Rules to Live By
By Archie Johnson of VtUniversity.com
NEVER OVER TRADE
I have found that an amazingly high percentage
of traders are forced out of positions because of over
trading. Over trading tends to put traders on thin ice,
and can eat into valuable trading equity.
Experience has taught me to always have at least 100
percent additional capital available to protect a position.
In other words, when establishing a position, risk only
½ of your available capital to avoid over extension
or a potential margin call.
Remember, the un-predictability of the markets is stressful
in its own right-dont add to the stress with something
you can control.
2. DONT TRADE
TOO MANY MARKETS AT THE SAME TIME
Just as you shouldnt over extend your capital,
be cautious also not to over extend your attention span.
Computerization has allowed us to now watch more markets
than was once possible. Regardless of this technology,
however, greed can often cause us to take more than our
mental energies will allow. Even the most sophisticated
system cannot produce the best results if you have your
hand in eight different markets.
I cannot stress the importance of finding a personal
trading niche and staying focused. The markets are not
a candy store. Successful trading requires work. Make
sure you get the best return for your efforts by not spreading
yourself to thin.
3. DONT TREAT
ALL MARKETS THE SAME
Learn to adjust the size of your positions and the frequency
of your trades for different markets.
In soybeans, for example, your goal may be a 50 cent
move - $2,500 per 5000 bushels - over the next two or
three months. The S&P markets, on the other hand,
frequently make the equivalent of a $2,500 move in one
day. You probably would never want to trade as many S&Ps
as soybeans unless you increase your trading capital to
accommodate such a risk.
The same is true with margin requirements. If you are
trading 5-10 bonds, it is unwise to start trading 60 contracts
of corn merely because the margin requirements are the
same. (Oh, how many times I have done this one!) Just
because you are comfortable trading 10 bonds, dont
believe youll feel at ease trading 300 corn.
As you progress in your trading, you will develop a comfort
level I refer to as the sleeping position. (An overnight
position which does not disturb your sleep). For me that
would mean sleeping soundly with 500 beans (100 contracts),
but tossing and turning with 50 bonds.
Remember, dont fit your trading size to margin
requirements. They have nothing to do with one another.
And always, always trade within your capabilities.
4. DONT TRADE
WHEN YOU DONT UNDERSTAND THE MARKET
Many novice traders are deceived into thinking that the
successful trader is always in the market. But when you
dont understand what is happening in the market
is when it is best to leave it alone. You do not need
to trade all of the time. The market will open tomorrow,
next month, and next year. There is no law that says you
must trade today.
How many times I have thought I really dont
know whats going on, but the market is acting well,
I should jump in. but the difference between this
thought and active action can be very expensive.
Keeping a safe distance from the market is always prudent
when you are in doubt. Unless you are reasonably sure
of your conviction to either buy, sell or hold, it is
better to observe the market from the sidelines until
your confidence improves.
5. NEVER TRADE PRICE-ALWAYS
TRADE THE MARKET
Once I refused to buy soybeans because they were seven
dollars. I was bullish and so was the market, but seven
dollars was a price I had never seen before in beans.
Subsequently, I watched the market go to 13 dollars.
Put your trust in the markets, and do not be afraid when
they reach historic highs or lows. Markets are where they
are for a reason. Evaluate that reason on its own merits,
and except the inherit unpredictable qualities of speculation.
6. PAY ATTENTION TO
When too many market participants are moving the market
in any one direction, the market becomes very vulnerable.
Also be sure to pay attention to the makeup of these
participants. For example, is the activity due to public
or commercial trading?
Never underestimate the makeup and volume of the market
7. IGNORE THE MINOR
FLUCTUATIONS AND PLACE POSITIONS IN HARMONY WITH THE BASIC
Minor daily or day to day market moves cannot be anticipated
with sufficient accuracy, or traded with any level of
consistent success. Only when put in the perspective of
the basic main trend do minor fluctuations have any significance.
The key, therefore, is to ignore minor fluctuations and
to trade with the trend.
Trading against the trend and solely to play the part
of the contrarian has wiped out more profits and traders
than any other single violation of basic trading principles.
One can make many errors of judgment in establishing positions
in harmony with the basic trend of the price movement.
But to deliberately trade against the trend requires a
conviction in opinion, precise timing and price level
judgment that can be difficult for even the nimblest of
We are all in the markets to make money, if you feel
that your contrary opinion is indeed the best way to achieve
this goal, then you should follow your instincts. But
no one has made, and kept, profits by becoming addicted
to either the action in minor fluctuations or to opposing
the majority for oppositions sake.
8. BELIEF IN YOURSELF
I think by now we all know what this means.
MARKETS ANSWER TO THE OLD WIVES TALE:
TRADING RULES TO DISREGARD
The following are some of the most common trading rules.
But sometimes the most well- intentioned advice can be
unrealistic, unproductive, or just plain outmoded-which
is how I feel about the following:
1. BUY ON THE LOW AND
SELL AT THE TOP
Guessing at reversal points can be risky and very frustrating.
Trade with the trend, and let the market tell you by patterned
reverse in direction, when its over. Always buy
when the market is on the way backup, and sell when it
is on the way back down.
Be sure to watch the volume of the market carefully at
Price extremes. Declining volume usually means the market
is not accepting these higher or lower prices and could
indicate a turn. A market that is topping or bottoming
out does not spend much time at the extremes, so there
will be little volume at these points. I cannot stress
the importance of daily volume enough.
Remember: let the market determine the trend, and trade
with the trend by buying on the way up and selling on
the way down.
2. ALWAYS REMAIN TRUE
TO YOUR TRADING PLAN
The only plan you should have is a plan to know yourself
and to follow the trading stop that works best for you.
Im not criticizing the careful planning that goes
into the development of trading goals. Instead, I am advocating
a flexibility that will not prohibit your growth as a
trader. When you establish goals for yourself, leave room
to alter your plan as it suits your increasing knowledge
of the markets.
The key to any plan is how well it holds overtime. So
be sure that the goals you develop are reflective of who
you are and what you wish to accomplish. And always be
yourself and trade naturally.
3. ONLY TRADE WITH RISK
CAPITAL AND BE AWARE OF THE RISK OF LOSING
I would never suggest to anybody to trade with the rent
money. This is a risk business, however, and once you
have decided that you are in the financial position to
open a futures account, it is best to concentrate on trading
and not on risking.
Of course in concentrating on trading, you want to be
sure to avoid spreading yourself to thin. How often I
have seen traders jeopardize the profits from years of
hard work by pyramiding a position when they cannot truly
Be sure to accept the risk inherit in futures, but never
let greed become a substitute for the courage to take
TRADING RULES I DEVELOPED THROUGH MY OWN EXPERIENCE
To offer only positive or negative responses to common
trading maxims without devoting my own personal convictions
would be unfair.
My own personal trading beliefs reflect the flexibility
that I feel has contributed to my success in over 24 years
of trading. And although on the surface they appear to
be quite simple, they are principles that nonetheless
have stood the test of time over two decades of changing
markets. The difficulty is not in their concept, but in
the discipline required to implement them properly:
Why do beginners rush in where experts fear to trade?
Maybe its because novices dont know the dangers
awaiting the unwary. Theres absolutely no rush.
The markets will be there tomorrow. Just be sure you are
there to trade them and in the proper frame of mind.
The rewards of successful trading do not come easily.
Theres a price you must pay. There are skills you
must develop. Thats why you must be patient and
allow yourself some time.
FROM YOUR MISTAKES
You must never have a losing trade and fail to ask yourself
why. Maybe you were wrong in your assessment of the market.
That would be easy to correct. But suppose you were right
in your judgment of the market and still lost money? Was
your timing wrong? Did you over trade? Did other information
change your opinion? Was your management of your account
wrong? Did another position in your account force you
to liquidate? These and other questions must be asked
and answered if you are to learn and if you are to ever
turn your trading account into a profitable venture.
Never make a mistake without asking yourself why.
THAT KNOWLEDGE IS THE KEY TO SUCCESS
To trade contracts in the soybean complex, you dont
have to be an expert on the soybean plant. But you should
know where it is grown worldwide, crop size, export outlook,
supply and demand factors, government loan programs, etc.
similarly, you dont need to be an economist to trade
in the financial markets. But again, you must be aware
of all government reports, when they are due, and what
is expected. The exchange where a commodity is traded
will be pleased to send you all you need to get started.
There is no book you can read that will teach you how
to trade successfully. I certainly cannot teach you how
to trade. But you must know what is going on in the marketplace.
Knowledge is one of the key ingredients to success in
this field. And the more knowledge you acquire, I believe,
the more you reduce the risk in trading.
TO LOOK AT ALL SIDES OF THE MARKET
One of the best traders I know refers to it as thinking
in 180 degrees. If you are bullish and trading from the
long side, dont ignore bearish thinking. Being aware
of the bullish thoughts as well as the bearish ones will
allow you to become more flexible and a much better trader.
There is success to be found in both bullish and bearish
views of the market. I believe that the trader who becomes
active in both bullish and bearish positions has more
fun and finds more opportunities for success.
Article by Archie Johnson
the Most Powerful Commodity Futures & Options Techniques,
Tips, Strategies & Tools Ever Assembled And Made Available
In One Place!