2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides immediately when one side has gained the upper hand.
3. Capital comes in two varieties: Mental and Actual. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital .
4. 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.” We can, however, have a modest, reasonable chance at knowing what the trend is and acting upon that trend.
5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, however.
6. “Markets can remain illogical longer than we can remain solvent,” according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish we need to throw our rocks into the wettest paper sacks, for they break most readily. In bull markets, we need to ride upon the strongest winds… they shall carry us higher than lesser ones.
8. Try to trade the first day of a gap (either higher or lower), for gaps usually indicate violent new action. We have come to respect “gaps” in our twenty five years of watching markets; however in the world of twenty four hour trading, they are becoming less and less important, especially in forex dealing. None the less, when they happen (especially in stocks) they are usually very important.
9. 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. This is the nature of trading; accept it.
10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but that we understand the market’s technicals also. When we do, then and only then can we, or should we, trade.
11. 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. Even more respect must be paid to “weekly” and “monthly,” reversals. Pay heed!
12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.
13. Respect, expect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the retracement.
14. In trading/investing, an understanding of mass psychology is often more important than an understanding of economics.. at least much, if not most, of the time.
15. 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.
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 that we have learned very 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 more often then not to be bought; new lows are to be sold.
20. ALL RULES ARE MEANT TO BE BROKEN: The trick is knowing when… and how infrequently this rule may be invoked.!
