30 Trading Rules by Tyler Bollhorn

My added rules in red.

1. Buying a weak stock is like betting on a slow horse. It is retarded.
(Shorting a strong stock is like betting on a slower horse.  It is more retarded.)
2. Stocks are only cheap if they are going higher after you buy them.
3. Never trust a person more than the market. People lie, the market does not.
4. Controlling losers is a must; let your winners run out of control.
(Hang on to a partial position with a stop to increase profits)
5. Simplicity in trading demonstrates wisdom.Complexity is the sign of inexperience.
(Less is more in trading)
6. Have loyalty to your family, your dog, your team. Have no loyalty to your stocks.
7. Emotional traders want to give the disciplined their money.
(Study self-control of emotions and mindfullness.  Meditation helps)
8. Trends have counter trends to shake the weak hands out of the market.
9. The market is usually efficient and can not be beat. Exploit inefficiencies.
10. To beat the market, you must have an edge.
(FOCUS on your edge(s), i.e. ideal trading setups/situations)
11. Being wrong is a necessary part of trading profitably. Admit when you are wrong.
12. If you do what everyone is doing you will be average, so goes the definition.
13. Information is only valuable if no one knows about it.
(99% of the time within seconds to minutes almost ALL information has been factored into price)
14. Lower your risk till you sleep like a baby.
(Understand bigger trends before taking size positions overnight)
15. There is always a reason why stocks go up or down, we usually only learn the reason when it is too late.
(Searching for a reason will likely cost you some/all profit)
16. Trades that make a lot of intellectual sense are likely to be losers.
17. You do not have to be right more than you are wrong to make money in the market.
18. Don’t worry about the trades that you miss, there will always be another.
19. Fear is more powerful than greed and so down trends are sharper than up trends.
(The greatest losses occur because you don't act soon enough)
20. Analyze the people, not the stock.
(Analyze the reaction of the news, not the news itself)
21. Trading is a dictators game; you can not trade by committee.
22. The best traders are the ones who do not care about the money.
23. Do not think you are smarter than the market, you are not.
24. For most traders, profits are short term loans from the market.
25. The stock market can not be predicted, we can only play the probabilities.
26. The farther price is from a linear trend, the more likely it is to correct.
27. Learn from your losses, you paid for them.
28. The market is cruel, it gives the test first and the lesson afterward.
29. Trading is simple but it is not easy.
30. The easiest time to make money is when there is a trend.
(Your best trades should always be identified at the beginning of the trend)

© 1 Trader and jcspe85.blog.com, 2016

Napolean Hill's 30 Major Causes of Failure and How They Relate to a Trader

Think and Grow Rich was written in 1937 by Napoleon Hill.  What I have found most helpful in relation to trading are his "30 Major Causes of Failure".  I have added questions which relate to being a trader.  I personally write notes to myself about my daily mistakes.  And I think about these questions so I can identify the content of my notes.

1. Unfavorable hereditary background.  

2. Lack of a well-defined purpose in life.  Do you have desire and focus every day you trade?

3. Lack of ambition to aim above mediocrity.  Do you learn by finding the answers yourself?

4. Insufficient education.  Have you done adequate paper trading?  Are you aware of the importance of trader psychology?  

5. Lack of self-discipline.  Are you able to self-correct mistakes?

6. Ill health.  Are you 100% alert? Are you hungover?

7. Unfavorable environmental influences during childhood.

8. Procrastination.  Do you delay making changes?

9. Lack of persistence.  

10. Negative personality.

11. Lack of controlled sexual urge. LOL

12. Uncontrolled desire for “something for nothing”. 

13. Lack of a well defined power of decision.  Do you reach decisions promptly?  Can you take losses without hesitation?  Can you reverse your opinion in a split second?

14. One or more of the six basic fears.  (fear of poverty, criticism, ill health, loss of love, old age, and death)  Do you fear the opinions of others?  

15. Wrong selection of a mate in marriage. 

16. Over-caution.  Are you comfortable with risk?

17. Wrong selection of associates in business. 

18. Superstition and prejudice.

19. Wrong selection of a vocation.  If trading makes you ill or unhappy, don't do it.

20. Lack of concentration of effort.  Have you eliminated your distractions?

21. The habit of indiscriminate spending.

22. Lack of enthusiasm. 

23. Intolerance.  

24. Intemperance.

25. Inability to cooperate with others.  

26. Possession of power that was not acquired through self-effort. 

27. Intentional dishonesty.  

28. Egotism and vanity.  Do you feel a need to feed your ego?

29. Guessing instead of thinking.

30. Lack of capital.

Shorting Gapped-Up stocks before/after the open

Before shorting gapped up stocks at the open, you should already be familiar with day trading short.

Here are considerations when shorting stocks that gap up Pre-Market:

There needs to be signifigant volume Pre-Market or AH the prior day for a gapped up, short trade to potentially work.  In other words, the catalyst has to force a squeeze of existing shorts and/or create buying panic.

Pre-market direction is difficult to judge.  90% of the time I close or reduce my pre-mkt short trade before the open and then re-short after the open(even if I get filled at a worst price).

If you are unfamiliar or uncomfortable with thin, pre-market trading conditions, then don't trade short during pre-market.

Reduce trading size until you are consistent.

Intraday volatility is normally highest at the open.  Spreads become wide.  So, you must allow for wiggle room.  And if you are wrong, i.e. squeezed, expect to lose more money than usual.

Always scale-in.  Increase exposure upon confirmation. On some trades, confirmation usually occurs when the opening range is broken.  Realize there will be many sell orders, likely market orders, following the break of the opening range. On other trades, initial shorts are squeezed to a higher price before the actual stock price decline begins.

Level of shorting difficulty for gapped up stocks, from most difficult to least difficult: momentum based, earnings beat, news and analyst upgrades.

Momentum based shorts which move due to popularity, for ex. Ebola stocks or body camera stocks, are difficult to short if the float has been traded several times over during the previous day.  Other recent stocks which fall into this category include PBMD and VLTC.  Avoid shorting these stocks until you have an advanced ability in market timing.  Better to trade these stocks on the long side.

Stocks which gap up due to strong earnings will potentially be a long trade after a morning decline, particularly if the stock is trading at new highs.

excellent article on Revenge Trading: Trying to Recover Losses Back

Before you read this... realize this information pertains more to beginning-intermediate traders.  Stocks like $PTBI $VLTC $ICLD, which I recently traded, have difficult to spot trends/pivot points.  Plus, when the float is traded 2X, 3X or more in one day, there is a high likelihood of being squeezed if you are short.  Until you have a built up mental resistance to drawdowns along with trading experience,  these trades should be done with reduced size or possibly not done at all.

No reason to cut your teeth in trading difficult stocks or difficult strategies.

When I do tweet a trade in this type of stock, it is likely that I have found a better (for lack of correct adjective) entry point to short.  So I will tweet the trade.  However, the risk to get squeezed is still there.

Remember, some traders, usually ones with greater experience, ability and deeper pockets, can turn around the next day from a loss and trade at 100%, with a clear mind. However, this ability is not something that can be attained easily, likely not in the first year or two of trading.  Most traders should recoup from the psychological damage from a large loss before continuing trading.  I recommend reducing trade size or taking a break first, if you are not an advanced trader.

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The article below is written about the 'angry trade' but even if you are not angry, the same scenario and outcome could result due to your damaged mental state.

From http://www.financial-spread-betting.com/strategies/revenge-trading.html

The ‘angry trade’ is the worst possible trade you can make.  It’s usually done after a loss with a desire to get your own back, or more specifically to win back the money you’ve just lost.

There are several reasons it’s so bad:

1) It’s often not planned out properly. Whereas your first trade may have been carefully planned and may actually have been a sensible trade that just went wrong, more often than not the trade following it is an unplanned one that’s done in a hurry. More often than not it’s no better than gambling. You do it in such a hurry to win back your losses that you haven’t properly considered exit points and analysed the risk.

2) Quite often it’s a larger bet than the first one because you’re so desperate to win back what you’ve just lost that you want to do this as quickly as possible. And the quickest way to do this (according to your logic at the time) is to raise your stake size. Again, you’ve completely ignored the risk.

3) It’s an emotional trade that’s done for the wrong reasons. Your emotions have so overcome your normal rational decision making process that it’s quite likely that you’ve not factored in all sorts of other potential pitfalls (e.g. long-term support or resistance that you might be trading against).

The problem with the angry trade is that it often starts off a spiral. If it wins great, but the problem here is you’ve effectively won by gambling, and you might try to repeat that win by gambling again, without using anything more than gut instinct. This goes against all the rules of trading and will result in you eventually blowing your account. If it loses, as it’s more likely to do, then you’ve effectively dug yourself even deeper into the hole you were just in. This then results in an even angrier trade, and so on, leading to desperation and seriously increasing the chances of blowing everything in a short space of time.

Ask yourself, what caused this angry trade in the first place? Why were you so desperate to win back what you’d just lost?

The chances are that, although the first trade may have been a good one that didn’t work out, you hadn’t correctly mentally accepted the risk before you went into the trade. You may also have been trading too large a stake. A good technique is, before placing a trade, to always assume that it’s going to be a loser. Work out your risk this way. How much are you willing to lose on the trade? You need to see it in the long term perspective as a proportion of the capital that you’ve set aside for trading. This way, if it does lose, you’ll be ready for it. You will only have lost a small proportion of your capital (it shouldn’t really be any more than 2%) and you’ll better be able to deal with it. Then you simply have to try to forget about it. Do not let it affect your next trade. This is the hardest part and what divides the winners from the losers. If necessary, take some time out for example, don’t trade for another 24 hours – until you’re convinced that you’re in an unemotional state of mind that will make sure that your next trade isn’t an angry one – ie that it’s taking advantage of a beneficial opportunity (not just trading for the sake of it), that it’s properly planned out, and that you’ve properly calculated your stake size based on your risk limits.

This is another of those incredibly important lessons that you’ll do well to heed. Just remember, next time you have a loss, just stop. Accept that the money’s gone and that the next trade you make will be on its own merits, completely unconnected from the last one. This way and this way only will you progress from being a loser to being a winner.

Book Review of Pit Bull, Lessons from WALL STREET'S Champion Trader

(all quotes from the book are in BOLD)

There are many rudimentary points mentioned in this book which are invaluable to any trader.  Martin "Buzzy" Schwartz has given thorough details about his trading life.  Also, he has given much insight into the reasons for his losing and winning trades.  I will summarize information which I have found helpful.  This is a book which should be read many times during a trader's career, especially if you have suffered a setback.

Martin always wanted to be a trader.  His wife of 4 months, Audrey, told him to become a trader at age 33.

Martin was good at math, loved gambling and the market.  He wrote down BECOME A TRADER. (his goal)

He then wrote a plan DEVELOP A METHODOLOGY FOR TRADING THAT FITS MY STYLE.

ACCUMULATE A GRUBSTAKE OF $100,000.

He set a time frame WITHIN ONE YEAR

He needed a mentor MAKE ZOELLNER MY MENTOR.

GET A SEAT ON SOME EXCHANGE.

TAKE A SABBATICAL.

He started trading Call options.  He broke even the first two years.  And then began making consistent money.

YOU HAVE TO PROVE YOUR ABILITIES AND TEST YOUR METHODS BY ACTUALLY TRADING, AND MAKING REAL MONEY, BEFORE YOU DEPEND ON TRADING FOR YOUR LIVELIHOOD

He borrowed $50,000 after saving $50,000 for his grubstake.

He was a securities analyst for 9.5 years before he quit to become a trader.

What he learned from playing craps:

DIVORCE YOUR EGO FROM THE GAME

MANAGE YOUR MONEY

CHANGE TABLES AFTER A WINNING STREAK (periodically deposit your winnings)

...mental discipline may not make you a winner in the market , but if you don't have it, you're sure to be a loser.

In 1981 he made $1.2 million trading options in mainly one stock, ASA.

In 1982, he began trading S&P futures.  His trading edge for trading S&P futures was by watching bond futures.

At age 37, he became a multimillionaire.

Luck?  You bet it was luck.  but it was also intellectual because I worked so hard at it.

Going short's a game for the pros.

He lost $800,000 on a short S&P futures trade.  But ended down only $57,000 for the same month.

...thanks to Audrey and Zoellner (his mentor), I'd realized my mistake and got beyond it.

The best way to end a losing streak is to cut your losses and divorce your ego from the game.

Stop trading, take time to recover and start trading small.

...concentrate on being profitable.  DON'T START BY TRYING TO MAKE A KILLING.

CONFIDENCE IS ESSENTIAL TO A SUCCESSFUL TRADER.

Losing streaks are an unfortunate part of the game, but if you are a good disciplined trader who can shift into neutral, the losing will end and black ink will start to flow again.

He won the U.S. Investing Championships in 1983 with a 175.3 percent return.  Over a 4 month period he parlayed his $482,000 stake into $1.2 million.  In the next contest he posted a 443.7 percent return, beating 262 entrants.

One of the great tools of trading is the stop, the point at which you divorce yourself from your emotions and ego and admit that you're wrong.

EXITING A LOSING TRADE QUICKLY CLEARS YOUR HEAD AND RESTORES YOUR OBJECTIVITY.

By preserving your capital through the use of a stop, you make it possible to wait for a high-probability trade with a low-risk entry point.

According to his friend Mark Cook:

to be a successful trader you have to have a complete commitment to trading and do it full-time.

...fit your trading habits to your personality.  Know you emotional weaknesses

...planning is the objective part of trading.

You have to have natural skills, but you have to train yourself on how to use them.

Break the pressure before it breaks you.

WHEN YOU'RE IN A LOSING POSITION AND YOU'RE BRAINLOCKED, DO WHATEVER'S NECESSARY TO HELP CLEAR YOUR HEAD.

I've learned through the years that after a good run of profits in the markets, it's very important to take a few days off as a reward.

KEEP YOUR BALANCE.

Hard work is the primary reason why I've become so successful, but hard work's just part of the equation.  By nature, I'm a gambler with a good feel for numbers, and , as I've mentioned before, Amherst taught me how to think, Columbia Business School taught me what to think about, the Marine Corps taught me how to perform under fire, and Audrey taught me the importance of money management.

Listening to what the market is saying takes extreme concentration.

There is an entire chapter titled "The Pit Bull's Guide to Successful Trading."  I recommend reading it.

... the most important change in my trading career occurred when I learned to DIVORCE MY EGO FROM THE TRADE.  Trading is a psychological game.

You have to stop trying to will things to happen in order to prove you're right.  Listen to what the market is telling you now.  Forget what you thought it was telling you five minutes ago.

What I like most about this book is that Martin Schwartz did not need to write this book for the money.  I have read short interviews about traders.  But this book hits home because it details the entire journey of a highly successful trader, one of the Market Wizards.

1trader