Rules for Traders

Rules for Traders

1. Follow the trends. This is probably some of the hardest advice for a trader to follow because the personality of the typical futures trader is not "one of the crowd." Futures traders (and futures brokers) are highly individualistic; the markets seem to attract those who are. Very simply, it takes a special kind of person, not "one of the crowd," to earn enough risk capital to get involved in the futures markets. So the typical trader and the typical broker must guard against their natural instincts to be highly individualistic, to buck the trend.

2. Know why you are in the markets. To relieve boredom? To hit it big? When you can honestly answer this question, you may be on your way to successful futures trading.

3. Use a system, any system, and stick to it.

4. Apply money management techniques to your trading.

5. Do not overtrade.

6. Take a position only when you know where your profit goal is and where you are going to get out if the market goes against you.

7. Trade with the trends, rather than trying to pick tops and bottoms.

8. Don't trade many markets with little capital.

9. Don't just trade the volatile contracts.

10. Calculate the risk/reward ratio before putting a trade on, then
guard against holding it too long.

11. Establish your trading plans before the market opening to eliminate emotional reactions. Decide on entry points, exit points, and objectives. Subject your decisions to only minor changes during the session. Profits are for those who act, not react. Don't change during the session unless you have a very good reason.

12. Follow your plan. Once a position is established and stops are selected, do not get out unless the stop is reached or the fundamental reason for taking the position changes.

13. Use technical signals (charts) to maintain discipline-the vast majority of traders are not emotionally equipped to stay disciplined without some technical tools.

14. Have a disciplined, detailed trading plan for each trade; i.e., entry, objective, exit, with no changes unless hard data changes. Disciplined money management means intelligent trading allocation and risk management. The overall objective is end-of-year bottom line, not each individual trade.

15. When you have a successful trade, fight the natural tendency to give some of it back.

16. Use a disciplined trade selection system...an organized, systematic process to eliminate impulse or emotional trading.

17. Trade with a plan-not with hope, greed, or fear. Plan where you will get in the market, how much you will risk on the trade, and where you will take your profits.

18. Most importantly, cut your losses short and let your profits run. It sounds simple, but it isn't. Let's look at some of the reasons many traders have a hard time "cutting losses short." First, it's hard for any of us to admit we've made a mistake. Let's say a position starts going against you, and all your "good" reasons for putting the position on are still there. You say to yourself, "it's only a temporary set-back. After all (you reason), the more the position goes against me, the better chance it has to come back-the odds will catch up." Also, the reasons for entering the trade are still there. By now you've lost quite a bit; you sell yourself on giving it "one more day." It's easy to convince yourself because, by this time, you probably aren't thinking very clearly about the position. Besides, you've lost so much already, what's a little more? Panic sets in, and then comes the worst, the most devastating, the most fallacious reasoning of all, when you figure: "That contract doesn't expire for a few more months; things are bound to turn around in the meantime."

So it goes; so cut those losses short. In fact, many experienced traders say if a position still goes against you the third day in, get out. Cut those losses fast, before the losing position starts to infect you, before you "fall in love" with it. The easiest way is to inscribe across the front of your brain, "Cut my losses fast." Use stop loss orders, aim for a $500 per contract loss limit...or whatever works for you, but do it.

Now to the "letting profits run" side of the equation. This is even harder because who knows when those profits will stop running? Well, of course, no one does, but there are some things to consider. First of all, be aware that there is an urge in all of us to want to win...even if it's only by a narrow margin. Most of us were raised that way. Win-even if it's only by one touchdown, one point, or one run. Following that philosophy almost assures you of losing in the futures markets because the nature of trading futures usually means that there are more losers than winners. The winners are often big, big, big winners, not "one run" winners. Here again, you have to fight human nature. Let's say you've had several losses (like most traders), and now one of your positions is developing into a pretty good winner. The temptation to close it out is universally overwhelming. You're sick about all those losses, and here's a chance to cash in on a pretty good winner. You don't want it to get away. Besides, it gives you a nice warm feeling to close out a winning position and tell yourself (and maybe even your friends) how smart you were (particularly if you're beginning to doubt yourself because of all those past losers). That kind of reasoning and emotionalism have no place in futures trading; therefore, the next time you are about to close out a winning position, ask yourself why. If the cold, calculating, sound reasons you used to put on the position are still there, you should strongly consider staying. Of course, you can use trailing stops to protect your profits, but if you are exiting a winning position out of fear...don't; out of greed...don't; out of ego... don't; out of impatience...don't; out of anxiety...don't; out of sound fundamental and/or technical reasoning...do.

19. You can avoid the emotionalism, the second guessing, the wondering, the agonizing, if you have a sound trading plan (including price objectives, entry points, exit points, risk-reward ratios, stops, information about historical price levels, seasonal influences, government reports, prices of related markets, chart analysis, etc.) and follow it. Most traders don't want to bother, they like to "wing it." Perhaps they think a plan might take the fun out of it for them. If you're like that and trade futures for the fun of it, fine. If you're trying to make money without a plan-forget it. Trading a sound, smart plan is the answer to cutting your losses short and letting your profits run.

20. Do not overstay a good market. If you do, you are bound to overstay a bad one also.

21. Take your lumps, just be sure they are little lumps. Very successful traders generally have more losing trades than winning trades. They don't have any hang-ups about admitting they're wrong, and have the ability to close out losing positions quickly.

22. Trade all positions in futures on a performance basis. The position must give a profit by the end of the third day after the position is taken, or else get out.

23. Program your mind to accept many small losses. Program your mind to "sit still" for a few large gains.

24. Most people would rather own something (go long) than owe something (go short). Markets can (and should) also be traded from the short side.

25. Watch for divergences in related markets-is one market making a new high and another not following?

26. Recognize that fear, greed. ignorance, generosity, stupidity, impatience. self-delusion, etc., can cost you a lot more money than the market(s) going against you, and that there is no fundamental method to recognize these factors.

27. Don't blindly follow computer trading. A computer trading plan is only as good as the program. As the old saying goes, "Garbage in, garbage out."

28. Learn the basics of futures trading. It's amazing how many people simply don't know what they're doing. They're bound to lose, unless they have a strong broker to guide them and keep them out of trouble.

29. Standing aside is a position.

30. Client and broker must have rapport. Chemistry between account executive and client is very important; the odds of picking the right AE the first time are remote. Pick a broker who will protect you from yourself...greed, ego, fear, subconscious desire to lose (actually true with some traders). Ask someone who trades if they know a good futures broker. If you find one who has room for you, give him your account.

31. Sometimes, when things aren't going well and you're thinking about changing brokerage firms, think about just changing AEs instead. Phone the manager of the local office, let him describe some of the other AEs in the office, and see if any of them seem right enough to have a first meeting with. Don't worry about getting your account executive in trouble; the office certainly would rather have you switch AEs than to lose your business altogether.

32. Broker/client psychology must be in tune, or else the broker and client should part company early in the program. Client and broker should be in touch repeatedly, so when the time comes, both parties are mentally programmed to take the necessary action without delay.

33. Most people do not have the time or the experience to trade futures profitably, so choosing a broker is the most important step to profitable futures trading.

34. When you go stale, get out of the markets for a while. Trading futures is demanding, and can be draining-especially when you're losing. Step back; get away from it all to recharge your batteries.

35. If you're in futures simply for the thrill of gambling, you'll probably lose because, chances are, the money does not mean as much to you as the excitement. Just knowing this about yourself may cause you to be more prudent, which could improve your trading record. Have a business-like approach to the markets. Anyone who is inclined to speculate in futures should look at speculation as a business, and treat it as such. Do not regard it as a pure gamble, as so many people do. If speculation is a business, anyone in that business should learn and understand it to the best of his/her ability.

36. When you open an account with a broker, don't just decide on the amount of money, decide on the length of time you should trade. This approach helps you conserve your equity, and helps avoid the Las Vegas approach of "Well, I'll trade till my stake runs out."

37. Don't trade on rumors. If you have, ask yourself this: "Over the long run, have I made money or lost money trading on rumors?" O.K. then, stop it.

38. Beware of all tips and inside information. Wait for the market's action to tell you if the information you've obtained is accurate, then take a position with the developing trend.

39. Don't trade unless you're well financed...so that market action, not financial condition, dictates your entry and exit from the market. If you don't start with enough money, you may not be able to hang in there if the market temporarily turns against you.

40. Be more careful if you're extra smart. Smart people very often put on a position a little too early. They see the potential for a price movement before it becomes actual. They become worn out or "tapped out," and aren't around when a big move finally gets underway. They were too busy trading to make money.

41. Stay out of trouble, your first loss is your smallest loss.

42. Analyze your losses. Learn from your losses. They're expensive lessons; you paid for them. Most traders don't learn from their mistakes because they don't like to think about them.

43. If you're just getting into the markets, be a small trader for at least a year, then analyze your good trades and your bad ones. You can really learn more from your bad ones.

44. Carry a notebook with you, and jot down interesting market information. Write down the market openings, price ranges, your fills, stop orders, and your own personal observations. Re-read your notes from time to time; use them to help analyze your performance.

45. "Rome was not built in a day," and no real movement of importance takes place in one day. A speculator should have enough excess margin in his account to provide staying power so he can participate in big moves.

46. Take windfall profits (profits that have no sound reasons for occurring).

47. Periodically redefine the kind of capital you have in the markets. If your personal financial situation changes and the risk capital becomes necessary capital, don't wait for "just one more day" or "one more price tick," get out right away. If you don't, you'll most likely start trading with your heart instead of your head, and then you'll surely lose.

48. Always use stop orders, always...always...always.

49. Don't use the markets to feed your need for excitement.

50. Futures trading contains substantial risk, is not for every trader, and only risk capital should be used. Any form of trading, including options, hedging and spreads contains risk. Past performance is not indicative of future results. Margins are subject to change without notice.

Louise's Thoughts - Dinosaur Trading

Louise's Thoughts - Dinosaur Trading
In the year 2000, eminent scientists and National Geographic magazine, one of the world's most respected science journals, were duped by a fake Chinese fossil. For years there had been lively academic disputes that questioned whether modern day birds could have descended from dinosaurs. Finally, a unique little cross-section of a fossil with the wings and legs of a bird, but the tail of a dinosaur was located in China. It appeared to be the fabled missing link between dinosaurs and birds!

Everyone was ecstatic!
Because of the enormity of the find, National Geographic editors got carried away with the excitement, and ignored a small number of scientists who had presented conflicting evidence. Inconsistencies with the thickness of the rock in several places were ignored, amidst the overwhelming evidence that a half-bird, half-dinosaur had finally been found. The story was published to worldwide fanfare.

Fast forward a few months, and an amazing series of events lead to the second half of the fossil cross-section being found. Unfortunately, this provided proof that the original cross-section had been tampered with, calling the whole find into scientific question. Basically, two pieces of different animals had been broken up and then glued together. One looked more like a prehistoric bird showing a wing like structure, and the other that had more dinosaur-like characteristics of possessing a tail.

We can only imagine the initial elation felt by those involved at National Geographic when the fossil was analysed, and the subsequent disappointment and embarrassment after it was revealed as a fake. Makes you cringe, doesn’t it!

I wonder whether the scientists involved actually experienced some form of euphoric mass hysteria. The excitement of working on such a significant scientific finding must have been overwhelming. What a magnificent time it must have been for people more used to sifting through 10 tonnes of rubble only to find an empty coke can.

Even the most professional of us can be guilty of ignoring or over-looking pertinent evidence. Traders are renowned for over-estimating their performance and over-stating their trading results. As the Chinese fossil example shows, this tendency is hardly peculiar to our profession. Our own individual psychology can hamper our trading results, making even the most capable traders subject to the vagaries of fear, greed and ego.

During my preparations for a recent presentation on why charting tends to be effective, I got to thinking about the differences between fundamental and technical analysis.

Having spent quite a few years trading from a fundamental perspective, I found that it tended to produce ambiguous results. Sometimes, positive fundamental information such as higher than expected profits, would make the share price increase, but at other times, the share price declined immediately after the same type of announcement. Have a look at CBA for instance. On the 9th of August, CBA announced that it had achieved incredibly spectacular profits, far in excess of their previous expectations. However, on August 10th, the share price dropped 83 cents! What were people expecting?

After seeing example after example of this similar, confusing mass psychology, it occurred to me that if people reacted rationally 100% of the time, we could use fundamental data with ruthless precision. I realise that this may be hard to accept, but the problem is that people don’t behave in a rational manner.

As some quick questions to test your own level of irrationality:
Have you...

ever bought some clothes you only wore once?
ever bought a Ferrari, just because you turned 55 years old?
ever slept with the wrong person?
ever bought a share that was going down in price?
Obviously you don’t need to answer these questions out loud. I’m guessing the answers could be just plain embarrassing!

Rather than expect people to behave rationally, chartists tend to watch what people ‘do’ instead of what they ‘say’, and follow the herd that is creating a trend. The beauty of making your trading decisions based on a technical analysis springs from the chart’s brilliant ability to crystallise mass psychology. There is simply no better tool to determine the underlying emotion of the people trading that instrument. Perhaps if National Geographic could have developed a tool that charted the emotions of the scientists working on the dinosaur fossils, they would have realised that their emotions were blocking their capacity for rational thought. So, rather than breezing over any incongruities within the data, the editors would have delved more deeply into why these irregularities existed in the first place.

Ironically, the dinosaur story has one final twist. The two prehistoric halves that were glued together to create the fake dinosaur ended up each being unique finds in their own right. As luck would have it, although the composite creature itself wasn’t a real animal, the two creatures that went towards forming that animal provided indisputable proof that birds originated from dinosaurs!

Unfortunately trading isn’t that forgiving. If your trading account shows a debit, ripping up and re-gluing your broker’s statements won’t make it show a credit.

Takeovers

Takeovers - How you can make money from a company under takeover

Takeovers can provide excellent trading opportunities, as The Rivkin Report has demonstrated time and time again. Understanding takeovers is necessary if one is to benefit from the wonderful investment potential that they offer.

A takeover is when one company attempts to buy another company in order to expand. This may be a hostile bid, which is unwelcome by the target company, or a welcome bid, which has been already agreed to by the respective boards of directors and often results in a merger.

Companies launch takeover bids for a variety of reasons. For most, the primary reason is to not only grow sales, earnings and dividends, but to increase the value of shares and hence, the return to shareholders. However, sometimes one company may buy another in order to gain access to intellectual property, or eliminate a potential competitor before they become too powerful. This may be referred to as a defensive takeover bid. Other reasons for launching a takeover bid include:

• If two companies manufacture products or provide services that compliment each other, such as two companies that are in a similar business or involved in the same industry although operating at different points in the supply chain.

• Sometimes companies make radical changes to their core business by buying businesses in a completely different industry. This often happens during booms, with many companies scrambling to become involved in the latest fashionable industry

• A complete rebirth of the core business.

• Diversification. A good example of this is when Kerry Packer’s Publishing & Broadcasting Ltd launched a takeover for Crown Casino. This was an example of a media company taking over a gaming company, which has totally unrelated products and services, apart from some marketing synergies.

There are, of course, infinite specific reasons for takeover bids. Through understanding some of the basic reasons why companies launch takeover bids, you will be more informed about the merits and pitfalls of takeover plays in today’s market.

Time has shown that the long-term result of takeovers on the share price of the bidding company depends largely on the quality of the deal and the ability of management to blend the two organisations efficiently. Some bids are ultimately positive for shareholders, although many are not.