The Little Book of Trading Wisdom

The Little Book o Trading Wisdom 175 things you should know about trading beore you start

David James Norman

2009

IntroductIon Trading is a dicult business, there’s no doubt about it. It is, perhaps, one o the most demanding ways to earn a living although many traders manage to do so. What is it, then, that makes one trader successul while many others ail? The ollowing ve words provide clues: discipline, ocus, intelligence, inormation and courage. A successul trader needs to exert a high level o discipline by sticking with his winning trades and cutting his losing trades quickly. In addition the trader must be solely ocused on the market, quick to pick up subtle changes in price momentum and volatility while deploying sensible, protable trading strategies that repeat successul behaviour. The successul trader must also make good use o the right sources o inormation in order to make intelligent trading decisions and, in the ace o adversity, must show courage to stay with his or her trading ideas.

This paperback First Edition published by O4MT Ltd, 2009 Copyright ©2009 David James Norman Published by O4MT Ltd New Bridge Street House 30-34 New Bridge Street London EC4V 6BJ All rights reserved

What knowledge, then, do successul traders have that other less successul traders don’t? The answer is wisdom rom many years o making mistakes, learning rom them and adapting strategy to be more protable. The Little Book o Trading Wisdom condenses this valuable trading knowledge and experience built up by traders across the world over many years into one small book. No one source currently provides such inormation and more can, no doubt, be added. It is up to the trader to nd his or her own clues. The Little Book o Trading Wisdom helps to start the ball rolling. It may only be a ew pages long but, as you will see, it speaks volumes. Incorporate the wisdom in this book into your trading day and you will see results.

The author asserts a moral right to be identied as the author o this work. No part o this publication may be reproduced, stored in a retrieval system or transmitted, in any orm or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission o the publisher and the author. Exceptions are made or brie excerpts to be used in published reviews. ISBN0 9540 49330 ISBN13- Digit: 9780954049331

Good luck and happy trading! D.J.N. London, May 2009

175 thIngs you should know about tradIng before you start

23. I a trader gives you a tip, he’s hoping you will help him to sell his stock 24. Listen to what the market is telling you 25. Listen careully; markets oten whisper

1.

The market is always right

26. Don’t be araid to take a prot; be araid o losses

2.

The market does not owe you a living

27. Don’t averagea loser; pyramid a winner

3.

Risk no more than 10% -20% o your equity on each individual trade

28. Take big protsand smalllosses

4.

I you have three bad opening trades, take yoursel out o the market or the day

5.

Rumour is the stepchild o real news

6.

Market wisdom can be learned but never ignored

7. 8.

A trader’s job is to take risk; it’s part o doing business Never place a trade just or the sake o it

32. Good money will never come easily; easy money will never stay with you or good 33. Don’t trade until three out o ve o your saety checks are true

9.

You can lose 100% o the time as a trader, butyou rarely win 100%

34. Back your conviction i you have made all o your checks

29. Treat prots and losses withequal disdain 30. Don’t buy a stock just because you think ti is cheap; don’t sella stock because you think it is too expensive 31. Run your winners, cut your losers

10. Higher risk, higher chance o lar ge prots; and larger losses

35. Understand themarket condition and thentrade

11. Abandon ‘hope’ 12. The market is only a game

36. There is a time to speculate and a time to walk away; know each implicitly

13. Don’t over trade

37. Run with the herd but leave beore they exit

14. Don’t under trade

38. I you win three times in a or w halve your trade size or the ourth trade

15. When you can, ollow the trend 16. Longer term the marketis always bullish 17. Don’t let good prots turn into bad ol sses 18. Be careul o using stops; the market knows they are there 19. I you can, enter passively; close aggressively

39. Don’t trade too manymarkets at thesame time 40. Don’t trade more than three stocks at the same time 41. Buy the rumour; sellthe news 42. Timing is everything

20. Always close a trade decisively; don’t wait orthe market to help you

43. You will never make quick money or long 44. Expect to lose;it’s the cost o doing business

21. Treat other’s market commentary with caution

45. Someone, somewhere is watchinghow you trade

22. Don’t ollow tips; they are likely to be second-hand

46. There’s nothing newin trading

47. The more you lose, the smaller your trades should be 48. When you’re winning, trade like a winner 49. Don’t ollow the guy next to you; he’ll be out beore you are in 50. Be jealous oyour capital; guardit careully 51. Never hedge whenyou should be out o themarket 52. Keep your tyres to the road or you will travel nowhere 53. Trading can appear to be deceptively easy; don’t believe it 54. Keep in good health;sleep well 55. Never trade when you are drunk; the market loves a drinker 56. Don’t expectto win every day

70. Make sure you are sitting at your desk at east l 20 minutes beore the market opens 71. I you are late or the open, don’t trade until you have spent at least an hour catching up 72. Pairs trades are as risky as outright longor short positions 73. Don’t get mad at themarket; it doesn’tcare 74. Know your trading technology 75. Don’t accept what you don’t understand 76. Respect the market; it has survivedlonger than any trader 77. You can make money through luck, but notevery day

57. Be ready to modiy your approach; the market is like a river with

78. Use charts to conrm a move; but don’t rely on them or  making decisions

tides and currents 58. I you are right, back yourtrades with all your conviction

79. Know how to recognize and ollow the smart money 80. Understand who moves your market

59. Expect only ve trades a year to make you ten times oy ur average daily prot; these are the Alpha trades; always anticipate them

81. Traders rarely movemarkets unless theyshould not be trading

60. A good trade eels good rom the start; abad trade, bad.

82. Never put your stops on or next to a big number;e.g 5000

61. Learn to recognize the other participants in your market; they leave ootprints like you

83. Only use a buy/sell stop toget into a position when themarket is gathering directional momentum

62. Set an exit point but be prepared to extend it; neverlet your prot all below it however

84. Put in the ground work, study oy ur inormation sources and revisit your trades

63. Think like a human; tradelike a machine

85. New traderswho don’t live and breathe the marketswill be claiming social security benets within twelve weeks ostarting

64. Big moves, like storms, take time to develop although the sky darkens and the rain alls sometime beore they hit 65. Know when totake a loss 66. Losing trades have ahabit o sticking together; winners tendto like their own company 67. The market loves a big mouthedsucker 68. Don’t bring ‘home’into work with you 69. I the market starts to bore you, it’s time o r a holiday

86. I a new trader lives and breathes the markets, he will make money within three months 87. Don’t sit on the ‘Simulated trading mark et’ or longer than three weeks; it will take six weeks to unlearn it 88. Be passionate about trading, or leave 89. I you arrive at your desk ater the market opens, don’t expect to make money in the rst hal an hour other than by luck 90. I you leave beore the market close, don’t expect to know how it may open

91. Smoking can kill your trading; ciga rette breaks will render 12.5% o your trading day useless;

107. Don’t take the big boys on; there’s nothing they like better than a loaded dog-ght

92. Missing 1 hour o the live market a day or cigarette breaks can mean missing a year o trading over an eight year period.

108. Pride will ruin you; humility will quietly support you

93. I you don’t drink and drive, why drink and trade? oBth are equally hazardous or your (andother people’s) health. 94. A lot happens when you’re not watching 95. A trader who reads through his daily trading og l at the end o the trading session relives the market again; hedoubles his experience o the market compared to those who donot, and makes money twice as quickly 96. I a trader does not review his market activity at the end o eve ry day, it will take him twice as long to reach thestandard o one that does. 97. Drink plenty ofuids; hydration willmean better cognitive unctions 98. Never trade when you are hungry or tired; you can be distracted by strong natural urges

109. A trading idea has a limited liespan; like an option, itruns out o theta 110. A trade will have its moment; when that moment is over, kill it 111. Look or conrmation inthree places beore committing to a large trade 112. Keep a journal o your past successes and ailures; you never know when the same conditions may arise 113. Don’t trust a sudden uptrend in a bear market; itcan change direction in an instant 114. Sometimes markets are so strong you have to gowith them 115. I you have a long term winning trade, don’t waituntil the last moment to take your prot; exit switly and leave a little oyour prot or the market 116. A charting average is olittle value to anyone

99. You can orget,ignore orrenounce your trading perormance, but you can’t hide it

117. I you can’t make money rom thebest trading stocks o theday, then you should not be trading

100. Don’t treat the market like an intellectual challenge; it’s not a conundrum

118. Watch out or the wrong turn; themarket leads many a trader down a dead end

101. Theorists are theorists because theyaren’t traders; good traders are rarely theorists because they rely on act and knowledge

119. Time wasted trading the wrong stock will ruinyour chances o picking the right stock in the short term

102. The market is dierent but nearly the same, oneday to the next

120. I a stock has had a signicant positive run,don’t be surprised i it gets tired

103. Common sense does playa part in markets; normally ater they are closed. 104. Markets conound

121. I you place a trade or certain reasons and those reasons don’t change, don’t cancel your trade

105. Even the best trading strategy has a faw; 9 times out o10 that faw is unknown until it’s too late

122. There is no such thing as a good long-term investment; conditions always change, and when they do, a good long-term investment can all 99% in value

106. The big players can be wrong; but they have a soter cushion to hide it under

123. Investors are bigger gamblers thanspeculators; they expecttheir

124. When in doubt, don’t trade

investments to take care othemselves

143. Be judge and jury on your own trades but spare yoursel the gallows

125. Don’t trade when you sense danger; i you are wrong, you can always get back in

144. Give yoursel a break; workwith yoursel rather thanbeat yoursel up over losses

126. Hesitation will ruinyou; impatience, destroy you

145. Sel criticism is meant tobe constructive; be kind; ater all, you have yoursel to live with

127. Successul trading relies ona correctly timed and weighted response to opportunity

146. Personal victories are thebest

128. Listen to your instinct; youwill know when you are wrong

147. Take time to practice; top classathletes do not race everyday

129. Never make speculation apart-time hobby unless you are happy to donate unds to the proessionals

148. Create a trading planor every market condition

130. Speculation can be unor those that don’t take it seriously; however, it will neverbe rewarding

150. Think successul thoughts when you dothink about trading

131.wouldn’t I you areexpect seriousa about trading, make ittoyour ull-time you successul surgeon learn his tradeocus; part-time

152. Skilul traders get their reputation rom themarket’s storms and tempests

132. I your broker sends youa margin call, close yourtrade; it’s a bad one

153. Trading is psychology; yours andeveryone else’s

133. I you have made a good trading decisionyou are likely to show a prot rom the start 134. Look, listen and learn;there are clues everywhere.

149. Build a toolbox o trading strategies 151. Commit ully; or gradually ail

154. Ask yoursel a question beore you sleep; themorning will have your answer 155. The mark o a good trader is how he deals with his losses

135. Try and learn something newabout trading every day.

156. Traders must get used to making decisions with incomplete inormation

136. Seek out and use the best sources o inormation

157. Like nature, there are no straightlines in markets

137. I the best sources o inormation cost you,pay; they will pay or themselves 100 times over

158. I you double your money, draw halo your prot and place it in reserve (Jesse Livermore)

138. Don’t let trade costs interere with your trading decisions 139. Don’t let small losses create bigproblems

159. Trading is a perormance discipline thatresponds directly to training

140. When you have taken a good prot, be satised; never re-enter the market to better it

160. Trading perormance is infuencedby the methods a trader uses to learn

141. Don’t try and justiy your losing trades to others; they are not criticizing you or them

161. Training translatestrading talent into skills(Brett Steenbarger)

142. Don’t brag about winningtrades; it will sound like youdon’t have that many

162. Winning in trading demands sustaining enhanced learning processes

163. Trading success in the present so rarely ensures uture success 164. Traders experience emotional confict when they depart rom their trading plans 165. A trader will only improve i he pushes himsel into uncomortable territory 166. The trading day does not stop when the market closes 167. Good traders don’t accept deeat lightly 168. Good losers usually lose (Vince Lombardi) 169. Practice is the cornerstone o expertise because it multiplies experience 170. The tape never lies (Jesse Livermore) 171. Be patient; the right moment to trade will arrive soonerthan you think 172. There is always a signalat the start o any race; learn the signals 173. An important market move will not end in a day (Jesse Livermore) 174. Never buy more than you can easily sell back to the market 175. Risk the prots not the losses