Trading indicators of masters - 12. Trading Principles

Trading Principles

The objective of trading principles is to trade as objectively and consistently as possible within the bounds of human nature.

Principle 1: Trade according to your plan and adhere to it strictly.
Principle 2: Trade with the trend; "The trend is your friend."
Principle 3: Use stop-loss orders as much as permitted.
Principle 4: When in doubt, get out immediately!
Principle 5: Be patient; do not overtrade.
Principle 6: Cut losses quickly and let your profits run.
Principle 7: Never let a winning position turn into a loss (or, protect your profitable positions whenever possible).
Principle 8: Buy in weakness and sell in strength. Approach selling with the same willingness as buying.
Principle 9: In the early stages of a bull market, act as an investor. In the late stages of a bull market and during bear markets, act as a speculator.
Principle 10: Never average down—do not add to a losing position.
Principle 11: Do not buy simply because the price is low, and do not sell simply because the price is high.
Principle 12: Only trade in highly liquid markets.
Principle 13: Do not establish a position when prices are moving too rapidly (volatile gaps).
Principle 14: Do not trade on "inside" tips. In other words, "trade the trend, not your friend’s opinion." Furthermore, no matter how strongly you feel about a stock or market, do not give out free tips or advice.
Principle 15: Always analyze your own mistakes.
Principle 16: Beware of "false merger rumors."
Principle 17: If the success of a trade depends entirely on the perfect execution of an order, you should not enter that trade.
Principle 18: You must maintain your own trading records.
Principle 19: Know and follow the rules!

On Execution and Discipline

The difference between success and failure lies not in intelligence or knowledge, but in the willpower to execute that knowledge. Whether it is trading, losing weight, or pursuing any other goal, the greatest challenge is not knowing how to do it, but finding the resolve to act and the persistence to follow through.

The best we can do is strive for a state of integration, where our thoughts, actions, and emotions are in harmony, making life an inherently enjoyable process. To achieve ideal trading performance, you must:

Establish goals.
Acquire market knowledge.
Define effective trading principles.
Execute the above three steps by strictly following those principles.

By practicing emotional discipline as a continuous process, you can master your mind and develop decisiveness. This reduces the frequency and intensity of emotional conflict—which is vital for trading and serves as a proactive way of living. This is the only way I know to achieve mind-body consistency and foster self-esteem.

However, practicing emotional discipline is difficult because our values and beliefs often harbor hidden contradictions within the subconscious. Identifying the root of emotional reactions is particularly challenging. It requires self-reflection to recognize the relationship between your beliefs and reality, and the willingness to discard contradictory ones.

Note that simply adopting new beliefs does not guarantee an immediate change in emotional response. Changing how you react emotionally requires long-term introspection, honest self-confrontation, and the willingness to endure the pain associated with letting go of deeply held, yet misguided, values.

Summary

If you think in terms of fundamental essentials and integrate your trading methodology with time-tested principles, you will be able to adapt to any evolving market condition. While you may adjust your short-term strategies to meet market fluctuations, the underlying principles remain eternally valid.

By clearly defining your trading philosophy and adhering to it strictly, you can maintain your center of gravity and avoid derailing. Specifically, if you can protect your trading capital and maintain consistent profitability—rather than swinging for "home runs"—you can avoid the total ruin that befalls most traders.

If you study Dow Theory, your insight into market behavior (across all markets) will be unparalleled by any other theory. You will understand that market activity is essentially a psychological phenomenon; it cannot be measured in absolute terms, but it possesses a high degree of predictability on a probabilistic level.

If you understand what constitutes a trend and when it changes, that knowledge will save you from countless hours of aimless exploration. You will avoid erratic market entries and exits while mastering the knack of trading with the trend.

If you understand technical analysis, including both its strengths and weaknesses, it will assist you in timing your trades. By utilizing only a few fundamental technical tools, you can avoid the trap many technicians fall into—paralysis by analysis caused by an overabundance of indicators.

If you understand the basic principles of economics, including how money and credit influence economic cycles, you can predict how markets will react to government interventions and profit accordingly.

If you understand money management and trade based on a sound risk-reward ratio, you will never be "struck out" by the market.

If you can strictly follow your trading principles, you will be able to achieve your trading goals with the consistency that defines an elite trader.

However, as previously stated, knowledge alone is not enough. This is not because the knowledge itself is flawed. The problem lies within the individual—specifically, the inability to apply that knowledge consistently. One finds oneself repeating the same mistakes over and over. I was deeply perplexed as to why this happens. I delved into psychology and read over 200 books on the subject. The answers I discovered form the content of Part II.

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Trading Principles

On Execution and Discipline

Summary

The vast majority of the strategies and indicators I have implemented so far are inspired by the works of Wyckoff, Livermore, and Victor.

I generally release private, invite-only scripts. If you need access to a specific one, feel free to send me an email—note that a basic Tradingview subscription is required. You’re also welcome to join my Discord channel, where I share regular content updates.