ForexSpirit

This week’s edition of John Mauldin’s Thoughts from the Frontline newsletter includes some great information on the really long term view of the dollar against the euro. The dollar is currently in the same place it was 12 years ago. Plus c’est la meme chose, plus ça change.

Another interesting part of this week’s newsletter is a list of trading rules from John’s friend Dennis Gartman.

I thought it would be interesting to list the rules here and see how well they meld with the 4×1 methodology that I follow.

John and Dennis attest that these rules are central to having a long successful trading career. Let’s see how I do stacking up to them.

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING

1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never!
Oops. Looks like we might be off to a bad start here. Part of the 4×1 methodology is to enter low leveraged trades at multiple price levels, even if price is going against us. As long as we are correct in identifying the long term trend direction of the market, and we are able to hang in for a reasonable amount of time then we will see the long term trend re-establish itself, taking our open positions into profit.

In a way I am looking to scale into a longer trade that is made up of much smaller entries, spread out over different price levels. I assume that the market is random in nature at very short time frames, therefore it is alright to enter at different price levels even if the short term trend is going against me.

2. Trade Like a Wizened Mercenary Soldier.
This rule is part and parcel of my methodology. You should never be married to any one viewpoint forever. Markets change and you need to be able to change with them. If your one direction switches then you must not hesitate in switching with it.

3. Mental Capital Trumps Real Capital.
It costs time and energy to be able to deal with any losing positions on your books, much more with losing positions than with open winners. You must accept the reality of this and must recognise that losers have an adverse affect on your mental state as well as your bottom line. If too much of your mental capital is being used up then you would be better off ditching the losing trade so that you can redirect your energies to future protfitable trades.

4. This Is Not a Business of Buying Low and Selling High it is, however, a business of buying high and selling higher.
Trade with the trend. Go with the flow.

5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral.
This is a central tenant of the one direction mantra of the 4×1 methodology. If our one direction is long, then we should be profitable if the market trends up or is range bound. Similarly, if our one direction is bearish, then we should come out on top if the market moves down or is range bound.

6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.”
Always keep in mind that things are rarely logical in the trading world, especially in the short and medium term time frames. You don’t need to understand everything in the market to make money trading. Similarly, the market will not conform to your viewpoint of what should be happening. The market doesn’t care what you think.

7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness.
While this is probably sound advice, it is hard to follow while focusing on only trading a small number of forex pairs. Since I only currently trade the one pair, I have no choice in which market I trade, although this could change if I decide to one day in the future to add trading the yen or sterling pairs (once my experience and comfort levels are sufficient for the extra workload).

8. Think Like a Fundamentalist; Trade Like a Simple Technician.
This is a great little rule. Fundamentals govern my one direction. Daily economic analysis and price action within the median grid determines how I enter and exit trades.

9. Trading Runs in Cycles, Some Good, Most Bad.
We all go through periods where we can do no wrong. Other times we find the opposite is true and nothing goes right. It seems to be part of the cyclical nature of trading. Always be on the look out as to where you might be in the cycle.

10. Keep Your Technical Systems Simple.
This is another rule that aligns very well with my trading methodology. Simplicity is a important factor in the way I currently trade. In fact, it is one of my keys to trading success. The markets are hard enough to extract profits from without tying yourself in knots with additional complications that you self-generate.

11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics.
This rule emcompasses such adages as ‘Buy the rumour, sell the fact’. It is important to know the participants in the market. In the forex world, you have entities such as banks, hedge funds, CTAs, global businesses and speculators. Each group has their own agendas and it is important to have a handle on what each is looking to get out of the market. With should undertstanding you can better predict how each participant will react to data releases and market moves.

12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections.
This rule does not really apply to currencies, as a currency pair is a representation of the relative value between two distinct currencies. If one currency is bearish in the pair, then that means that the other currency is bullish.

13. There Is Never Just One Cockroach.
A company’s stock value can fall on bad news. Similarly bad macro economic news in a country can adversly affect the value of that country’s currency. Where there is one bad economic news release there is sure to be more to follow.

14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades.
This rule seems to go hand in hand with the first one. Since my trading plan goes against the first rule, it similarly does not follow this rule too well. I generally look to take frequent small profits, and thus I am impatient with my winning trades. I still like to let some of them run for larger profits, but those are in the minority. I like to leave my losing trades in place, confident that my one directional bias will return them to profit in the near future. Obviously if my one direction changes I will exit my losers at a loss rather than hope that they’ll come good.

15. Do More of That Which Is Working and Less of That Which Is Not.
This rule effectively sums up the previous 14 rules. If you have an edge and it is working in the market then press that edge for all it is worth. If aspects of your trading are not having the desired effect then eliminate them.

16. All Rules Are Meant To Be Broken…. but only very, very infrequently.
I must be off to a good start with this rule, having already broken two of the rules straight from the off! This rule is basically saying that nothing is set in stone. You have to be adaptable.

It is hard to break down what contributes to becoming a successful trader into easy to digest sound bites. These 16 rules make a good stab at it. While they are most certainly targetted at the equity markets, there is still value in evaluating them to see how well they fit to the world of currencies.

How does your current trading plan stack up against them?