Always worth reviewing.

30 Trading Rules From Tyler Bollhorn

Make it a habit to reread those trading rules lists every now and then. You want those important concepts to become deeply ingrained. Today’s timeless wisdom is from Tyler Bollhorn…

1.Buying a weak stock is like betting on a slow horse. It is retarded.
2.Stocks are only cheap if they are going higher after you buy them.
3.Never trust a person more than the market. People lie, the market does not.
4.Controlling losers is a must; let your winners run out of control.
5.Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.
6.Have loyalty to your family, your dog, your team. Have no loyalty to your stocks.
7.Emotional traders want to give the disciplined their money.
8.Trends have counter trends to shake the weak hands out of the market.
9.The market is usually efficient and can not be beat. Exploit inefficiencies.
10.To beat the market, you must have an edge.
11.Being wrong is a necessary part of trading profitably. Admit when you are wrong.
12.If you do what everyone is doing you will be average, so goes the definition.
13.Information is only valuable if no one knows about it.
14.Lower your risk till you sleep like a baby.
15.There is always a reason why stocks go up or down, we usually only learn the reason when it is too late.
16.Trades that make a lot of intellectual sense are likely to be losers.
17.You do not have to be right more than you are wrong to make money in the market.
18.Don’t worry about the trades that you miss, there will always be another.
19.Fear is more powerful than greed and so down trends are sharper than up trends.
20.Analyze the people, not the stock.
21.Trading is a dictators game; you can not trade by committee.
22.The best traders are the ones who do not care about the money.
23.Do not think you are smarter than the market, you are not.
24.For most traders, profits are short term loans from the market.
25.The stock market can not be predicted, we can only play the probabilities.
26.The farther price is from a linear trend, the more likely it is to correct.
27.Learn from your losses, you paid for them.
28.The market is cruel, it gives the test first and the lesson afterward.
29.Trading is simple but it is not easy.
30.The easiest time to make money is when there is a trend.

For total novice traders, who want and need to learn the art of profitable trading, the first decision is timeframes. Initially I was looking at daytrading, however numerous comments have forced a rethink. Daytrading is without a doubt the hardest timeframe to trade. The decision process has to be fast. Speed in the decision process comes with experience.

Pattern recognition is fractal, thus, timeframe is totally unimportant from this starting point. It is all about decision speed and recognition speed, that are put together in a rational framework to manage risk.

I have noticed through a few of the blogs that I follow that this concept is actually not accepted at all. The reverse seems to be argued: that risk and decision speed are best managed in the shortest timeframe available, viz. daytrading.

Food for thought

From John,

John Forman Says:

August 4, 2010 at 7:13 am e
A couple of follow-up points.

First, who’s doing the actual trade execution? For that matter, who’s deciding what trades to do? If the answer to either is the coach, then the coachee isn’t getting anything out of it. If the answer to both is the coachee, then what protection does the coach have that the coachee doesn’t just botch the whole thing up?

The coachee is executing the trades from his direct access platform. The protection is dependent upon securites being traded. If Options, there is an inherent safety mechanism, viz. loss cannot exceed 100% of contract purchased.

If stocks, then prior to a trade being executed, frank discussion regarding the theory of stop-losses and practical points needs to take place. Freezing is a function of position sizing and market conditions. Sizing correctly should mitigate the deer-in-headlights syndrome, it will not help in a flash-crash as we had the other month if we are incorrectly positioned. This is a tough one for daytraders, not position traders, who should use Options [I feel]

Second, while there may be a few fundamental building blocks upon which trading strategies are built, that’s only part of the trading equation. What about position sizing, for example? And how about all that between the ears stuff – like dealing with a drawdown period, or a great string of winners for that matter?

I think I’ve covered [briefly] position sizing. Drawdowns etc are a fact of trading reality. A good coach, one who actually trades, and is in the market with you, can differentiate twixt a trading drawdown that is normal and one that is not.

Third, who foots the bill for losses should they be the result of the coaching period – as could certainly happen just from bad luck, if nothing else?

They are shared, somewhat disproportionately I concede: the coachee loses capital, the coach doesn’t get paid. Under the traditional system the coachee pays for tuition, say $4000.00 over the weekend, compounds his losses in the market and is pretty despondent. My way is I feel far fairer in this aspect.

jog on

Having read and responded to a few comments, there is one point that I wish to expand upon. The point that John Forman raised, viz. the teaching of a system, that without the coach, the coachee cannot continue.

From marketsci:

This is the last post in our series analyzing the DVI (read part one, two and three), a contrarian intermediate-term (IT) indicator from CSS Analytics (click to calculate).

In this post I’ll compare the DVI to an IT indicator I use a lot in my own trading.

I want to drive home the point that all of these price-based IT indicators, despite being very different in their calculations, tend to pick similar entries/exits, so we should be looking at them as “concepts” and not marrying any one in particular.

In the graph above I’ve shown the results of trading the S&P 500 index using the DVI strategy described in my first post (red), versus trading my own IT indicator (grey) in a similar fashion (above/below the midpoint), from 1970 to the present.

See end of post for assumptions about dividends, return on cash, and trade frictions.

This is a rare post where I’m not going to disclose everything going on under the hood. I’m going to keep my IT indicator a black box, but know that it’s a component in ALL of our proprietary strategies, I’ve been trading with it for almost a decade, and I even include it on the free State of the Market report (yes, I love this concept).

It’s radically different than DVI in how it’s calculated, but it shares the fact that it’s only considering price (and not other data like volume or the price of tea in China).

Numbers for the number-lovers …

Just by visual inspection, it’s pretty clear these two strategies are close cousins. Any difference in performance between the two is most likely random chance.

The Point

The point of showing the data above is to say that, despite our best efforts to make one indicator better than another, indicators that are timing the market in similar timeframes (in this case, the intermediate-term) using similar data (in this case, price) are going to come to similar conclusions about the market.

That’s why RSI(2), DV(2), etc. generally say the same thing about the short-term state of the market (read more), or different variations of long-term moving averages say the same thing about the trend.

Unless we’re changing something much more fundamental, indicators tend to just be regurgitations of each other.

There are things that might make this indicator preferable to that one for you (ex. I like that DVI is both “bounded” from 0 – 100% and “normalized” to recent market data, and that my own indicator is more-KISS and a “dimmer” not a “light-switch”), but none of those preferences justify marrying any of them.

We should choose one (or two), add that “concept” to our trading, and move on to find other concepts, and not other redundant indicators.

And I think the DVI is a perfectly reasonable choice to fill traders’ need for a price-based, intermediate-term indicator.

This dovetails nicely with my reply to John: essentially, trading, whatever system that you employ, has basic fundamentals underlying, and they are consistent across all strategies, systems etc.

The only variations to this are Option based strategies that look at volatility or time rather than direction. These however, if desired, can be coached on the same basis.

Thus our coach, to get paid and deliver value, must be able to teach the fundamentals and implement the correct strategy for market conditions. This is important, and there has been much discussion around blogoland with regard to trend continuation, counter-trend trading, that the correct strategy is employed for current market conditions. Of course, the wrong strategy for market conditions will see losses to a valid strategy, in the wrong conditions.

Food for thought

I’ve had various discussions with John Forman in the past with regards to this topic. I’ve also poured ridicule upon the ChartAddict for advertising a $4000.oo per weekend [market closed] stockmarket coaching business.

So what do I think is a fair way to proceed?

How about the coach, coaches the coachee during market hours, and takes his fee from the profits generated via executed trades? Using MSN messenger or somesuch, trades, analysis, etc are undertaken in real time with real money for real results.

How does that grab any newbies thinking about daytrading or even swing trading for that matter? Of course all the basics, risk management etc must, as this is live, be adhered to and taught.

Food for thought.