The Little Book of Trading Wisdom
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The Little Book o Trading Wisdom 175 things you should know about trading beore you start
David James Norman
2009
IntroductIon Trading is a dicult 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 successul while many others ail? The ollowing ve words provide clues: discipline, ocus, intelligence, inormation and courage. A successul 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, protable trading strategies that repeat successul behaviour. The successul trader must also make good use o the right sources o inormation 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 successul traders have that other less successul traders don’t? The answer is wisdom rom many years o making mistakes, learning rom them and adapting strategy to be more protable. 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 inormation 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 identied 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 careully; markets oten whisper
1.
The market is always right
26. Don’t be araid to take a prot; be araid 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 protsand 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 saety 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 prots 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 prots; 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 beore 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 prots turn into bad ol sses 18. Be careul 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 beore you are in 50. Be jealous oyour capital; guardit careully 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 beore 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 modiy your approach; the market is like a river with
78. Use charts to conrm 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 prot; 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 prot all below it however
84. Put in the ground work, study oy ur inormation 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 benets within twelve weeks ostarting
64. Big moves, like storms, take time to develop although the sky darkens and the rain alls sometime beore 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 ater the market opens, don’t expect to make money in the rst hal an hour other than by luck 90. I you leave beore 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 ofuids; 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 liespan; like an option, itruns out o theta 110. A trade will have its moment; when that moment is over, kill it 111. Look or conrmation inthree places beore 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 prot; exit switly and leave a little oyour prot or the market 116. A charting average is olittle value to anyone
99. You can orget,ignore orrenounce your trading perormance, 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 dierent but nearly the same, oneday to the next
120. I a stock has had a signicant positive run,don’t be surprised i it gets tired
103. Common sense does playa part in markets; normally ater they are closed. 104. Markets conound
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 o10 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 soter cushion to hide it under
123. Investors are bigger gamblers thanspeculators; they expecttheir
124. When in doubt, don’t trade
investments to take care othemselves
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; ater all, you have yoursel to live with
127. Successul 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 proessionals
148. Create a trading planor every market condition
130. Speculation can be unor those that don’t take it seriously; however, it will neverbe rewarding
150. Think successul thoughts when you dothink about trading
131.wouldn’t I you areexpect seriousa about trading, make ittoyour ull-time you successul surgeon learn his tradeocus; part-time
152. Skilul 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 prot 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 beore 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 inormation
136. Seek out and use the best sources o inormation
157. Like nature, there are no straightlines in markets
137. I the best sources o inormation cost you,pay; they will pay or themselves 100 times over
158. I you double your money, draw halo your prot and place it in reserve (Jesse Livermore)
138. Don’t let trade costs interere with your trading decisions 139. Don’t let small losses create bigproblems
159. Trading is a perormance discipline thatresponds directly to training
140. When you have taken a good prot, be satised; never re-enter the market to better it
160. Trading perormance is infuencedby the methods a trader uses to learn
141. Don’t try and justiy 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 uncomortable territory 166. The trading day does not stop when the market closes 167. Good traders don’t accept deeat 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 prots not the losses
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