22 Rules of Trading

(from http://www.frontlinethoughts.com/index.asp by John Mauldin)

1. Never, under any circumstance add to a losing position.... ever! Nothing
more need be said; to do otherwise will eventually and absolutely lead to
ruin!

2. Trade like a mercenary guerrilla. We must fight on the winning side and
be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket
or account. Of the two types of capital, the mental is the more important
and expensive of the two. Holding to losing positions costs measurable sums
of actual capital, but it costs immeasurable sums of mental capital .

4. The objective is not to buy low and sell high, but to buy high and to
sell higher. We can never know what price is "low." Nor can we know what
price is "high." Always remember that sugar once fell from $1.25/lb to 2
cent/lb and seemed "cheap" many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we
can only be short or neutral. That may seem self-evident; it is not, and it
is a lesson learned too late by far too many.

6. "Markets can remain illogical longer than you or I can remain solvent,"
according to our good friend, Dr. A. Gary Shilling. Illogic often reigns
and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show
the greatest strength. Metaphorically, when bearish, throw your rocks into
the wettest paper sack, for they break most readily. In bull markets, we
need to ride upon the strongest winds... they shall carry us higher than
shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent
new action. We have come to respect "gaps" in our nearly thirty years of
watching markets; when they happen (especially in stocks) they are usually
very important.

9. Trading runs in cycles: some good; most bad. Trade large and
aggressively when trading well; trade small and modestly when trading
poorly. In "good times," even errors are profitable; in "bad times" even
the most well researched trades go awry. This is the nature of trading;
accept it.

10. To trade successfully, think like a fundamentalist; trade like a
technician. It is imperative that we understand the fundamentals driving a
trade, but also that we understand the market's technicals. When we do,
then, and only then, can we or should we, trade.

11. Respect "outside reversals" after extended bull or bear runs. Reversal
days on the charts signal the final exhaustion of the bullish or bearish
forces that drove the market previously. Respect them, and respect even
more "weekly" and "monthly," reversals.

12. Keep your technical systems simple. Complicated systems breed
confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take
prices back to major trends. If a trade is missed, wait patiently for the
market to retrace. Far more often than not, retracements happen... just as
we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an
understanding of economics. Markets are driven by human beings making human
errors and also making super-human insights.

15. Establish initial positions on strength in bull markets and on weakness
in bear markets. The first "addition" should also be added on strength as
the market shows the trend to be working. Henceforth, subsequent additions
are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are
their retracements.

17. Be patient with winning trades; be enormously impatient with losing
trades. Remember it is quite possible to make large sums trading/investing
if we are "right" only 30% of the time, as long as our losses are small and
our profits are large.

18. The market is the sum total of the wisdom ... and the ignorance...of
all of those who deal in it; and we dare not argue with the market's
wisdom. If we learn nothing more than this we've learned much indeed.

19. Do more of that which is working and less of that which is not: If a
market is strong, buy more; if a market is weak, sell more. New highs are
to be bought; new lows sold.

20. The hard trade is the right trade: If it is easy to sell, don't; and if
it is easy to buy, don't. Do the trade that is hard to do and that which
the crowd finds objectionable. Peter Steidelmeyer taught us this twenty
five years ago and it holds truer now than then.

21. There is never one cockroach! This is the "winning" new rule submitted
by our friend, Tom Powell.

22. All rules are meant to be broken: The trick is knowing when... and how
infrequently this rule may be invoked!