The Golden Rules of Trading by W. D. Gann
Many of you will know of W. D. Gann. He was a very successful trader during his life, and developed a unique trading style, which bears his name. He was born in 1878, in Texas, and died in 1955.
Gann’s books and educational resources are still used today, throughout the trading world, and he has a large following. But even if you don’t use his exact methods, it is still worth looking at his Golden Rules in more detail to see if as traders in 2022, we can learn anything about successful trading in today’s markets.
So, without further ado, here are his 28 Golden Rules of Trading:
1. Never risk more than 10% of your trading capital in a single trade.
10% feels like a huge percentage to me, but the idea that traders only risk a set percentage of their capital on any one trade is very sound. It’s just up to the individual trader to decide what percentage they are comfortable with.
2. Always use stoploss orders.
This one is is pretty clear and means we always know our risk on any trade. Some traders still prefer not to use a stoploss, but if you are thinking of following them, it is worth having a look at the pros and cons in more detail.
3. Never overtrade.
This one can be tricky, especially when we see a “dead cert” trade, or we get frustrated after a string of losers and want to revenge trade. We might start looking at lower timeframes or searching for trades that are just not there, so this rule is well worth remembering.
4. Never let a profit run into a loss.
This one depends on the timeframe and a trader’s own strategy. Many a new trader will move a stoploss to break-even too soon, only to see the trade stop out and then move back in the original direction, without them. So yes, protect profits, but give a trade room to move all the same.
5. Don’t enter a trade if you are unsure of the trend. Never trade against the trend.
When the trend is clear, it’s clear. If the trend in not clear then don’t trade. I can be so tempting to try a trade against the trend sometimes (especially when you’ve missed the big move) but this rule says don’t.
6. When in doubt, get out, and don't get in when in doubt.
Similar to the previous rule, if you’re not sure what to do, whether the trade is part of your strategy, or which way the trend is running, don’t trade.
7. Only trade active markets.
Liquid markets have lots of participants, which means they move, providing lots of opportunities to make money, and their spreads are smaller.
8. Distribute your risk equally among different markets.
Some traders trade only one instrument, others only one market, but if you trade a variety of different markets, spread your risk.
9. Never limit your orders. Trade at the market.
This one is interesting. There are plenty of traders who make money entering trades on limit orders, but I get what he’s saying. By trading at the market, you get a real feel of the price movement before opening the trade. Stop orders on breakouts of course make more sense if there is momentum behind a move.
10. Don’t close trades without a good reason.
That reason being that your strategy tells you to. Or you have so much experience that you know there is a good reason to do so based on what is going on.
11. Extra monies from successful trades should be placed in a separate account.
This is another interesting one. Many people are attracted to trading because of the power of compounding and we all want to see our trading account grow. But the advice to move extra profits out of the trading account (for spending or saving or investing in something else) means that if the worse happens (black swan?) you will still have your profits.
12. Never trade to scalp a profit.
A bit like rule number 3, if you are not a scalper, don’t scalp. If you are a scalper however…
13. Never average a loss.
The trade starts going against you but you’re sure it’s going to turn around. In fact, now it’s at an even “better” price, so you add to your position. Don’t, it will likely end in tears.
14. Never get out of the market because you have lost patience or get in because you are anxious from waiting.
Having the patience for a trade to play out or for an opportunity to appear is so hard, but one thing you can do is switch off the screens, set a price alarm and go for a run/walk, or clear out your workstation.
15. Avoid taking small profits and large losses.
Cut the losses and let the winners run. Easier said than done, but keeping a healthy risk/reward ratio over a large number of trades usually bodes well.
16. Never cancel a stop loss after you have placed the trade.
Tempting though this may be. Always know where price has to be for you to get out. That is why the best time to place a stoploss is when you open the trade. Then leave it alone.
17. Avoid getting in and out of the market too often.
See overtrading rule number 3 (again). We often forget how every time we trade we are using up some of our mental (and emotional) capital. This tires us out so that we are less focussed when the good trading opportunities come along.
18. Be willing to make money from both sides of the market.
Some traders only go long or short and it’s true that uptrends and downtrends of some instruments behave differently. Some traders always seem to do better being on one side than the other. Also, some find being short psychologically difficult. Trading currency pairs helps with this for the simple reason that long on one currency is short on the other, and vice versa.
19. Never buy or sell just because the price is low or high.
This is linked to rule number 13. The idea that a price is “good” because it is in your option too low, or too high, is just that, your opinion. Also see rule number 25.
20. Be careful about pyramiding at the wrong time. Pyramiding should be only accomplished once it has crossed resistance levels and broken zones of support.
Adding to a position once it goes in your favour is potentially a very profitable strategy, but don’t add too early. Add once the trade shows you that your analysis of direction is correct and is therefore more likely to continue in that direction.
21. Pyramiding can be very profitable at the right time. Select instruments with a strong trend up when buying and with definite downtrend to sell short.
Linked to rule number 20, pyramiding works best in strong trends.
22. Never hedge a losing position. If you are long one commodity and it starts to go down, don't sell another commodity short to hedge it. Get out of the market. Take your loss and wait for another opportunity.
Some traders do very well through hedging so this rule has mixed reviews. I take it to mean don’t hedge unless that is your proven strategy.
23. Never change your position without a good reason. When you make a trade, make it with good reason according to some definite rule. Then do not get out unless there is a definite indication of change in trend.
This rule reminds us not to chop and change direction on every small price move. Don’t get spooked if price initially goes against you. If you have a solid reason for your initial trade, that conviction should carry you through small movements in price. If you change your mind easily, you were not that convinced to start with!
24. Avoid trading after long periods of success. You should maintain a disciplined, planned trading program.
This rule rings true with many traders who have had a great string of profitable trades, only to give a lot back to the market. A string of winners can make us over-confident, complacent and lazy in our execution, so beware, and take a break if needs be.
25. Don’t try to guess tops or bottoms. Let the market show you that it has genuinely made a top or bottom.
See rule 19. No matter how far price has come, it can always keep going. You don’t have to be that clever to make money, just one bite of a move is enough to make a living, you don’t need be in on the whole move right from the beginning.
26. Don't follow a blind man's advice.
Trade your own strategy. Another trader's tips and ideas are all well and good, but at the end of the day, every trader has a different style based on their personality. So the best strategy to trade is your own.
27. Reduce trading after the first loss; never increase.
A great risk management rule, and what are traders if not risk managers? Each loss affects our confidence which in turn affects our mindset and the next trade. Reduce risk until the confidence returns.
28. Avoid getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake.
The last rule is a great reminder that where to exit a trade is even more important than where to enter!
I think I might have broken nearly every one of these rules more than once, and smiled on reading a lot of them. Studying rules are great, but they are extra pertinent when you know the pain of breaking them from personal experience!
Even though these rules were written many moons ago, there is plenty of wisdom within them, from one of the most successful traders who ever lived. What do you think of them? How many of these do you follow? What would you add?
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