Richard Rhodes passes along these “ridiculously simple” trading rules, given to him by “a great trader some 15 years ago.”

Follow these rules, breaking them infrequently, and you will make money year in and year out.

The rules are simple. Sticking to them is what’s difficult.

“Old Rules…but Very Good Rules”

  1. The first and most important rule is – in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I’ll do it again at some point in the future. Thus, we’ve not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
  2. Buy that which is showing strength – sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher”. Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
  3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don’t enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
  4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
  5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
  6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
  7. Be patient. The old adage that “you never go broke taking a profit” is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
  8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
  9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
  10. Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
  11. Do more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.”
  12. Don’t trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don’t care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
  13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.
  14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial “hay” when the sun does shine.
  15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
  16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don’t need to fight at all.
  17. Markets form their tops in violence; markets form their lows in quiet conditions.
  18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.

There is no “genius” in these rules. They are common sense and nothing else, but as Voltaire said, “Common sense is uncommon.” Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only.

Category: Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “Richard Rhodes’ 12 Trading Rules”

  1. Dapple says:

    Dennis Gartman’s rules ?

  2. ssc says:

    Re: rule #1: Where do I sign up to be notified when a bull market starts and ends (for REAL, not afterwards). Actually, I will gladly settle for knowing when a single stock is going to go up and when that ends..Just one single stock and I will be set for life.

  3. Bill Wilson says:

    “Markets form their tops in violence; markets form their lows in quiet conditions.”

    I don’t get that one. I thought it was the opposite. Tops come when volatility is low, and lows come when volatility is high.

  4. Rofs says:

    What a great post. Thank you very much for these golden advices!

    I’m too impatient when taking profits.
    For instance I closed my short positions of Netflix and GMCR too early.

  5. drewburn says:

    Are these really consistent?

    4.On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.

    10.Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.

  6. drewburn says:

    Eh, traders rules…………I like them but, investors rules are a little different. I find this valuable, but hardly indispensible. I work with half taxable money………..

  7. rd says:

    Pretty simple. In the end, all you really have to do is know whether or not you are in a bull market…..

  8. Bill Wilson says:

    drewburn,

    I don’t think those points contradict. Rule #4 is about adding to winning positions. Rule #10 says never add to a losing position. In my opinion, Rule #10 is the single most important rule on that list.

  9. theexpertisin says:

    Thanks for posting these common sense rules.

    Now, to put one’s self esteem aside and follow them!

  10. BigSpooky says:

    I’ve never understood why so many people spit out these same rules, and expect them to be some formula for outperformance. Almost by definition, if you follow the same rules as everyone else, you should expect the same results.

    Maybe it’s just me, but the big money for me has almost never come from chasing momentum, but doing all the “wrong” things – catching knives, sitting through bear markets, buying stocks everyone has given up on, etc.

  11. aiadvisors says:

    Too damn many rules.

  12. Orange14 says:

    I’m not so sure about #10. If one has done the financial analysis and is confident of the margin of safety, why wouldn’t you buy more when the price fell. I routinely have done just this and most of the time (probably 90% but I would have to go back a decade or more to be sure of this) it works in my favor. Of course I tend to hold things for a long time until the stock is fully valued.

  13. dina says:

    Some of the rules are well documented in this report http://www.futuresethicstraining.com/newpdf/How_to_Trade_Futures.pdf
    by Walsh Agency.

  14. Petey Wheatstraw says:

    ssc and rd:

    Exactly.

  15. victor says:

    @ssc: for market tops sign up at Barron’s. When Alan Abelson turns bullish sell everything. For market bottoms, sorry but they dont ring a bell but then we have Jim Cramer. If he says sell everything, that’s it, it’s the bottom. You heard it here first.

  16. A7L-B says:

    Avoid brokerages about to BK…

  17. Irwin Fletcher says:

    Great post. Thank you.

  18. jus7tme says:

    >>Richard Rhodes passes along these “ridiculously simple” trading rules, given to him by “a great trader some 15 years ago.”

    Alright, so these rules are from about 1995 or before. Maybe they worked well in the 1980-2007 time period, were unlimited cheap credit meant that you could hardly go wrong in the stock market, except when you could.

    Yeah, just buy the fucking dip.

  19. motfool says:

    BR,

    We have talked a lot about the top 1% but this was a very interesting article. Re: top 0.1%.

    http://news.yahoo.com/top-0-1-nation-earn-half-capital-gains-172647859.html

    Here are the two quotes that stood out.

    The facts are clear according to the Congressional Budget Office more than 80% of the increase in income inequality was the result of an increase in the share of household income from capital gains.

    Capital gains are the key ingredient of income disparity in the US– and the force behind the winner takes all mantra of our economic system. If you want even out earning power in the U.S, you have to raise the 15% capital gains tax.

    Your thoughts.

  20. honeybadger says:

    Is following the rules harder than learning to count? 18 items on a list of 12 rules…

    sorry to be snarky, I sincerely appreciate your posting of these pieces of wisdom.

  21. hammerandtong2001 says:

    Straight from Livermore, seems to me.

    I think he should add one:

    “What happened today on Wall Street has happened before, and will happen again. And that is becasue speculation is as old as the hills…and human nature never changes.”

    .

  22. [...] Trade simply, some rules for trading success.  (Big Picture) [...]

  23. kinkistyle says:

    I don’t think Ben Graham nor Warren Buffett would agree with these.

  24. [...] 12 simple trading rules, passed from one trader to another.  (TBP) [...]

  25. Jim67545 says:

    Found these as good food for thought. I’ve violated some of these, to my detriment.
    On the subject of why the top 1% see faster growth in wealth.. I wonder what the savings rate is stratified by income. Nationally we might have a 3% savings rate but then you see statistics to the effect that 45% of all families have less than $1,000 saved to meet emergencies.
    If the lower 50% save nothing and the top 1% save perhaps 25% of income (given lower marginal tax rates than in the 1980s) perhaps much of the growth in wealth is simply saving and investing of untaxed income.

  26. ES says:

    Whatever. Make well thought out trades but be impatient adn never add to a losing position? How do you do all 3 together with a martket that swings 2-3-4-5% daily?
    I have only two rules – only buy value with dividends ( but now fallen angels) and avoid momentum garbage. Also only buy in areas you know, which for me is IT with some branching out into industrials and commodities. Value will come through eventually.
    Everything else, i.e. “growth” a.k.a. momentum only works for the members of the Wall Street club.

  27. [...] Richard Rhodes’ ‘ridiculously simple’ trading rules. (The Big Picture) [...]

  28. Jim67545 says:

    Just read http://ibankcoin.com/chessnwine/2011/11/20/update-on-the-20-period-monthly/. May give a clue to the question raised above how to tell when we are in a bull vs. bear market.

  29. Expat says:

    Oh, great! One of the lists from last year’s post (your list, Barry?…I will check later) includes the dreaded “you never go broke taking a profit”. I teach that in my classes because I think it is much more important for beginner traders to learn to cut positions. Obviously, they have to learn to cut losses, but I also think the meaning of the adage is that you should not swing for the fences on every trade.

    An old boss used to tell us, “bears make money, bulls make money, but pigs get slaughtered.” This is what the earlier adage refers to, not to simply getting out as soon as make a dollar.

  30. eurostoxx says:

    hmm here is gartmans etf (http://www.bloomberg.com/quote/HAG:CN)??

    those rules are for MoMo traders, and hindsite traders (buy this breakout, sell this trendline etc)

  31. [...] Richard Rhodes’ 18 trading rules [...]

  32. klhoughton says:

    ES – Never add to a losing position is fulfilled if you follow “each new buy price must be higher than the previous buy price.” (If it was cheap at $40, it’s a bargain at $20…Look! Down on the ground! it’s a worm, it’s a flame, it’s Citibank! [Substitute BofA, Pfizer, etc. to taste.])

    The way to do all three together is to watch those swings carefully. If your “winner” is falling farther and recovering to lower, it’s not (or, at least, no longer) a winner. If your “loser” is whipping itself slowly higher, it’s not a loser for the moment.

    If the former does that often enough, screw the volatility and take the small loss.

  33. ToNYC says:

    Paul Tudor Jones reduced most of these, and especially No. 10, “Losers Average Losers”.
    The only big sign I saw on his wall at 160 Broadway in the late 1980s.

  34. [...] Trade simply, some rules for trading success.  (Big Picture) [...]

  35. [...] • Richard Rhodes’ 12 Trading Rules [...]