GANN'S
TWELVE [MAJOR] RULES FOR SUCCESSFUL TRADING
AT THIS LINK:
#12RULES
W.D.Gann's
TWENTY-FOUR [GENERAL] RULES FOR TRADING:
1. Amount of capital to use : Divide your capital into 10 equal parts
and never risk more than one tenth of your capital on any one trade.
2. Use stop loss orders. Always protect a trade when you make it with
a stop loss order .
3. Never overtrade. This would be violating your capital rule.
4. Never let a profit run into a loss. After you once have a profit of
3 points or more, raise your stop loss order so that you will have no loss
of capital.
5. Do not buck the trend. Never buy or sell if you are not sure of the
trend according to your charts.
6. When in doubt get out, and don't get in when in doubt.
7. Trade only in active stocks. Keep out of slow dead ones.
8. Equal distribution of risk. Trade in four or five stocks, if possible.
Avoid tying up your capital on any one stock.
9. Never limit your orders or fix a buying or selling price. Trade at
the market.
10. Don't close your trades without a good reason . follow up with a stop
loss order to protect your profits.
11. Accumulate a surplus. After you have made a series of successful trades,
put some money into a surplus account to be used only in emergency or in
times of panic.
12. Never buy just to get a dividend.
13. Never average a loss. This is one of the worst mistakes a trader can
make.
14. Never get out of the market just because you have lost patience or
get into the market because you are anxious from waiting.
15. Avoid taking small profits and big losses.
16. Never cancel a stop loss order after you have placed it at the time
you make a trade.
17. Avoid getting in and out of the market to often.
18. Be just as willing to sell short as you are to buy. Let your object
be to keep with the trend and make money.
19. Never buy just because the price of a stock is low or sell short just
because theprice is high.
20. Be careful about pyramiding at the wrong time. Wait until the stock
is very active and has crossed Resistance Levels before buying more and
until it has broken out of the zone of distribution before selling more.
21. Select the stocks with small volume of shares outstanding to pyramid
on the buying side and the ones with the largest volumn of stock outstanding
to sell short..
22. Never hedge. If you are long of one stock and it starts to go down,
do not sell another stock short to hedge it. Get out at the market ; take
your loss wait for another opportunity.
23. Never change your position in the market without a good reason.When
you make a trade, let it be for some reason or according to some definite
plan ; then do not get out without a definite indication of a change in
trend.
RULES FOR SUCCESSFUL TRADING
If you can not follow a rule, do not
begin speculating or investing, as you are sure to lose. Learn to adhere
strictly to a rule or do not follow it at all. The following rules should
be carefully studied and applied in your trading
1st : CAPITAL REQUIRED
You would not try to run an automobile and start out
to travel several hundred miles unless you knew how much gasoline it required
to run a given number of miles. Yet, you go into speculation without knowing
one of the most important things, the amount of capital required to succeed
and make speculation a business.
Do not try to get rich in a few months or a year.
A man certainly should be satisfied if he can acquire a competent fortune
over a period of ten to twenty years. Often we have one year when a man
with nerve and knowledge and a small amount of capital can make a fortune.
I have been able to pile up enormous profits in a short time by pyramiding,
but this can not be done continuously and I do not claim to be able to do
it. What I am trying to teach you is a safe, sure way, which will yield more
profits than any other business on earth if you will only be conservative
and not make speculation a wild gamble.
A man may go into business and lose all of his money
and then years pass before he has another opportunity to make a large amount
of money in that or any other business. Yet, in the speculative markets
opportunities return every year, provided a man has studied enough to see
them when they appear. The chances for gain are so unusual and so many great
opportunities do come in Wall Street that the average man gets greedy, gambles
and does not wait between times for the real opportunity.
People expect more profits in speculation than in
any other business. A man who would be satisfied with a return of 25 per
cent per year in a business is not satisfied if he doubles his capital every
month in Wall Street. Many people are satisfied with 4 per cent in a savings
bank, but when they come to Wall Street and put up $1,000.00 they expect
to make $1,000.00 in two or three weeks. They are the people who buy on a
10-point margin and always lose.
Do not expect the impossible in speculative markets.
Great and unusual opportunities, when you can start at the bottom or top
of a move, pyramid and make a fortune, occur every few years. Two or three
times each year, when stocks are at the extreme high or low, there are opportunities
for making 10 to 40 points’ profit.
You may think an average of 1/2 point a day, or 3
points a week, is too small a profit to bother with. Yet, in 52 weeks it
would amount to 156 points, or $1,560.00 a year, on a 10-share trade. Make
speculation a business, not a gamble. Go into it to stay, not to gamble all
on a few trades, lose and quit. Be patient. If you can double $1,000.00 the
first year and keep doubling it for ten years, you would have over a million
dollars.
Active leading stocks make major moves of 10 to 40
points three to four times a year. If you are able to catch half of these
major moves on conservative trades, your profits will be enormous. Do not
try to catch all the minor fluctuations. The inside manipulators themselves
do not get one-tenth of the minor fluctuations. Why should you expect to?
In beginning to trade in stocks the most important
thing\par to know is the amount of capital required. Many traders make the
mistake of thinking that about 10 points margin is enough. Nothing is more
erroneous. The man who starts trading on 10 points’ margin is gambling,
not even making safe, speculative ventures. When you start to trade use
your capital as you would in a business, and in such a conservative way that
you can continue.
For trading in stocks selling at $100.00 per share
or over, you should have $5,000.00 for each 100 shares you trade in; $2,500.00
for trading in stocks selling over $50.00; $1,500.00 for stocks selling
around $25.00; $1,000.00 for stocks selling at $10.00 to $15.00. This amount
of capital is not to margin stocks and let them run against you 10 to 30
points. It is to be used to make a large number of trades and pay small losses
when they occur. You should always limit your loss on each trade to about
3 points and never more than 5 points.
If you have only $300.00 to start trading with, when
you buy or sell a stock, place a 3-point stop loss order on it. This will
allow you to make ten trades on your capital. Suppose you make five consecutive
trades and lose, your capital will be half gone, but if on the next trade
you are right and make 15-points’ profit, you will regain all of your losses;
or, if you make three trades with 5 points’ profit, they would wipe out
the losses of five trades with 3 point losses on each.
2nd : LIMIT YOUR RISK
A strong will power is just as essential as plenty
of capital. If you have not the firmness, will power, and determination
to protect every trade with a stop loss order, do not start trading, for
you will fail.
I have often heard traders say “If I place a stop
loss order at a certain point the market is sure to catch it.” Yet they
realize afterward that the stop loss order being caught was the best thing
that could happen to them. There is nothing better than getting out quickly
when you are wrong. The man who refuses to get out when he is wrong usually
stays until his money is gone and the margin clerk sells him out.
A lot of people do not know how to place a stop loss
order on a trade when they make it. A stop loss order is an order given
to the broker that becomes a market order when the stock reaches the price
at which it is placed.
For example:
We will assume that you buy 100 shares of U. S. Steel
at 106. You feel that 2 points is enough to risk on the trade And that if
it declines to 104 you would sell it out. It is not necessary for you to
sit in a broker's office and watch the ticker until Steel declines to 104
and then get up and tell the broker to sell 100 Steel at the market. When
you buy the stock simply give your broker an order reading as follows:
Sell 100 U. S. Steel at 104 Stop G. T. C. which means
“good till cancelled.” Now, suppose that Steel\par declines to 104. When
it reaches this price, your broker sells 100 at the market. He may get 104
for it or he may get 103 7/8 or 103 3/4, but you know that when it reaches
this price your stock will be sold. A broker can not guarantee to sell your
stock at the limit of your stop loss order, but he does sell it immediately
at the next best price after your stop loss order price is reached.
Suppose that you sell U. S. Steel short at 106 instead
of buying it, and that you want to protect yourself against loss. You give
your broker an order to buy 100 U. S. Steel at 108 stop G. T. C. If it reaches
this price, he buys in the stock.
If your stop is not reached and the market goes in
your favor, you must then cancel your stop loss order when you close out
your trade with a profit. You can, of course, give a stop loss order good
for one day, one week, or any specified length of time, but the best way
to place the order is G. T. C.; then you do not have to worry about it.
3rd : OVERTRADING - THE GREATEST EVIL
Overtrading is the cause of more losses than anything
else in Wall Street. The average man does not know how much capital is required
to make a success and he buys or sells more than he should. Therefore he
is forced to get out of the market when his capital is nearly exhausted and
probably misses opportunities for making profits. Make up your mind how much
loss you can afford before you make a trade and not afterward.
Stick to small quantities. Be conservative. Do not
overtrade, especially at the bottom or top of long moves. Fortunes are lost
trying to catch the last 3 to 5 points in extreme moves. Keep cool. Avoid
getting overconfident at tops and bottoms. Study your charts carefully and
do not allow your judgment to be influenced by hope or fear.
Many a trader has started out trading in 10 shares
and made a success because he started near top or bottom; then when the
market had reached extreme, he began trading in 100-share lots and lost
all of his profits and capital too, because he violated the conservative
principle which helped him to make a success.
If you make one trade and it starts to go against
you, you are wrong. Then why buy or sell more to average a loss? When things
are getting worse, day by day in every way, why do your best to make them
get worse in every way? Stop the loss before it is eternally too late. Every
trader should remember that the weakest point of all is overtrading, and
the next, failing to place a stop loss order, and the third fatal mistake
of all, averaging a loss. Eliminate these three mistakes and you will make
a success. Cut short your losses, let your profits run, pyramid or increase
your buying or selling when the market is moving in your favor, not when
it is going against you.
Remember that wild, active markets are brought about
by feverish manipulation, and that they increase the imagination, exaggerate
your hopes, and take away all sense of reason and proportion. Therefore,
in extreme markets try to keep a cool head. Remember that all things come
to an end, and that a train going 60 miles an hour will cause a greater smash-up
if it leaves the track than one traveling 5 miles an hour. Therefore, in
a wild runaway market, jump before she bumps, for you will never be able
to get out once the crash comes. When everybody wants to sell, and no one
wants to buy, profits run into losses fast.
The great bull market of 1919 shows plainly what happens
when everybody gets crazy bullish, and can see no top in sight. This bull
market reached a point where everybody was bullish and buying, and no one
on the outside dared to sell short. It was one of the fastest markets in
history. And what happened? When the “bubble busted” in the early days of
November and the decline started, some stocks were off 50 to 60 points in
two weeks’ time, and the profits made during the whole campaign that year
were wiped out in ten days. The man who waited for a rally to get out on
after the move started down never had a chance, because everybody was trying
to get out, and the further prices declined, the more people there were forced
to sell out, with the result that the market got weaker as it declined lower.
4th : NEVER LET A PROFIT RUN INTO A LOSS
More traders are ruined by violating this rule than
any other, except overtrading. When you buy or sell a stock and it shows
you a profit of 3 to 4 points, what is the sense or reason for ever risking
any more of your capital on it? Place a stop loss order where you will get
out even or better; then you have all to win and nothing to lose. If the
trade continues to move in your favor, you can follow it up with a stop loss
order.
People often buy or sell a stock and it shows them
a good profit, but they are “hoggish,” expect more, hold on and hope and
let it run into a loss, which is very poor business, and the man who follows
it will not succeed in the end. Always protect your principal in every way
possible.
5th : DON’T BUCK THE TREND
The way to make money is to determine the trend and
then follow it. When you are in a Bear market and the long trend is down,
it is always much safer to wait for rallies and sell short than to buy.
If you are in a big Bear market where stocks are going to break from 50
to 200 points, you can miss the bottom several times on the way down and
lose all of your capital. The same applies to a Bull market. You should
never sell short on an advancing market. It is better to wait for reactions
and buy than to try to pick tops for selling. Big profits are made by going
with the trend and not against it. One of the most vital and important things
for either an investor or a trader to learn is to take a loss and take it
quickly. When you see that you are wrong there is no use putting up more
margin and holding on and hoping. If you take a small loss quickly and get
out of the market, your judgment will be much better and you can see an opportunity
to get in again and make profits.
6th : WHEN IN DOUBT GET OUT
When you buy or sell a stock and it does not act right
immediately or start to move in your favor within a reasonable length of
time, get out of it. Your judgment gets worse the longer you hold on and
hope for the market to go your way, and at extremes you always do the wrong
thing. It is much better to take a quick loss of 2, 3, or 5 points than
to hold on and hope and eventually take anywhere from a 10 to a 50-point
loss.
Stocks are not going to stop going up or down once
they start just for your benefit. Always remember what Jim Keene said: “If
stocks won’t go your way, you must go their way.” Always go with the tide
; never buck it. If you were on a railroad track and saw a train coming
at 60 miles an hour, would you stand there and hope that the train would
stop before it hit you, or would you hope that maybe you could knock it
off the track? Of course you wouldn’t. You would get out of the way and
do it quick. You should do the same thing in the stock market -- Get out
; let them go by, or get aboard and ride with them.
7th : TRADE IN ACTIVE STOCKS
Always confine your trading to standard, active stocks
listed on the New York Stock Exchange. Outside stocks have spurts, but the
active leaders yield more profits in the long run. Stocks traded in on the
New York Stock Exchange always have a good market and you can get in and
out when you want to. Ninety per cent of the unlisted and curb stocks disappear
sooner or later. Leave the pups, cats and dogs, and mining stocks alone.
The same group of stocks over a long period of time
do not remain leaders. Changing conditions in the country cause certain
groups to lead for a time, then become laggards, while new groups become
public favorites and leaders.
It is the same thing with individual stocks of the
different groups. As a rule, a stock that becomes a favorite and a leader
will continue active anywhere from five to ten years. After this period
of time, it will pass into the hands of investors and its activity will
cease. Fluctuations will become narrow because investors do not jump in
and out every day. They hold for a long time, and finally when they do start
to sell out for some good reason, or get scared, then the old time leaders
become active on the down side until liquidation has been completed.
Of course, the big money is always made in trading
in stocks that fluctuate over a wide range. For this reason, you must always
be on the lookout for a new leader that will give opportunities for making
big profits. Be up-to-date, keep up with the new stocks as they are listed,
watch their development, and you will be able to pick the new live leaders
and discard the old, inactive stocks. Big money is made, not from dividends
but from fluctuations, if you know how to trade quickly. That is why it
pays to trade in active stocks that make a wide range. If you have to take
a loss in stocks of this kind, you can make it back very quickly, because
opportunities occur often.
8th : EQUAL DISTRIBUTION OF RISK
There is an old saying, “Never put all of your eggs
in one basket.” And in the stock market it is a very good rule to follow.
If you are in position to do so, select as many as four or five stocks,
one from each of the different groups. Buy or sell in equal amounts.
Divide your capital up so that you can make seven
to ten trades with it. Suppose you have $5,000.00. Trade in 100- share lots
and limit risks to 3 to 5 points. You would be able to stand five or six
consecutive losses and still have capital to work with. By letting your profits
run one big profit will often wipe out four or five small losses. But, if
you take big losses and small profits, you have no chance of gaining in the
end.
If you can only trade in 50 shares, take 10 shares
each of five different stocks. Place stop loss orders on these trades from
3 to 5 points away, according to the indications on the stocks you are trading
in. Two of these stocks may go against you and catch your stop while the
other three may not. This will leave you part of your holdings and if they
move in your favor, will make back your losses on the others and show profits.
If you get into the market right and with a reason,
records show that it very seldom occurs that you would get the stops caught
on all of your stocks. You may not always make as much profit as you would
to trade in one or two of the active, fast moving stocks, but you will be
safer. That is my aim : To teach you safety; help you protect yourself and
cut short your losses in every possible way and let your profits run.
9th : FIXING A PRICE OR POINT TO BUY OR SELL
The majority of people have a habit when they buy
or sell a stock, of fixing in their minds a certain figure at which they
expect to take profits. There is no reason or cause for this. It is simply
a bad habit based on hope. When you make a trade, your object should be to
make profits and there is no way that you can determine in advance how much
profits you can expect on any one particular trade. The market itself determines
the amount of your profit, and the thing that you must do is to be ready
to get out and accept a profit whenever the trend changes and not before.
Remember the market is not going to act to please you or go to certain figures
just because you want to buy or sell at those figures.
Many traders lose big profits by fixing the price
at which they intend to sell. Stocks sometimes go within 2, 3 or 4 points
of their selling price and start to decline. They hold on and hope. Just
because it does not reach the point that they have fixed in their minds,
they often hold on and hope until they lose all the profits and take a loss,
refusing to see that the trend has changed. Hope will ruin any man who follows
it in the stock market. To succeed you must face facts, and facts are often
cold and stubborn and do not agree with your hope, but you must accept them
for your own good.
In nearly every bull or bear campaign in the market
the general public gets certain fixed points in their heads where stocks
are going to make tops or bottoms. The newspapers talk about certain favorite
stocks going to 100, 125, 150 or 175. Everybody gets the idea that these
prices are going to be made and they become “hope” prices, but are never
realized.
To illustrate this: During the fall of 1909, when
the bull campaign in stocks was at its height and Steel common had advanced
to around 90, the newspapers began to talk of 100 for “little Steel.” The
public all got the idea in their heads that Steel was sure to make 100 and
that was the place they were going to sell and take profits. The writer
predicted that Steel would advance to 94 7/8 and no higher, which it did,
and he sold out, while the “hope” crowd held on and eventually took losses,
for U. S. Steel declined eventually to 38. Several years later when it did
reach 100, it was the place to buy and not to sell, for it immediately advanced
to 129 3/4.
The man who tries to get the last point or the top
or bottom eighth generally loses all his profits. You do not have to get
in at the bottom and out at the top to make big money. All you have to do
is to look over the list of the active leading stocks and you will find that
they make moves of from 50 to 150 points between bottom and top every few
years. Then, if you can get in after the stock has advanced 10 points from
the bottom, and sell out within 10 points of the top, you certainly will
be able to accumulate plenty of profits.
Never get the idea in your head that you can or will
hold a stock until it goes your way. This is nothing but pure stubbornness
and is not based on any sound logic or reasoning. In case of doubt, get
out. Do not hesitate. Delays are always dangerous. Do as the insiders do:
If they can not get what they want, they take what they can get; if the
market will not take what they have to offer, they offer what it will take;
if the market will not go their way, they go its way. A wise man changes
his mind, a fool never.
10th : WHEN TO TAKE PROFITS
Never close a trade just because you have a profit.
The time to hold on is when the tide is running in your favor. When tempted
to close a trade just because you have a profit ask yourself the questions:
“Do I need the money?” “Is the move over?” “Do I have to sell?” “Why should
I take profits?” Look at your charts; do what they tell you. If they do
not show a change in trend, wait. Protect profits with stop loss order,
but do not take a profit too soon. This is just as bad as taking a loss
too late. Patience to hold on when you are right and nerve to get out quickly
when you are wrong will make a success.
11th : ACCUMULATE A SURPLUS
A surplus must be accumulated before you increase
your trading quantities. Margins are not to hold on with, only “lambs” do
that. If big risks are required, do not make the trade. Wait for an opportunity
when you can buy or sell and place a stop loss order 3 to 5 points away.
It is financial suicide to take big losses when they can be prevented.
You must not expand until after you have made profits.
Every important business concern carefully creates a surplus and is proud
to publish it. No business is run without a loss at some time and a speculator
or investor must expect losses. Therefore, he must create a surplus out
of which he can pay losses and still continue to trade.
In very active markets, when trading in high priced
stocks, as a rule it does not pay to take a loss amounting to more than
two consecutive days’ fluctuations. If stocks go against you two days, they
are likely to go more. Take your loss out of your surplus and leave your
capital unimpaired and wait for another opportunity.
12th : BUYING FOR DIVIDENDS
A great many people make the mistake of always wanting
to buy stocks that will pay dividends. Do not buy stocks just because they
pay dividends, nor sell them because they do not. Often people hold stocks
because they continue to pay big dividends, only to see their capital half
or more wiped out; then the dividend is cut or passed altogether. Look to
the protection of your capital, not for dividend returns. Trade for points
of profit, not dividends. Fluctuations yield more money than dividends and
you will be able to tell when stocks are being accumulated or distributed
for an advance or a decline.
If a stock is selling very low or out of line according
to the dividend it pays, there is probably something wrong and it is a better
short sale than a purchase. If a stock is selling very high and pays no
dividend, there is a reason for it and you should not sell it short. Probably
it is going to pay a dividend or it is in a very strong position. Otherwise
it would not be selling at a high price.
Manipulation for a time will force stocks above or
below their intrinsic value, but in the end Supply and Demand\par govern
the course of prices, and values are based on these factors. I intend to
teach you how to tell when Supply and Demand show the place where you should
buy or sell.
The word “dividend” means a division of profits or
earnings, but often when you buy Curb or mining stocks the word means “divy,”
or that you divide up your capital with the other fellow and later lose
all.