The "Not-So-Simple" (But Really Utterly So) Rules of Trading By Dennis Gartman
“The world of investing/treading, even at the very highest levels, where we are supposed to believe that wisdom prevails and profits abound, is littered with the wreckage of wealth that has hit the various myriad rocks that exist just beneath the tranquil surface of the global economy. It matters not what level of supposed wisdom, or education, that the money managers or individuals in question have. We can make a list of wondrously large financial failures that have come to flounder upon these rocks for the very same reasons. Let us, for a bit, have a moment of collective silence for Long Term Capital Management; for Baring's Brothers; for Sumitomo Copper... and for the tens of thousands of individuals each year who follow their lead into financial oblivion.
I've been in the business of trading since the early 1970s as a bank trader, as a member of the Chicago Board of Trade, as a private investor, and as the writer of The Gartman Letter, a daily newsletter I've been producing for primarily institutional clientele since the middle 1980s. I've survived, but often just barely. I've made preposterous errors of judgment. I've made wondrously insightful "plays." I've understood, from time to time, basis economic fundamentals that should drive prices--and then don't. I've misunderstood other economic fundamentals that, in retrospect, were 180 degrees out of logic and yet prevailed profitably. I've prospered; I've almost failed utterly. I've won, I've lost, and I've broken even.
As I get older, and in my mid-50s, having seen so much of the game--for a game it is, with bad players who get lucky; great players who get unlucky; mediocre players who find their slot in the lineup and produce nice, steady results over long periods of time; "streak-y" players who score big for a while and lose big at other times--I have distilled what it is that we do to survive into a series of "Not-So-Simple" Rules of Trading that I try my best to live by every day ... every week ... every month. When I do stand by my rules, I prosper; when I don't, I don't. I am convinced that had Long Term Capital Management not listened to its myriad Nobel Laureates in Economics and had instead followed these rules, it would not only still be extant, it would be enormously larger, preposterously profitable and an example to everyone. I am convinced that had Nick Leeson and Barings Brothers adhered to these rules, Barings too would be alive and functioning. Perhaps the same might even be said for Mr. Hamanaka and Sumitomo Copper…Dennis Gartman”
DENNIS GARTMAN'S NOT-SO-SIMPLE RULES OF TRADING
(Annotated in red by Janice Dorn, M.D., Ph.D.)
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position... not ever, not ever! Adding to losing positions is trading's carcinogen; it is trading's driving while intoxicated. It will lead to ruin. Count on it! (There are many traders—Jim Cramer is one example—that keep buying lower and lower. He describes this as "when the stock comes in, buy more and when it comes in more, buy more. Don't buy all at once, but in tranches. He does this because of fundamentals, i.e., he believes that good companies are bargains as their stock price goes lower. He has huge pockets. Most of us do not. Please—never confuse a good company with a good stock. Price is the only technical indicator that does not lie)
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically. (Trade with a killer instinct like a great warrior. Never try to be a hero and fight the trend)
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital. (Trading and investing are 100% Neuropsychiatric and Neuropsychological. It is all inside your brain and anything that drawns down brain synaptic capital will affect your trading adversely)
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness. (This is a principle of trend trading and does not apply to everyone. Markets are trendless or range-bound more often than trending. In strong markets that are trending, this works well. In range-bound markets, both breakouts and breakdowns fail regularly)
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it. (In bear markets, the winner is the one that loses the least money. In bull markets, everyone is a genius)
6. "Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent." These are Keynes' words, and illogic does often reign, despite what the academics would have us believe. (Markets are neither random nor rational. They are irrational and mean because there are over six million rat brains trading every day. Think of the markets as a complex, adaptive system that is constant evolving)
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest. (In life, as in the markets, the strong get stronger and the weak get weaker)
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem. ( YOU are not bullish or bearish. Your stock, commodity, option or future is in a bullish or bearish pattern. Bearish and bullish are not states of mind, they are states of the markets).
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In "good times," even errors turn to profits; in "bad times," the most well-researched trade will go awry. This is the nature of trading; accept it and move on. (But always remember that hubris can turn malignant and malignant hubris metastasizes and kills. Wall Street is littered with corpses of such people. Always remain humble and grateful for what the Market Mistress gives you)
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we've known have the simplest methods of trading. There is a correlation here! (Albert Einstein said: Everything should be made as simple as possible, but not simpler than that. Remember Occam’s Razor and the K.I.S.S. principle)
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, "When they are cryin', you should be buyin'! And when they are yellin', you should be sellin'!" (Buy when there is blood in the streets and sell peanuts when the circus is packed with standing room only)
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on. (FEAR is always stronger than greed. There are too many one-rule systems and the “big guys” are all leaning in the same direction. When one of them runs for the exits, the rest follow like lemmings).
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow... usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions. (Once everyone has puked, and the vomitus has been cleaned up from the floor, and the room begins to smell good again and the pesticides are finally working—it might be time to start nibbling at the stock. DO NOT ANTICIPATE OR TRY TO CATCH FALLING KNIVES. OUCH!!!)
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older (more consciously competent) we get, the more small losses we take each year... and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a "secret" to trading (and of life), this is it. (In life, we want to hang with the winners and remove any and all energy vultures. Those people that are always moaning, whining, negative and sniveling will take emotional, physical, temporal and financial capital away from you. Time is money—both in the markets and in life. Make your life a “No Sniveling" Zone.)
16. All Rules Are Meant To Be Broken.... but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper. (I don’t like this rule much, but there are rare times when you can break your rules. RARE TIMES!! Don’t get sneaky and smart about it, because it is likely to slap you really hard in the face or shred you like a head of lettuce.)
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