Time Tested Classic Trading Rules for the Modern Traders

Very good compilation of the trading mistakes that are often made, and repeatedly made by traders.  These mistakes are often the key factors why traders lose money in the long term.

By Linda Bradford Raschke

This is a list of classic trading rules that was given to me while on the trading floor in 1984. A senior trader collected these rules from classic trading literature throughout the twentieth century. They obviously withstand the age-old test of time.

I’m sure most everybody knows these truisms in their hearts, but this list is nicely edited and makes a good read.

1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don’t take the market home.
5. Continually set higher trading goals.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Successful traders have a well-scheduled planned time for studying the markets.
9. Successful traders isolate themselves from the opinions of others.
10. Continually strive for patience, perseverance, determination, and rational action.
11. Limit your losses – use stops!
12. Never cancel a stop loss order after you have placed it!
13. Place the stop at the time you make your trade.
14. Never get into the market because you are anxious because of waiting.
15. Avoid getting in or out of the market too often.
16. Losses make the trader studious – not profits. Take advantage of every loss to improve your knowledge of market action.
17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
18. Always discipline yourself by following a pre-determined set of rules.
19. Remember that a bear market will give back in one month what a bull market has taken three months to build.
20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you must follow your program.
22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
23. Split your profits right down the middle and never risk more than 50% of them again in the market.
24. The key to successful trading is knowing yourself and your stress point.
25. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes.
26. In trading as in fencing there are the quick and the dead.
27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
29. Accept failure as a step towards victory.
30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work.
31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.
32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.
33. It’s much easier to put on a trade than to take it off.
34. If a market doesn’t do what you think it should do, get out.
35. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
36. Never add to a losing position.
37. Beware of trying to pick tops or bottoms.
38. You must believe in yourself and your judgement if you expect to make a living at this game.
39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be – up or down.
40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss – that is what does the damage to the pocket book and to the soul.
41. Never volunteer advice and never brag of your winnings.
42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.
43. Standing aside is a position.
44. It is better to be more interested in the market’s reaction to new information than in the piece of news itself.
45. If you don’t know who you are, the markets are an expensive place to find out.
46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.
48. When the ship starts to sink, don’t pray – jump!
49. Lose your opinion – not your money.
50. Assimilate into your very bones a set of trading rules that works for you.

By Linda Bradford Raschke
Source: http://www.traderslog.com/trading-rules/

A Quick Look at FBMKLCI in the Past Week (14/5-18/5)

I had been busy, but just to follow up on the direction of KLCI from the chart, here are some charts and data.

Weekly KLCI Chart

Bearish solid black candles with a small tail.  Broken convincing the 20w MA, which I interpret as uptrend has been convincing broken, and now supported by the 50w MA.

KLCI Daily Chart 

Broken the 100d MA and the 23.6% Fibonacci retracement in moderate volume/  The next level of support to look fro will be 1510 at the long term 200d MA.  

Market Participants

Retail investors had been exiting in a big way in the past one month.   Foreign funds seemed to be still in the market without aggressive selling.  As the foreign market participants include foreign retail investors, it was likely that foreign retail investors sold on Wednesday from the net selling data.

Conclusion

Confirmed bearish

My Views

The KLCI chart had turned bearish with retail investors getting panicky.  The Eurozone debt crisis were getting more serious. Couple with the uncertain general election date, and the KLCI may be difficult to rebound without fresh positive leads or positive quarterly results of index linked stocks.  Trading will be more difficult, and patience and greed are the emotions that retail investors need to manage well.   Although I would advise retail investors to be on the sideline until the uncertainties are cleared up, the reading of interpretation of individual stock charts may still provide trade opportunities, but the probability would likely be lowered with the uncertainties that are not within the control of retail investors.  The only factor that a retail investor can manage and control is the trading plan.  For retail investors, the best action is to stay on the sideline to preserve capital, rather than taking a low probability trade with the cash.  

Last Call for Participants in Candlestick and VSA Learning Progream

This is an announcement of the closing date for participating in the first session of the Candlestick and VSA Learning Program in Kuala Lumpur on 26-27 May 2012.  The closing date is 16 May, 2012.  Registration will not be accepted after 16 May, as the actual learning shall commence online not later than 16 May.   The details of the full learning program can be found in the link below.

http://fundamentalwithtechnicalanalysis.blogspot.com/2011/10/candlestick-and-volume-spread-analysis.html

For registration: send email to: leetg@yahoo.com
Note: Acceptance of participation will subject to a maximum number of 5 participants. .


Phases of Candlestick and VSA Learning Program

The complete Candlestick and VSA Analysis Learning Program is a continual life long learning program for one fee.  Basically it covers 5 phases of continuous learning with focus on learning and mastering the essential few and application of the few tools.  The 5 phases are briefly outlined as below:


1. Pre-Face to Face Learning
Through reading of a closed blog for paid participants and past participants only, that means, learning lessons start as soon as the payment is made.  The blog will have basic contents like articles and videos on learning the basics of candlestick through videos. The blog also will list out good resources for pre-training learning.  The presentation materials for the first-2 day session will be emailed to participants one week before the actual face-to-face learning session

2. Face-to-face learning (first 2 days session)
This 2 days of 6 hours each day session will focus on showing examples and illustration of learning contents, on candlestick analysis, as well as exercises and case studies discussion by participants. Real charts will be used to allow ample practices in candlestick recognition and discussion.  This session would be also be guiding participants through exercises on how to identify and interpret candlestick chart patterns.  More than a hundred charts will be shown to illustrate all the candlestick patterns and entry and exit applications.  Participants will be shown how to identify candlestick pattern in real charts and how to apply candlestick analysis with western technical tools like indicators and chart patterns in trade setups and trading plan..  After this first session, participants would have the knowledge and confidence to watch real charts of stocks to master the skills of candlestick analysis

3. Post first session mentoring in FB  and Blog 
Participants may ask questions or seek further clarifications on the learning contents on candlestick pattern identification and application, as well as second session contents.  This is a period for participants to reinforce what they learnt in the first session through their own observations and study of real charts

4. Second session Face-to-face learning on VSA and Trading System using Candlestick and VSA
This second and final 2-day of  hours each session will focus on understanding and application of Volume Spread Analysis and the technique to detect Smart Money.   It will focus on applications with real charts and examples with case studies.  The various types of trading strategies will be discuss for participants to make a decision of the trading system they can adopt to suit their profile.  One of the two days may be a trading session to view and explore how the market makers operate in real trading sessions

5. Continual Follow up Mentoring sessions in FB and Blog after Completion of the Program
Discussion of charts and actual trades and chart analysis with reference to candlesticks and VSA.  The Forum and Blog serve as a place to continual learning of the candlestick and VSA analysis skills, as well as allowing participants catching up what they may have missed.  The blog and forum will be the means of ensuring all learning participants will learn and master the skills at their own time and to share among themselves trading opportunities and candlestick pattern alerts or smart money actions during market hours or trading sessions.his part of the learning program guarantee completely free.  The contents of the blog consist of the essential tools to learn and master, and some basic concepts to understand, and it will be a permanent source of reference in future for all subscribers.   Others who are not taking the program will need to be paid members of the monthly subscription service when it is open to the trading community.

FBMKLCI: Where is KLCI now, and where it would likely go?

Headline News in Financial Market 
"JPMorgan Discloses $2 Billion in Trading Losses" 

This disclosure was one of the reasons of the downward pressures on the global stock market the past two days.  So how would this disclosure and its impact on Dow affect KLCI?   In this analysis, I will not spend time to analyse what would be the impact of the sudden disclosure, and how this shocker would impact the US market or on KLCI.  I do not have the knowledge to carry out a good prognosis at all.   I will merely look at the chart that really reflects the immediate reactions and actions of market participants by looking at the Dow and KLCI from the perspective technical analysis. I will also use the Bursa Statistics to comment on the market participants movements in the past week.

What we see in Dow so far

Dow Weekly Chart 

The week closing price is sitting on the 20w MA, the week broke the 10d MA and down to touch the 20w MA on the close.  The black candle is sitting between the 10w MA and 20w MA.  This solid black candle could be the reaction of Dow on the JP Morgan's surprised disclosure.

Dow Daily Chart 

Apparently there was a sell down as shown in the daily chart during the week, with the Dow tested the 100d MA but rebounded on Friday.  Immediate support is 12832, resistance 12930.   The critical support to see a situation of a lower low is at the horizontal support at 12710, and breaking this support will signal a beginning down trend


Where is FBMKLCI? 

KLCI Weekly Chart 

I am using 10w MA as the dynamic support and resistance reference, as it can be seen from the shaded area of touching or breakdown down the 10d MA and rebounded upward (shaded) to continue its upward trend since mid September 2011 until the high at End April 2012.

The last candlestick was a doji, and the closing price of the week was sitting on the 10w MA which was seen flat.  But the price was still above the 20w MA which is the next dynamic support level.   I am using a technical indicator, stochastic, which is seen moving down crossing over from the overbought region.

The weekly chart shows there is weakness from my technical interpretation. The key support level should be the 20w MA.

KLCI Daily Chart 

For the KLCI daily chart,  I am using 20d MA as a key dynamic support, and this 20d MA line (shaded green) had been touched and broken several times during the last 5 months, but managed to rebound to stay on the upward trend until this week.  The closing price of 1584 is seen slightly below the 50d MA.  Looking at the candlestick pattern, the market appeared to be on a sideway trading range. The hammer on Friday is the result of a key-in transaction entry error of one component stock KLK.   The stochastic is still above the signal line, though it appears to be flat.  The daily volume during the week has been quite low below 1.5b shares.

To reference KLCI at 1584 with other moving averages, here are the approximate index numbers:

10d MA - 1582 (KLCI above this support)
20d MA - 1587 (KLCI slightly below)
50d MA - 1587 (KLCI slightly below)
100d MA - 1555
200d MA - 1512

KLCI was trading in a  bearish sentiment within the cluster of 10d, 20d and 50d MA levels, and the next support is 100d MA. Any downward direction of KLCI in the next few days would turn KLCI to be very bearish


Market Participants in KLSE 

Source: http://christrade.blogspot.com/2012/05/1052012.html

Source: http://bursatradestatistics.blogspot.com/

Foreign funds inflow had been favourable during the last month, and Friday's was an inflow of foreign funds. Retail Investors had been selling down as clearly seen from the chart.  Local funds (likely government linked investment funds) as usual, had been providing the supply and demand in the market. I speculate the the net selling of the two days was due to selling for foreign individual retail investors and not the foreign funds as the net selling amount were small.

So where would KLCI be heading?

I cannot answer nor I wish to guess, as the chart does not show me any confirmation or any likely direction. The last candle on Friday is a doji, and a doji is also the last candle of the weekly chart.  Technically there is hint of indecision on the right side direction from what appeared on the left side of the chart.  The external environments are uncertain, and so is Malaysia's internal political conditions when the general election is expected to be very soon.  

From the Bursa Statistic diagram above, we can see that retail investors had been selling down the past week, while foreign buying had slowed with two days of net selling.   I can see that the sentiment of retail investors had been cautious to fearful of a market crash, while foreign funds are more cautious, and volume had been slow.   Simply put, I have no idea where KLCI would be heading next week.

My overall view

Apparently retail investors are fearful now, and I would look at the market solely from the chart that reflects the market participants' sentiment and reaction to the market, and my current sentiment is cautiously pessimistic, that I think the market would likely be drifting down or on consolidation with low volume. The key indicators to watch closely will be the market volume and the foreign funds buy/sell in the Bursa Statistics data as the trend of the line chart above would show the reaction of foreign funds, and that will be the key to influence the direction of KLCI.  But for wise and knowledged investors, we should be looking at the charts or fundamental analysis of individual stocks to make our investment decisions. If an investor does not have knowledge, a wise option is to stay on the sideline to watch, and learn something.  Patience and discipline will be important during times of uncertainties,  and only full time traders need to trade for a living. 

Where is FBMKLCI now? (23-27 April)

KLCI Weekly Chart

The weekly chart shows a solid black candles breaking through the 10w MA for the first time since its broke out the same MA line during December 2011 to continue the upward trend until last week. It had also broken down the immediate horizontal resistance of 1577  This longer term chart shows a signal of an impending correction downward.  The past two weeks were likely the result of profit taking activities.

KLCI Daily Chart 

Look from a shorter time frame, the daily chart shows a bearish week, with the index starting to break down the 20d MA the beginning of the week, and widening MACD from the signal line.  The index even broke down the 50d MA on Friday, and we can see a MACD line cross over below the zero line.  The next significant support is 1565, breaching this support may likely see a sharper decline.

Foreign Participation

A. Weekly Trade Statistics (23/7/12 to 27/4/12)

Source: http://bursatradestatistics.blogspot.com/

B. Daily Trade Statistics (27/4/12)

Foreign funds inflow continued in the week with net buying in, while local institutions were taking profits. Foreign funds were continuing their buy in from Monday to Thursday, but there was a small net selling by foreign funds.  On  Friday we also saw the net buying and selling by various categories of market participants narrowing. This may be interpreted as switching of stocks in their portfolios, and the black candles was likely due to selling of index linked stocks, while other non index linked stocks were bought in by foreign funds as well as local institutions. Retail investors appeared to be optimistic of the market direction as seen but the net buying in, which was more as a result of bargain hunting of index linked stocks.

Looking Forward

Although the longer term weekly chart had not indicated a complete breakdown of the uptrend yet, as it is staying above the 20w MA, the daily chart is bearish, and showing a signal of an upward trend reversal.  The daily volume of the week had been moderate and consistent, but KLCI had been declining.  I would take this as the bigger players were switching the stocks within their fund portfolios, letting go of more index linked stocks, driving down the index.  

So what can we expect next week?  It is uncertain, as we have the uncertainties of the general election date, as well as the impact of Bersih 3.0 rally on 28/4/12.  We can only see the likely the impact of Bersih 3.0 rally on the local market the coming session. I had underestimated the sentiments of the market on Bersih 3.0, and in fact forgotten about its likely impact, and the market did not consolidate or rebound as I had expected, but instead it had declined.  

But apparently the foreign funds participation remained positive for the week, and again the decline in KLCI in the past week was mainly due to profit taking activities as well as switching of stocks in the funds portfolios, rather than exiting from the market.  The index was also affected by the selling of Armada, which is also an index linked stock, though it is a small component of KLCI. 

The coming week will see the end of April which will also coincide with the fiscal year end of some funds, so the index is more likely supported.   But in May 2012, we have yet to see.  I see the critical support of KLCI is the 20w MA line, which is around 1555.  But I would expect retail investors would start to get panicky and losing their direction, and will sell down their stocks, especially the punter penny stocks.  After this analysis, I would have the more cautious and less optimistic sentiment, but we have to see the emerging few this week, and any positive external developments like QE3 may be a driver to boost up the local bourse for a strong rebound.    Entry at this moment  will carry higher risk of uncertainty, so let's just wait and see.

Now where would FBMKLCI be heading? (16-20 April)

All investors and traders in the KLSE market would be tracking this key index, and I would just have a brief look at the KLCI by looking from the left side of the chart, and I will try to make a forecast of the probability of what we may see this coming week.

KLCI Weekly Chart 

KLCI in the last two weeks had failed to continue to break out into a higher high after reaching a historical high of 1609.  The volume two weeks ago dropped to only about 4.6b shares, failing to follow through to a higher high. However the volume in last week nearly doubled traded with 8.6b shares in the week.   The price action showed a black candlestick, closing at 1592 at the end of the week, and the black candle  penetrating the weekly support of 1596, which now turned into the immediately resistance.  Apparently there were profit taking during the last week.   The next support is 1577, and the long term uptrend of KLCI was still intact as seen by the weekly chart whereby the price was clear above all the MAs and trending along an expanding Bollinger Band.

KLCI Daily Chart 

The shorter time frame daily chart showed a less optimistic technical outlook of the market, with the index slowly declining with quite a high relatively daily volume.  I interpret this the outcome of profit taking activities of some major market participants.  The end of the week black candlestick broke down the 20d MA, breaking down the horizontal support of 1596, and the 5th time testing this key dynamic 20d MA support line. The 10d MA was also starting to slope downward.  

Now how about Foreign Participation?

For the whole week, there had been a healthy net inflow of foreign funds, but it slowed down on Friday.   Foreign participation is a key index to watch in looking ahead of the direction of the KLCI, and those numbers are optimistic that the start of a sharp correction is not seen, though it could be near.

What is next?
We have to see, as the market last week appeared to be profit taking.  20d MA (support already breached) and the horizontal support further down at 1577 will be the key index numbers to watch as well as the volume and the foreign participation status.  I do not see a direction yet, but I would speculate the index may not start the correction, but likely a consolidation or rebound from the 20d MA.

For retail investors, it is advisable to be cautious in making an entry, while looking for exit signal or taking care of exercising discipline in executing the trailing stops.   Another significant factor that may impact on the KLCI is the expectation of general election, which I think, the dissolution of parliament would likely be the time of foreign fund starting to exit the market with their profits because of political uncertainties, and the beginning of a short term rapid decline in KLCI.  For those who are looking for entries, patience is the key, and for those holding stocks, discipline will be required to protect profits and capital.