“First, prove to yourself that the rules that I give you are good. They have worked in the past and they will work in the future. The rules given in this book are practical rules. They have cost me forty years of experience and hundreds of thousands of dollars to learn. I KNOW they will work. Don’t take my word for it. Prove to yourself that they are good. You will have to put in time for study. You will have to make sacrifices. But, if you are not willing to work and make sacrifices, you will not make a success at anything. I have studied and improved my methods every year for the 24 years. I am still learning. I hope to make greater discoveries in the future.”
“After long years of study and research, I have simplified and perfected my rules so that they are practical for others to use and apply. I have eliminated unnecessary details, and have cut down the work so you can get results quicker. You can make profits by strictly adhering to rules. Make up your mind. If you are not going to follow rules, don’t start speculating or trading in stocks—or anything else for you will lose in the end.”
Here’s a breakdown of why following established rules is crucial, and how you can integrate this advice into your trading practice to achieve success.
Why Proven Rules Matter
1. Reliability and Consistency
Explanation:
- Proven rules provide a reliable framework for making trading decisions. They have been tested over time and have demonstrated consistent results.
Implication:
- Following these rules helps traders avoid impulsive decisions and stick to strategies that have been shown to work.
Example:
- A rule might be to sell a stock if it drops 7% below the purchase price to limit losses. This rule, tested and proven over years, helps manage risk consistently.
2. Reduction of Emotional Biases
Explanation:
- Emotions like fear and greed can cloud judgment and lead to poor trading decisions. Rules help mitigate these emotional biases.
Implication:
- By sticking to predefined rules, traders can maintain discipline and make more rational decisions.
Example:
- A trader might have a rule to not chase stocks after a rapid rise, preventing impulsive buying driven by fear of missing out (FOMO).
3. Efficient Learning and Adaptation
Explanation:
- Established rules streamline the learning process by focusing on what works and eliminating unnecessary complexities.
Implication:
- Traders can achieve results faster and more efficiently by adhering to simplified and perfected rules.
Example:
- A simplified rule might involve using specific technical indicators like moving averages to identify entry and exit points, making it easier for traders to follow and apply consistently.
How to Prove and Apply Trading Rules
1. Backtesting
Action:
- Test the rules on historical data to verify their effectiveness over different market conditions.
Application:
- Use backtesting software to simulate trades based on the rules and analyze the outcomes.
Example:
- If a rule suggests buying stocks that break above their 50-day moving average, backtest this rule across multiple stocks and time periods to see how often it leads to profitable trades.
2. Paper Trading
Action:
- Practice trading using the rules without risking real money. This helps build confidence and understanding of how the rules work in real-time scenarios.
Application:
- Use a paper trading account to execute trades based on the rules and track the results.
Example:
- Execute trades in a simulated environment for a few months to see if the rules consistently yield positive results.
3. Continuous Learning and Adaptation
Action:
- Regularly review and refine the rules based on new insights and market changes. Stay committed to lifelong learning and improvement.
Application:
- Keep a trading journal to document each trade, noting which rules were followed and the outcomes. Use this information to tweak and improve the rules over time.
Example:
- If a rule is not performing as expected, analyze why and make adjustments. For instance, if a stop-loss rule is too tight and leads to frequent small losses, consider adjusting the stop-loss percentage.
The Commitment to Discipline and Sacrifice
1. Time and Effort
Explanation:
- Success in trading requires a significant investment of time and effort in studying and applying the rules.
Implication:
- Be prepared to dedicate time to learning and practicing the rules. This commitment is essential for achieving consistent success.
Example:
- Spend a few hours each week analyzing trades, reading market reports, and refining your strategy based on your trading journal.
2. Sacrifices
Explanation:
- Making sacrifices, such as giving up leisure time or short-term pleasures, is necessary to focus on learning and improving your trading skills.
Implication:
- The willingness to make these sacrifices demonstrates a serious commitment to trading success.
Example:
- Choosing to spend weekends studying market trends and backtesting new strategies instead of engaging in recreational activities.
Conclusion
Adhering to proven trading rules is essential for achieving success in the financial markets. These rules, developed through extensive experience and testing, provide a reliable framework for making informed and disciplined trading decisions. By committing to backtesting, paper trading, continuous learning, and making necessary sacrifices, you can effectively implement these rules and increase your chances of long-term success. Remember, the key to profitable trading lies in the consistent application of well-defined rules and a steadfast commitment to ongoing improvement.