2. To "buy down" requires a long purse and a strong nerve, and ruin often overtakes those who have both nerve and money. The stronger the nerve the more probability of staying too long. There is, however, a class of successful operators who "buy down" and hold on. They deal in relatively small amounts. Entering the market prudently with the determination of holding on for a long period, they are not disturbed by its fluctuations. They are men of good judgment, who buy in times of depression to hold for a general revival of business-an investing rather than a speculating class.
3. In all ordinary circumstances my advice would be to buy at once an amount that is within the proper limits of capital, etc., "selling out" at a loss or profit, according to judgment. The rule is to stop losses and let profits run. If small profits are taken, then small losses should be taken. Not to have the courage to accept a loss and to be too eager to take a profit, is fatal. It is the ruin of many.
4. Public opinion is not to be ignored. A strong speculative current is for the time being overwhelming, and should be closely watched. The rule is, to act cautiously with public opinion, against it, boldly. To so go with the market even when the basis is a good one, is dangerous. It may at any time turn and rend you. Every speculator knows the danger of too much "company." It is equally necessary to exercise caution in going against the market. This caution should be continued to the point of wavering-of loss of confidence-when the market should be boldly encountered to the full extent of strength, nerve and capital. The market has a pulse, on which the hand of the operator should be placed as that of the physician on the wrist of the patient. This pulsebeat must be the guide when and how to act.
5. Quiet, weak markets are good markets to sell. They ordinarily develop into declining markets. But when a market has gone through the stages of quiet and weak to active and declining, then on to semipanic or panic, it should be bought freely. When, vice versa, a quiet and firm market develops into activity and strength, then into excitement, it should be sold with great confidence.
6. In forming an opinion of the market the element of chance ought not to be omitted. There is a doctrine of chances-Napoleon, in his campaign, allowed a margin for chances-for the accidents that come in to destroy or modify the best calculation. Calculation must measure the incalculable. In the "reproof of chance lies the true proof of men." It is better to act on general than special information (it is not so misleading), vis.: the state of the country, the condition of the crops, manufactures, etc. Statistics are valuable, but they must be kept subordinate to a comprehensive view of the whole situation. Those who confine themselves too closely to statistics are poor guides. "There is nothing," said Canning, "so fallacious as facts except figures." "When in doubt do nothing." Don't enter the market on half conviction; wait till the convictions are full matured.
7. I have written to little purpose unless I have left the impression that the fundamental principle that lies at the base of all speculation is this: Act so as to keep the mind clear, its judgment trustworthy. A reserve force should therefore be maintained and kept for supreme moments, when the full strength of the whole man should be put on the stroke delivered.
Thirty-Two Rules from Peter Wyckoff
Peter Wyckoff was a well-known Wall Street research analyst of the 1960s. In his book, he lists a number of rules at the end of each chapter.* Those presented here are just a few of the most useful ones. Rule 15 concerning the conversion of weak points into strong ones is particularly compelling and unusual. Anyone wishing to establish a personal set of rules would be well advised to consider the 32 listed here, especially as they emphasize the need to combine technical and fundamental analysis.
1. Speculation demands cool judgment, self-reliance, courage, pliability and prudence.
2. A person's planned buying policy should always dovetail closely with a predetermined selling policy.
3. When in doubt about what to do in the market, do nothing. Nothing can destroy the cool temperament of a man like unsystematic speculation.
4. Look after the losses and the profits will take care of themselves.
5. If you wait too long to buy, until every uncertainty is removed and every doubt is lifted at the bottom of a market cycle, you may keep on waiting . . . and waiting.
6. The worst losses in the market come from uninformed people buying greatly overvalued stocks.
7. Whenever hope becomes a chief factor in determining a market position, sell out promptly.
8. Never buy or sell merely on the basis of background statistics. Technical market considerations and psychology must also be taken into account.
9. Don't believe everything a corporate official says about his company's stock.
10. Check over all the facts carefully yourself and view them conjunctively with other known market factors.
11. Never speculate with the money you need to live. If you can't afford a possible loss, stay out of the market.
12. One way to win in the market is to avoid doing what most others are doing.
13. When opinions in Wall Street are too unanimous-BEWARE! The market is famous for doing the unexpected.
14. Never cancel a Stop, or lower it, as the stock nears a trading point in a fast sliding market.
15. Try to analyze your weak points and convert them into strong ones.
16. Forget the idea that speculation depends entirely upon luck, and guard against blind faith in the suggestions of other men.
17. Eliminate trust in any system you do not understand, but still believe in the basic idea of the system.
18. You should consult other market aids besides charts.
19. Never be sentimental about a stock.
20. Before investing in a stock, look into its history.
21. You should be impervious to external forces and have no preconceived opinions to be a successful tape reader. Only the price changes appearing on the tape with attendant trading volume will tell you what to do and when to do it.
22. Always try to look and plan ahead, rather than considering just the last sales bobbing in front of you. The printed prices you see may have already largely discounted the news as it generally is known.
23. Tape reading is no exact science. You cannot form any definite rules, because all markets differ. Therefore, you must work out your own operational methods.
24. Be pliable at all times, but don't overtrade. Plan each campaign carefully, and never blame the tape for any error you may make.
25. You should be able to differentiate between what has been, what is now and what the future will be in planning a trading program.
26. Before taking a position, determine exactly where the stock you are watching, or the general market, stands. A study of price, breadth, activity, time and volume will be helpful in this respect.
27. Whatever is hard to do in the market is generally the right thing; and whatever is easy is usually the wrong thing to do.
28. Take an occasional mental inventory to find out exactly where you stand.
29. Do not press yourself! "Speculitis" is malignant!
30. When buying a stock, you should consider how far down it might carry in the event your judgment about it is wrong.
31. Try to avoid holding postmortem examinations of the "might have beens" in the market.
32. Buy the stocks of companies that have shown gradually increasing earnings in industries making articles that people cannot well do without.
Twenty-Eight Rules from W. D. Gann
W. D. Gann wrote a great deal about the markets. These rules were taken from his book How to Make Profits in Commodities, first published in 1942.* Gann had an active trading career but was not particularly successful. His work has become a lot more popular since the 1980s than when he was alive. In the book's foreword, he stated, "Trading in commodities is not a gambling business . . . but a practical, safe business when conducted on business principles." His rules are aimed at traders. I particularly like Rule 11, "Accumulate a surplus . . . ." One of the
most common mistakes made by traders is not knowing when to quit. If you put some profits to one side, this guarantees that you will walk away from the table with at least something, however many mistakes you might make elsewhere.
In order to make a success trading in the commodity market, the trader must have definite rules and follow them. The rules given below are based upon my personal experience and anyone who follows them will make a success.
1. Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.
2. Use stop loss orders. Always protect a trade when you make it with a stop loss order 1 to 3 cents, never more than 5 cents away, cotton 20 to 40, never more than 60 points away.
3. Never overtrade. This would be violating your capital rules.
4. Never let a profit run into a loss. After you once have a profit of 3 cents or more, raise your stop loss order so that you will have no loss of capital. For cotton when the profits are 60 points or more place stop where there will be no loss.
5. Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts and rules.
6. When in doubt, get out, and don't get in when in doubt.
7. Trade only in active markets. Keep out of slow, dead ones.
8. Equal distribution of risk. Trade in 2 or 3 different commodities, if possible. Avoid tying up all your capital in any one commodity.
9. Never limit your orders or fix a buying or selling price. Trade at the market.
10. Don't close your trades without a good reason. Follow up with a stop loss order to protect your profits.
11. Accumulate a surplus. After you have made a series of successful trades, put some money into a surplus account to be used only in emergency or in times of panic.
12. Never buy or sell just to get a scalping profit.
13. Never average a loss. This is one of the worst mistakes a trader can make.
14. Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.
15. Avoid taking small profits and big losses.
16. Never cancel a stop loss order after you have placed it at the time you make a trade.
17. Avoid getting in and out of the market too often.
18. Be just as willing to sell short as you are to buy. Let your object be to keep with the trend and make money.
19. Never buy just because the price of a commodity is low or sell short just because the price is high.
20. Be careful about pyramiding at the wrong time. Wait until the commodity is very active and has crossed Resistance Levels before buying more and until it has broken out of the zone of distribution before selling more.
21. Select the commodities that show strong uptrend to pyramid on the buying side and the ones that show definite downtrend to sell short.
22. Never hedge.If you are long of one commodity and it starts to go down, do not sell another commodity short to hedge it. Get out at the market; take your loss and wait for another opportunity.
23. Never change your position in the market without a good reason. When you make a trade, let it be for some good reason or according to some definite rule; then do not get out without a definite indication of a change in trend.
24. Avoid increasing your trading after a long period of success or a period of profitable trades.
25. Don't guess when the market is top. Let the market prove it is top. Don't guess when the market is bottom. Let the market prove it is bottom. By following definite rules, you can do this.
26. Do not follow another man's advice unless you know that he knows more than you do.
27. Reduce trading after first loss; never increase.
28. Avoid getting in wrong and out wrong; getting in right and out wrong; this is making double mistakes.
When you decide to make a trade be sure that you are not violating any of these 28 rules which are vital and important to your success. When you close a trade with a loss, go over these rules and see which rule you have violated; then do not make the same mistake the second time. Experience and investigation will convince you of the value of these rules, and observation and study will lead you to a correct and practical theory for successful Trading in Commodities.
Rules from Frank J. Williams
Frank Williams book, originally published in 1930, contains numerous rules. One important area he seems to emphasize is sound money management through such suggestions as "Pay all bills before speculating," "The broker who demands a large margin is your friend," and "Don't take fliers." He reminds us of an important point that we all tend to forget: "The market moves up slowly, but comes down fast." It is another way of warning us to take precautions against the unexpected.*
Pay all bills before speculating.
Don't speculate with another person's money.
Don't neglect your business to speculate.
If the market makes you irritable or interferes with sleep, you are wrong.
Don't use in the market money that you need for other purposes.
Don't go "joint account" with a friend-play a lone hand.
Don't give a broker "discretionary powers." If you can't run your own account, leave the market alone.
The broker who demands a large margin is your friend. Only a bucket-shop wants you to trade on a slender margin.
Don't buy more stock than you can safely carry. Over-trading means forced selling and losses.
Get accurate information. Demand facts, not opinions.
Don't take advice from uninformed people-they know no more than you about the market.
Such advice as "I think well of it" or "It is a cinch" means nothing.
Use only a part of your capital in speculation.
Don't buy "cats and dogs" (unseasoned stocks).
Buy good standard stocks that have stood the test of time.
Remember that good stocks always come back-unknown stocks may disappear.
Don't buy in a hurry-there is plenty of time to buy good stocks.
Investigate each stock thoroughly before you buy.
Remember that it is easier to buy than to sell. The salability of a stock is very important.
The market moves up slowly, but goes down fast.
Be prepared to buy your stock outright if necessary. If you can't do this, you are taking chances.
Buy in a selling market-when nobody wants stock.
Sell in a buying market-when everybody wants stock.
The market is most dangerous when it looks best; it is most inviting when it looks worst.
Don't get too active. Many trades many losses.
Long-pull trades are most profitable.
Don't try to outguess the market.
Look out for the buying fever; it is a dangerous disease.
Don't try to pick the top and the bottom of the market.
Don't dream in the stock-market; have some idea just how far your stock can go.
Remember that the majority of traders are always buying at the top and selling at the bottom.
Don't worry over the profits you might have made.
Don't spend your paper profits-they might turn into losses.
Watch the news. Remember that the market actually is a barometer of business and credit.
Don't buy fads or novelties-be sure the company you are becoming a partner in makes something everybody wants.
Don't finance new inventions unless you are wealthy.
Ask who manages the company whose stock you want to buy.
Don't follow pool operations. The pools are out to get you.
Don't listen to or give tips. Good tips are scarce and they take a long time to materialize.
Don't take flyers.
Don't treat your losses lightly; they are serious. You are losing actual currency.
When you win, don't get reckless; put your winnings in the bank for a while.
Don't talk about the
market-you will attract too much idle gossip.
Sniff at inside information; it is usually bunk. The big people don't talk about their operations.
Don't speculate unless you have plenty of time to think about it.
Fortunes are not easily made in Wall Street. Some professionals give their lives to the market and die poor.
There is such a thing as luck, but it does not hold all the time.
Don't pyramid.
Don't average unless you are sure you know your stock.
Don't buy more stock than you can afford, just to look big. If you are a ten-share man, don't be ashamed of it.
Beware of a stock that is given an abundance of publicity.
Use your mistakes as object-lessons-the person who makes the same mistake twice deserves no sympathy.
Don't open an account at the broker's just to oblige a friend. Charity and speculation don't mix.
Remember that many people believe they can find better use for your money than you can yourself.
Leave short selling to experienced professionals.
If you must sell short, pick a widely held stock or you may get caught in a corner.
Money made easily in the market is never valued-easy come, easy go.
Don't blame the Stock Exchange for your own mistakes.
Don't shape your financial policy on what your barber advises-hundreds of experts are waiting to give you exact information.
Don't let emotion or prejudice warp your judgment. Base your operations on facts.
Ten Rules from H. J. Wolf
H. J. Wolf's two-volume book Studies in Stock Speculation was originally published in 1926. In the introduction to the 1966 edition Jim Fraser, the book's publisher, reminds us, "Success means adapting Wall Street knowledge to one's individual needs and emotional make-up." He was no doubt influenced in making this statement by some of Wolf's rules, which are strongly oriented to the maintenance of trading discipline through money management controls.*
Investment Psychology Explained Page 25