Dennis Gartman is a professional trader. There is much wisdom and experience in these rules.
1. NEVER, EVER, EVER ADD TO A LOSING POSITION: EVER!: Adding to a losing position will lead to ruin. Count on it. Ask the Nobel Laureates of Long Term Capital Management… They’ll tell ya’!
2. TRADE LIKE A MERCENARY SOLDIER: We must fight on the winning side of the trade, not on the side of the trade we may believe to be
3. MENTAL CAPITAL TRUMPS REAL CAPITAL; Capital comes in two types: mental and real, and holding losing positions costs measurable real capital and immeasurable mental capital.
4. WE ARE NOT IN THE BUSINESS OF BUYING LOW AND SELLING HIGH: We are, instead, in the business of buying high and selling higher, or of selling low and buying lower. Strength begets strength; weakness, weakness.
5. IN BULL MARKETS ONE CAN ONLY BE LONG OR NEUTRAL: The corollary, obviously, is that in bear markets one can only be short or neutral. That may seem self-evident but very few understand it and fewer still embrace it.
6. “MARKETS CAN REMAIN ILLOGICAL FAR LONGER THAN YOU OR I CAN
REMAIN SOLVENT.” So said Lord Keynes many years ago and he was… and still is right… for illogic does often reign, despite what the academics
would have us believe.
7. BUY MARKETS THAT SHOW THE GREATEST STRENGTH; SELL THOSE 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 TECHNICIAN: Fundamentals may drive a market and need to be understood, but if the chart is not bullish, why be bullish? Be bullish when the technicals and the fundamentals, as you understand them, run in tandem. Be bearish in the same way.
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 the “Good Times” even one’s errors are profitable; in the inevitable “Bad Times” even the most well researched trade shall go awry. This is the nature of trading; accept it and move on.
10. KEEP YOUR TRADING SYSTEM SIMPLE: Complicated system breed confusion; simplicity breed elegance. The great traders we’ve known have the simplest methods of trading. There’s a connection here.
11. AN UNDERSTANDING OF MASS PSYCHOLOGY IS OFT’TIMES MORE
IMPORTANT THAN AN UNDERSTANDING OF ECONOMICS: Or more simply put, “When they’re cryin’ you should be buyin’ and when they’re yellin’ you should be sellin’!”
12. BEAR MARKET CORRECTIONS ARE FAR MORE VIOLENT AND FAR SWIFTER THAN ARE BULL MARKET CORRECTIONS: Why this is so remains a mystery to us, but they are; we accept it and we move on.
13. THERE IS NEVER ONE COCKROACH: The lesson of bad news is that more shall follow… usually hard upon and with even more detrimental
effects upon prices.
14. BE PATIENT WITH WINNING TRADES; BE ENORMOUSLY IMPATIENT WITH LOSERS: The older we get the more small losses we take.
15. DO MORE OF THAT WHICH IS WORKING AND LESS OF THAT WHICH IS NOT: This works well in life as well as trading. If there is a “secret” to trading and to life this is it!
16. 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.
And the new, winning rule for this year:
17. SOMEONE’S ALWAYS GOT A BIGGER JUNK YARD DOG: Peter Bianco of GLS Capital sent us this winning new “Rule,” and it speaks to the fact that no matter how much “work” we do on a trade, someone knows more and is more prepared than are we… and has more capital
Anybody who is serious about investing should read this classic book on trading: