allow for a margin
of error. With a little luck and a lot of discipline, we’ll find our way to
better times. Good luck today. R.P.

Minyanville [1]

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URLs in this post:

[1] Minyanville: http://www.minyanville.com/

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