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This is a very short summary taken from BEAR TRADING: STRATEGIES FOR SURVIVAL


These are not so much rules as observations. I do use this observations as trading rules and the combination is uniquely my own. They are developed from experience to suit my trading style, my personality and to compensate for my weaknesses. The specific rules you adopt will be different, although they may well be drawn from the same type of observations.


These 15 rules offer protection, but they are not shark proof.


RULE 1: Understand Trading Discipline - Trade Development.

This is most commonly understood to mean that you must have the discipline to follow your trading system and approach. Better traders understand it means meeting the challenge of cutting losses and taking early profits.


The novice concentrates on developing the discipline to wait until all the entry conditions are satisfied. Just because this is the first skill to be learned does not mean it is the least important. Without it, a trader cannot grow.


Trading discipline is the ability to exit a trade under either one of two conditions. The first is to realise a loss and the second is to take a profit.


Selling is more difficult because we can never be sure which way the market will perform, and if it will continue in an upward or downward direction. We buy for one reason, but we sell for many reasons. This side of the trading process is much more complex and challenging. Unless traders can develop a disciplined approach to the exit their trading suffers.


In understanding the way discipline applies in this trading rule we build on our understanding that a loss is not the same as losing.


Developing the discipline to take a profit sounds so simple that it is almost irrelevant. Yet failure in this aspect allows us to turn an unrealized profit into a substantial loss.


RULE 2: Understand Trading Discipline - Emotional Development.

The very successful traders have another understanding of discipline that separates them from the average. They do not let their emotions, their temper or their frustrations, get in the way of their trading.


A novice trader talks of loses as being caused by a mythical beast - the market. "I was taken by the market" they say. Then they go on; "I was so annoyed that I bought more as they fell." This is revenge trading, aiming to get even with the market. These traders let their emotions dictate their trading strategy.

How many times have your losing trades been driven by external emotions - by anger, frustration, revenge or the need to prove something to somebody else? Finding the answer takes some hard searching through your soul rather than the trading records.


RULE 3: Accept Total Responsibility For Your Actions.

Trading is an activity where personal responsibility cannot be avoided. Despite the efforts of the regulatory authorities to coddle and protect investors from the consequences of their decisions based on investment advice, the trader, has no such protection, and ultimately, seeks no such protection.


The novice trader and the wannabe, look for trading programs that automatically provide buy or sell triggers and which claim will turn users into successful traders.


A mechanical trading system developed by someone else is a convenient crutch which allows the novice trader to avoid responsibility. It is so easy to blame the system.


Exploring and understanding different trading approaches is one of the first steps towards developing trading responsibility. Rarely is a single trading approach adopted wholesale. Each trader brings his own experience and interpretations to every approach, whether it be using countback lines, Gann swings, Elliott wave, trend lines or MACD triggers. Having assembled the pieces himself the trader is more comfortable with accepting the responsibility for the outcome.


When your broker gives you trading advice that turns into a loser accept your responsibility. After all, you took the advice and acted upon it. It was you who chose not to initiate any stop loss procedures.


RULE 4: Plane The Trade: Trade The Plan

Everybody plans to trade, but only the successful traders have a plan to trade. This can be reduced to just a few notes, small enough to pin to the side of the computer. What goes into the reduction is important, and although we covered some of the mechanic's of the trade plan in Trading Tactics, there are some other ingredients which underpin the planning process.


This single rule has many sub-clauses, including:

  • Have a clear reason for being in the trade.

  • Know your exit conditions in advance.

  • Ride winners

  • Cut losses quickly

  • Money management

  • Keep positions small

RULE 5: Have A Clear Reason For Being In The Trade.

Why am I in this trade? Traders are often reluctant to probe the reasons for each individual trade even though it is an essential part of the planning process.


Take the time to put in writing the answer to the question that begins the planning process.

"I am in this trade because ...."


RULE 6: Know Your Exit Conditions In Advance.

The first exit condition is designed to cut losses quickly.

The second exit condition is to protect and lock in profits.


RULE 7: Money Management

Money management is the key to trading survival. You can get almost everything else in the planning process wrong, but if the money management aspect is right you will survive.


Conversely, if every other aspect of the trading plan is perfect, you will fail if money management is incorrect. Without money management all of the wins, big and small, can be destroyed in just a few losing trades.


Money management is a complex topic. In Share Trading I look at the impact of several different money management approaches under the same trading systems.

One money management model does not suit all, but without some form of money management you are extremely vulnerable in the market.


RULE 8: Keep Positions Small

Traders with limited capital often think this trade planning rule does not apply to them. Although they would readily agree that it is foolish to take a million dollars of trading capital and put it into a single stock or position, they are less agreeable to applying it to their own trading. All their $6,000 in trading capital sits with Southcorp.


Each position should consume only a relatively small proportion of your trading capital.

The objective is to match position size with risk. Each position puts at risk only 2% of total trading capital, and our exit is based on this figure.


This is one trading survival strategy. There are many others, but they all concentrate on ways to keep position size small relative to the overall portfolio so the risk of failure has diminished impact. Amateur traders, and amateur gamblers, bet big. Survivors take many small positions and many small losses in pursuit of the winner they can ride for major wins.


RULE 9: Trade The Market, Not Your Opinion Of It.

There is only one right answer and the market has it. If you catch yourself thinking "The market should not have done that", or "I didn't expect the market to drop today" - then examine all of your open positions. You get paid for trading the market, not your opinion of what the market should be.

This rule is not always broken by the novice. It is ignored by experienced traders. It comes a s a shock after a string of winning trades. Quite suddenly you lose touch with the market. The temptation is to add to the losing position until the market finally comes to its senses and understands your view is the correct one.


RULE 10: Trade With The Crowd, Not Where It Has Been.

The objective is every trade is to move with the crowd, either as a bite out of a trend trade, or as part of a fast moving rally. Sometimes we will position ourselves in anticipation of the crowd movement.

On every price spike at the very top of a rally a single buyer has tried to trade where the crowd has been. We need to avoid that situation by trading in the direction the crowd is travelling.


RULE 11: Take What The Market Will Give You Rather Than What You Would Like It To Give You.

Many times the market does not behave as anticipated. Carefully calculated profit targets are nearly reached, but the momentum slides away. By monitoring our open positions the trader should make a better judgement about the probability of his sell, or buy, order being filled.


If we do not sell, we find our open profits being eaten away by falling prices. If there are clear reasons for exiting the trade below our initial profit targets, then we should act on them.


Depending on the type of trade we are in, as defined by the answer to the question "I am in this trade because ...." we look for confirmation of the exit conditions.


RULE 12: Manage Every Trade Every Day.

Every single open position must be monitored and managed. Many times the management is no more difficult than peeking into a room to check the baby is sleeping well. At other times more serious action is required. If we lock the trade away in a bottom drawer we cannot tell when emergency action is needed.

Management comes from planning. At the end of each day bring up a new chart of the position and ask these six questions.

  • What was my trading plan?

  • Is it still valid?

  • If no, then what is my amended plan?

  • What were my exit plans?

  • Have these been triggered?

  • Are they close to being triggered?

A YES answer to the last two questions means you spend more time looking at this trade to decide if you need to take action on the next trading day.


RULE 13: Always Analyse Winners And Losers, But Never Agonize.

Assemble the objective circumstances and conditions that made each trade successful, whether it turned a healthy profit, or incurred a small loss.


We should not be concerned about the potential profits we could have made had we stayed with the trader for longer. To have stayed would make the trade a different trade, one that is outside of our planning process.


Study your trading errors so you can avoid repeating them.


RULE 14: Trading Is About Lifestyle, So We Can Do Without Stress.

Private trading is an optional choice. No one forces you to trade, or be involved in the market. If trading is unpleasant work then you can probably get similar returns with less stress and less risk from other occupations.


For myself, trading is about lifestyle. Successful trading allows me the time to pursue other activities.

Your objectives may be quite different, but remember trading is about lifestyle.


RULE 15: Be Humble

Never forget where you came from. The market can send you back there very quickly.

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