DENNIS GARTMAN'S NOT-SO-SIMPLE RULES OF TRADING
Excellent summary from Dennis Gartman via John Mauldin: Every year at this time, trading maven Dennis Gartman publishes his "Rules of Trading." This year they are more succinct than ever, and we are taking the liberty of reprinting them here because, simple though they may be, they are also profound.
Dennis has come by some of the rules the hard way, and it pays us to learn from his long and successful trading career:
DENNIS GARTMAN'S NOT-SO-SIMPLE RULES OF TRADING
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position... not ever, not never! Adding to losing positions is trading's carcinogen; it is trading's driving while intoxicated. It will lead to ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. "Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent." These are Keynes' words, and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In "good times," even errors turn to profits; in "bad times," the most well-researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we've known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, "When they are cryin', you should be buyin'! And when they are yellin', you should be sellin'!"
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow... usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year... and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a "secret" to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken.... but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
Great stuff, Dennis !
>
Source:
It's All About Your Time Frame
John Mauldin
Thoughts from the Frontline, November 24, 2006
http://www.frontlinethoughts.com/printarticle.asp?id=mwo112406
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Comments
Great list of trading rules!
But I thought it was the opposite of this that was actually true.
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
Posted by: Michael C. | Dec 3, 2006 11:20:33 AM
I thought Dennis Gartman's rules were great. Thanks for sharing them.
Posted by: ward dahlgren | Dec 3, 2006 11:26:16 AM
Rules 7 & 11 seem to contradict, (depending on the definition of "Market", I guess). "Buy when everyone is crying" to me means the overall market is going down. So pretty much nothing is "strong", therefore, what would one invest in? I guys what you could go long puts?
I would add a rule to "be sure to take some profits off the table".
A final rule: "Keep up with The Big Picture, IBD, and Kudlow & Co."
Mike
Posted by: Mike Gaffney | Dec 3, 2006 2:03:13 PM
17. All rules eventually cease to work.
Posted by: Rob | Dec 3, 2006 2:20:38 PM
Trading is probably the most counter-intuittive activity anyone can undertake. A market always looks the best at the highs and the worst at the lows. These trading rules are very good. One should always have rules. The most important rule I ever learned was to "STAY AWAKE!".
Don't ever let the outcome of a trade be a contingency for your happiness. "All Glory is Fleeting".
Posted by: ECONOMISTA NON GRATA | Dec 3, 2006 3:10:19 PM
I can't find a single rule of those that I would dispute. It's like a multiplication table.
Adding more rules is not good either, as this stuff must fit on one page that you stick above your desk. There is no space for more rules out there :-)
Posted by: theroxylandr | Dec 3, 2006 3:13:49 PM
Never bet your lifestyle.
If you don't bet, you can't win.
If you are uncertain, stay out.
Posted by: bushsux | Dec 3, 2006 3:26:38 PM
I agree with Mike - how do you reconcile the contradiction between those two rules as an investor?
Posted by: Jason | Dec 3, 2006 4:06:36 PM
Mike:
Rules 1-10 apply strictly to "TRADING" while 11-16 apply to "Investing" as well. In that case 7 and 11 would fall under two categories respectively.
Posted by: my1 | Dec 3, 2006 6:56:26 PM
On Rule # 1. Whatever happened to dollar cost averaging. I've bailed myself out very often by lowering my cost basis.
Posted by: Will R | Feb 22, 2008 1:05:31 PM
Todd -
Because Dennis is not one of the richest men on the planet, he is an idiot? The guy is very wealthy, appears on national television on a regular basis, and rights a widely followed newsletter. What have you done lately....nut job? Time for you to climb back under that rock, loser.
Uhhh.. now the case is closed.
Posted by: James Rodman | Feb 23, 2008 12:29:06 PM
Todd -
Because Dennis is not one of the richest men on the planet, he is an idiot? The guy is very wealthy, appears on national television on a regular basis, and rights a widely followed newsletter. What have you done lately....nut job? Time for you to climb back under that rock, loser.
Uhhh.. now the case is closed.
Posted by: James Rodman | Feb 23, 2008 12:29:40 PM
