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The Ten Trading Commandments

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If there wasn't risk in this profession, it would be called "winning," not trading.

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"Fight? No, not yet. Not until me and Harvey get the rules straightened out."
--Butch Cassidy


I remember why I wanted to be a trader. I figured that the easiest way to make money was to stand near the cash register.

Of course, as I discovered through my sixteen year career, there's a reason why consistent producers get paid the big bucks. Flashy bets and big swings sometimes connect but, in the end, a disciplined approach pays the bills.

I've tripped plenty through the years, the types of missteps that almost cost me my livelihood. But I persevered, climbed the ladder and morphed those mistakes into valuable lessons. First as a vice-president at Morgan Stanley, then as a Managing Director at the Galleon Group and, finally, as President of Cramer Berkowitz. My approach wasn't always constant but, in the end, certain rules allowed me to stay in the game.

These are those rules.


Respect the price action but never defer to it.

The action (or "eyes") is a valuable tool when trading but if you defer to the flickering ticks, stocks would be "better" up and "worse" down-and that's a losing proposition. This is a particularly pertinent point as headlines of new highs serve as sexy sirens for those on the sidelines.

Discipline trumps conviction.

No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you're smarter than the market.

Opportunities are made up easier than losses.

It's not necessary to play every move, it's only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.

Emotion is the enemy when trading.

Emotional decisions always have a way of coming back to haunt you. If you're personally attached to a position, your decision making process will be flawed. It's that simple.

Zig when others Zag.

Sell hope, buy despair and take the other side of emotional disconnects in the context of controlled risk. If you can't find the sheep in the herd, chances are that you're it.

Adapt your style to the market.

At various junctures, different investment approaches are warranted and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you.

Maximize your reward relative to your risk.

If you're patient and pick your spots, edges will emerge that provide an advantageous risk/reward. Proactive patience is a virtue.

Perception is reality in the marketplace.

Identifying the prevalent psychology is a necessary process when trading. It's not "what is," it's what's perceived to be that dictates supply and demand.

When unsure, trade "in between."

Your risk profile should always be an extension of your thought process. If you're unsure, trade smaller--or paper trade--until your identify your comfort zone. Trading "feel" is cyclical and any professional worth his or her salt must endure slumps.

Don't let your bad trades turn into investments.

Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off-win or lose.


There are obviously many more rules but I've found these to be the common thread through the years. Each of you has a unique risk profile and time horizon, so some of these commandments may not apply. As always, I share these thoughts with the hopes that it adds value to your process. Find any style that works for you and always allow for a margin of error. No approach is failsafe.

For if there wasn't risk in this profession, it would be called "winning," not trading.

Good luck today.


R.P.
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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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