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Dennis Gartman's Rules of Trading



May 29, 2010 – Comments (4)

As the tradition has always been, I try to post an article that I have found during my reading throughout the course of the week that I have found to be of the most interest and directly applicable to my trading. This week's article comes from a guest poster on a site that I frequent daily, call the The poster's name is Leisa, and has an unbelievable wealth of knowledge and experience when it comes to the markets. Here she has provided a very timely article on Dennis Gartman's trading rules. Everyone one of them is worth heeding and understanding and to break one is at your own peril. There is not a rule on here that I don't try to live and abide by in my daily trading - Consider applying these rules as well to your trading routine - you won't regret it! 

R U L E # 1
Never, ever, under any circumstance, should one add to a losing position ... not EVER!

Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out.

R U L E # 2
Never, ever, under any circumstance, should one add to a losing position ... not EVER!

We trust our point is made. If "location, location, location" are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.

R U L E # 3
Learn to trade like a mercenary guerrilla.

The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.

Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.

Holding on to losing positions costs real capital as one's account balance is depleted, but it can exhaust one's mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.

The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.

We can never know what price is really "low," nor what price is really "high." We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we've no idea how high high is, nor how low low is.

R U L E # 6
Sell markets that show the greatest weakness; buy markets that show the greatest strength.

Metaphorically, when bearish we need to throw our rocks into the wettest paper sack for it will break the most readily, while in bull markets we need to ride the strongest wind for it shall carry us farther than others.

R U L E # 7
In a Bull Market we can only be long or neutral; in a bear market we can only be bearish or neutral.

In a bull market we can be neutral, modestly long, or aggressively long--getting into the last position after a protracted bull run into which we've added to our winning position all along the way. Conversely, in a bear market we can be neutral, modestly short, or aggressively short, but never, ever can we--or should we--be the opposite way even so slightly.

Here are the Remaining 6 Trading Rules.

4 Comments – Post Your Own

#1) On May 29, 2010 at 6:14 PM, Turtleread (63.58) wrote:

Rule #5--yes, we can.  We do know how low low can be--it's zero (0).  While the rules are good, investors have a longer time horizon gerenally.  However, with the 2008 crash, most of us are traders now.

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#2) On May 29, 2010 at 6:20 PM, Superdrol (32.11) wrote:

Dennis Gartman's material is good.  He's one of the guys I try to follow on a regular basis.  Out of all those rules, the #1 rule that people have the hardest time following and what can ruin any trader or investor is taking losses early.  When things go sour, crazy things go on in their head, and the inability to act make small losses spiral out of control.

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#3) On May 29, 2010 at 9:42 PM, ChrisGraley (28.49) wrote:

If I think my valuation is sound and the market disagrees, I repeatedly break rule #1.

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#4) On May 30, 2010 at 7:08 AM, ralphmachio (< 20) wrote:

I recd this despite my success increasing my short and inverse 3x positions until they finally made their money back+. 3 days before things turned for the better(or worse), Jim Cramer came on TV and explained when to know you were wrong, and that you must change immediately. My father called me up and told me I should rethink my strategy. After 14 months of a bear market rally, I said, "why didn't you say that 12 months ago, when I was selling my C position? No I think I'll stay short"

If you know you are right, then it is weakness that makes you retreat, and time that will prove you correct. If you think you are right, but are wrong, the cost will be tremendous.  What I have found to be the costliest approach, is to maintain a position because of long term hopes. I could have stayed in cash, or even had some cynical faith in the herd for the last 12 months, and knew exactly when the tide turned, a few weeks back. 

Right now I just don't know, so I'm in cash, except for one small position in BEXP.  

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