Sunday, September 03, 2006

Trading Insights

These are some great rules to live by if you're a trader. The are from Gibbons Trading website. Gibbons is a trend follower that trades in stocks and futures.

Nine (9) Trading Basics & Rules
Michael Gibbons' Important Trading and Investing Concepts

There are many important things you need to know to trade and invest successfully in the stock market or any other market. Nine of the most important things that I can share with you based on many years of trading experience are enumerated below.
1. The first postulate of economics is that the future is uncertain. This means that it is useless to attempt to predict future prices-it cannot be done consistently. Anyone that tells you they can do so is attempting to deceive you. All of our trading profits come from betting against those that think they can forecast future prices.

2. The market is always right and price is the only reality in trading. If you want to make money in any market, you need to mirror what the market is doing. If the market is going down and you are long, the market is right and you are wrong. If the market is going up and you are short, the market is right and you are wrong. Other things being equal, the longer you stay right with the market, the more money you will make. The longer you stay wrong with the market, the more money you will lose.

3. The trend is your friend. Since the trend is the basis of all profit, we need long term trends to make sizeable money. The key is to know when to get aboard a trend and stick with it for a long period of time to maximize profits. Contrary to the short term perspective of most traders today, all the big money is made by catching large market moves-not by day trading or short term trading.

4. If you are looking for "reasons" that stocks or markets make large directional moves, I can tell you that you will probably never know for certain. Large institutional investors and well capitalized players move markets for reasons known only to them. Since we are dealing with perception of markets-not necessarily reality, you are wasting your time looking for the many reasons markets move. A huge mistake most investors make is assuming that markets are rational or that they are capable of ascertaining why markets do anything. To make a profit trading, it is only necessary to know that markets are moving-not why they are moving. The most profitable traders only care about direction and duration, while market losers are obsessed with the whys.

5. Markets generally move in advance of news or supportive fundamentals-sometimes months in advance. If you wait to invest until it is totally clear to you why a stock or a market is moving, you have to assume that others have done the same thing and you may be too late. The market reaction to good or bad news in a bull market will be positive more often than not. The market reaction to good or bad news in a bear market will be negative more often than not.

6. You must let your profits run and cut your losses quickly if you are to have any chance of being successful. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If you do not practice highly disciplined trading, you will not make money over the long term. In my long market experience, at least 90% of investors lack the necessary discipline to be successful. Emotion will replace discipline for most investors at the most critical of times. This is the real reason most people cannot beat the market; the market simply beats them.

7. The Efficient Market Hypothesis (EMH) is fallacious and is actually a derivative of the perfect competition model of capitalism. The EMH at root shares many of the same false premises as the perfect competition paradigm as described by economist George Reisman. The perfect competition model (and the EMH) is not based on anything that exists on this earth and is invalid. Consistently profitable professional trend traders simply bet against semi-rational investors who think they can predict future prices. Inefficient markets can last for long periods of time. You see, most investors are not fully rational. Therefore, any theory that posits investor rationality as one of it's cardinal tenets is irrefutably fallacious.

8. You should make your own trading decisions based on a rational analysis of current price trends. Forget fundamentals and news-they are useless for trading. Never trust the advice and/or ideas of trading software vendors, system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc., unless they trade their own money and have traded successfully for years. You should note that those that have traded successfully over very long periods of time are very few in number. Finally, I know some rich traders but no rich analysts.

9. A sound trend following strategy will make more money in the long run than any other alternative method. I am always amazed that people are addicted to picking tops and bottoms which can never be done with any level of consistency. In my exhaustive testing, the only method that worked over long periods of time in varying market conditions was trend following. If you use any other way to trade, your results will be substantially less than traders that follow trends.

3 comments:

Blue Falcon said...
This comment has been removed by a blog administrator.
Blue Falcon said...

I agree with most of your statements. Specifically I definitly agree with the fact that you need a trend following system. Some of your claim like the following 1. The first postulate of economics is that the future is uncertain. This means that it is useless to attempt to predict future prices-it cannot be done consistently. Anyone that tells you they can do so is attempting to deceive you. All of our trading profits come from betting against those that think they can forecast future prices. is declaring that a 'postulate' is a rule which can hardly be done. Think you are on the right track though!

Blue
Futures Trading Online

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