Dennis Gartman’s Timeless “Rules of Trading” with added emphasis.

1.   Never, under any circumstance add to a losing position.... EVER, EVER! Nothing

more need be said; to do otherwise will eventually and absolutely lead to ruin! - (Just to add a little extra emphasis, you will occasionally break this rule, and it will seem ok, it may even go right several times, but there is one time it won’t, and that time could kill you. – Remember ‘You only die once’.

2.   Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand. (There is nothing wrong with switching from bullish to bearish and vice-versa,’ there is everything wrong with being stubborn’).

3.   Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. (Risk Management is vital, but at least equal is self-management; learn to walk-away, ‘you can always fight another day’). 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." (Don’t be afraid to buy what you worry may be a top, it may soon be a long way from being the top. This is a check on worrying about looking stupid, in truth ‘no one else really cares’, remember that!)

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, and it is a lesson learned too late by far too many. (Fighting trends saps a lot of mental energy, see 3 above).

6.   "Markets can remain illogical far longer than you or I can remain solvent." Courtesy of the inimitable John Maynard Keynes. - We like to believe the market is full of people making rational logical decisions, think again most of them are reacting to emotional impulses. (See our ‘Chimp Paradox article’ for some further elaboration.)  

7.   Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones. (Such good advice, but so rarely heeded.)

8.   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 very much about being in the zone, and hammering the advantage when you can. It takes experience to get this one right)

9.   To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technical’s. When we do, then, and only then, can we or should we, trade. (Personally, I don’t fully subscribe fully to this one, but then who am I to question it.)

10. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance. In other words ‘Less is often more’, and ‘Simplicity is beauty’

11. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights. (Quite possibly the most undervalued piece of advice, refer again to the ‘Chimp Paradox article, markets are not being moved by thousands of Dr Spocks, but rather by the impulsive whims of herding mammals and battling tribes.  

12. Bear markets are more violent than are bull markets and so also are their retracements. (In a bear market everyone flees for the exit at the same time, liquidity is not guaranteed in these times.)

13. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large. (Advice as old as the markets themselves.- Heed it)

14. 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 this we've learned much indeed. (In other words ‘the market is always right’, it is never wrong, but you are, often.)

15. 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 to be bought; new lows sold. (A variation on points 4 and 7 with an added twist, just shows how important this is).,

16. The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. (If you are buying, and everyone else is long and buying, then soon who will be left to buy, there is probably not much upside left: This takes skill to get right, but the successful have normally perfect it. )

17. 'There is never one cockroach!’ This is a late addition to Gartman’s timeless rules. – (I love this phrase, write it down somewhere visible and keep reminding yourself about this.)

Good luck. Trading is never easy, only very few make it through boot camp. If they have its likely they have adhered too many of these rules.  There is one other rule however, which every great trader somehow manages to achieve: I don’t recommend trying it until you are way past bootcamp. It is this one: ALL RULES ARE MEANT TO BE BROKEN: But they are to be broken only rarely and true genius comes with knowing when, where and why!

Steven Goldstein is a leading Performance and Executive Coach working with Traders, Banks and Hedge funds: He is Managing Director of at Alpha R Cubed, which works with banks and investment firms to improve their human capital within financial risk businesses. To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com.

Follow Steven on Twitter and Linkedin. Join the flourishing LinkedIn group Trader, Trading & Risk Psychology. 

        Sign-up for the 'Behavioural Trading' Newsletter.

* indicates required

    Email Address  *
    

    First Name
    

    Last Name
    

    Email Format
   

• html


• text

   

   

 

‘The Chimp Paradox’ and 'Success in Financial Markets'.

The Chimp Paradox, written by Steve Peters a leading UK sports psychologist, is based on  simple metaphor which describes the interplay between the emotional and rational functions of our brains.

The ‘Chimp Paradox’ metaphor describes the brain as working in two modes, the chimp and the human mode. The chimp is the area of the brain driven by feeling, impressions, emotional thinking and gut instincts. The chimp makes snap judgments, thinks in black and white, and is capable of being paranoid, irrational and emotive. Its primary motivator is survival. On the other hand, the human part of the brain is rational, evidence-based, thinks in shades of grey, and operates on balanced judgement. It is driven by having a greater purpose in life rather than the pure survival instincts of the chimp. There is a third aspect to the metaphor, the computer within our brain. This computer, which had an empty hard drive at birth, is only as good as the information it contains and is limited by its operating system and hardware. The computer contains stored beliefs, some of which are positive, some negative, some deeply hard-wired and tough to change, and others easier to re-programme. Our personalities are formed by a combination of the chimp, the human and the computer: Together they dictate how we act and behave.

The assumption at first glance might be that we want to be in human mode at all times. However life is not that simple, we cannot simply ignore or turn off our 'inner chimp'. This inner chimp is part of our nature, and as in real life, the chimp is far stronger than the human and has far more stamina. A chimp has 5 times the strength of the average human, so don’t even think of challenging him to strength contest. Furthermore, the human requires a lot more energy to function than the chimp. Thus when tired, fatigued, and depleted, the human brain is more likely to turn off and we automatically switch to chimp mode. In reality we function by being in a constant interplay between the two, rather like a hybrid car switching between battery and oil/gasoline. However, as mentioned, there will be times when our inner chimp, far stronger than our inner human, will be in control. When this happens, the chimp can run riot, and the consequnces can be hugely destructive. I am sure everyone can think of times when they have functioned in this way, letting their inner chimp run wild. However understanding your inner chimp, and keeping him calm, can help bring the chimp, to a degree, under control. And in some cases you can make the chimp your ally. When you are under attack you want your chimp to be fighting your corner. And therein lies the paradox, there is a time and a place for everyone’s inner chimp to prove both useful and necessary.

It is on the back of this metaphor that one can draw upon the success of outstanding performers in many fields, including trading. Master performers learn to tame their inner chimp and work with it in practical ways to harness its enormous power’s of impulsivity and emotional strength. When combining the power of the chimp, and the logic and resourcefullness of the human, and using the computer as a more productive and reliable reference source, great things can be achieved.

How does this play out in the financial markets, where belief in the superiority of rationality and logic reign supreme?

We have been carrying out some fascinating research into the proclivities and behaviours of successful risk-takers. Our work is based around a number of banks and hedge funds where we coach traders and portfolio managers. The research is on-going and still its in early days, however we are seeing some clear trends emerging which may surprise some people’s expectations of traits and characteristics needed for success in financial markets. (We recently presented our initial work on trader personality as part of a webinar which can be seen here).

One of the aspects of our personality research we are seeing is a close correlation between success in volatile markets, and a tendency to favour emotional cues over rationality and logic, particularly when one is trading shorter-term time-frames. Perhaps this is not overly surprising when one links this to the ‘Chimp Paradox’. In fast volatile markets, the ability to make money relies as much on an on ability to react fast to new news and seemingly irrational price action, as it does on an ability to read markets and having a strategy for trading the markets. Allying the human rational perspectives; a definitive trading plan with strict money management, with the chimps extraordinary sensing and intuitives abilities, enables individuals with these skills to thrive in short-term fast markets. However, allow that chimp to run wild, and all the good work will be undone. Our recent interview with Brady Dahl, author of Momo Traders, revealed how these masters of fast markets are able to survive and thrive. The traders featured in Momo Traders mastered the art of allying their inner chimp with their inner human.

There will however be days where where extreme volatility reigns and fear stalks the markets. On these days the markets are full of agitated chimps, each reacting to threats, and making seemingly irrational decisions. January 2016 saw virtually a whole month of these days. So well done to all those who came through January on top. 

To know more about the chimp paradox, Steve Peters provides an excellent Ted talk on his 'Chimp Paradox' which can be seen below.

The 'Behavioural Trading' blog is presented and managed by leading Trading Performance and Behavioural Trading Coach Steven Goldstein. Steven is Managing Director at Alpha R Cubed, which works with banks, hedge funds and investment firms to help them improve their people's capabilities  within their frontline financial risk businesses. To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com.

You can follow 'Behavioural Trading' on Twitter and join our flourishing 'Behavioural Trading' Linkedin group. Or follow Steven directly on Twitter.

 

You can also sign up for our periodical 'Behavioural Trading' newsletter by completing the form below. Please be assured your data will not be shared with any other outside parties, and you are welcome to 'unsubscribe' at any time.

        Sign-up for the 'Behavioural Trading' Newsletter.

* indicates required

    Email Address  *
    

    First Name
    

    Last Name
    

    Email Format
 

• html


• text