Twenty-five years ago, Jack Schwager asked Paul Tudor Jones what were his trading rules to live by. This was his response:
Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situation where you don’t have control. For example, I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading.
If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start.
Don’t be too concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day. Always think of your entry as last night’s close. I can always tell a rookie trader because he will ask me, “Are you short or long?” Whether I am long or short should have no bearing on his market opinion. Next he will ask (assuming I have told him I am long), “Where are you long from?” Who cares where I am long from. That has no relevance to whether the market environment is bullish or bearish right now, or to the risk/reward balance of a long position at the moment.
The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.
Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.
Jesse Livermore, one of the greatest speculators of all time, reportedly said that, in the long run, you can’t ever win trading markets. That was a devastating quote for someone like me, just getting into the business. The idea that you can’t beat the markets is a frightening prospect. That is why my guiding philosophy is playing great defense. If you make a good trade, don’t think it is because you have some uncanny foresight. Always maintain your sense of confidence, but keep it in check.
Market Wizards – Jack Schwager