Wednesday, August 29, 2007

36 Rules for Trading Success

I have recently been reading a book called "How to Make Profits in Commodities" by WD Gann. So far, this book has been a really tough read, and it's been hard to extract much meaningful information from it.

I may discuss more about this book in a review at a later date. In the meantime, here are the main points of the book that I was able to extract:

The 24 rules:

1. Never risk one tenth of capital in one trade.
2. Always use stop loss orders.
3. Never overtrade.
4. Never let a profit run into a loss. (move stops up)
5. Do not buck the trend. (refer to my trading with the trend section)
6. When in doubt, get our or don't get in.
7. Trade only active stocks.
8. Equal distribution of risk in 4 or 5 stocks.
9. Trade market order.
10. Do not close your trades without a good reason.
11. Accumulate a surplus
12. Never buy just to get a dividend.
13. Never average a loss. (this is key)
14. Never get out/in of the market because of impatience or anxiety.
15. Avoid taking small profits and big losses. (easier said than done)
16. Never cancel a stop loss order after you placed it.
17. Avoid getting in and out of the market too often.
18. Be just as willing to sell short as you are to buy.
19. Never buy/sell just because the price is low/high.
20. Wait till the stock is very active and has crossed resistance levels before pyramiding.
21. Select stocks with small volume of shares outstanding to pyramid on the buying side.
22. Never hedge one stock by another.
23. Trade with a plan and do not get out without a definite indication of a change in trend.
24. Avoid increasing trading size after a long period of success.

The 12 rules:

1. Determine the trend
2. Buy at single, double and triple bottoms
3. Buy and sell on percentages
4. Buy and sell on 3 weeks' advance or decline
5. Market moves in sections/waves
6. Buy or sell on 5 to 7 point moves
7. Study volume to determine change in trend
8. Study time factor and time periods to determine change in trend.
9. Buy on higher tops and bottoms
10. A change in trend often occurs just before or after holidays.
11. Buy on a second reaction at a higher bottom.
12. Price gains in fast moves does not last very long.


DC said...

Hi Danny,
Thanks for posting on my blog. It felt strange reading this post of yours because it dawned on me throughout just how many of these rules I break. So I have a question: after reading the book, so far, how credible do you think the author is? Do you think his advice ought to be heeded?

Danny Merkel said...


In terms of how credible WD Gann is, there are a lot of people who say that he was one of the greatest traders of all time, and that he made millions trading stocks between 1920 and 1940.

On the other hand, there are those who say he was a fraud, and that he made most of his money selling his expensive book, and seminars.

In terms of whether the advice should be heeded, I would say yes, definitely.

I say this because Gann's advice matches the advice of so many other stock market legends, such as Jesse Livermore, and Richard Wyckoff.

There are contemporary stock traders and educators that are also well known, such as Martin Pring, and John J. Murphy, who advocate the same rules.

Rob said...

Just stumbled across your website.

Some excellent rules there Danny, I would have to agree with you on the 24 rules section. I never used to move my stop orders, but now use a trailing stop to lock in the profits. Works nicely with Forex as well.

Thanks for the excellent analysis.

Danny Merkel said...

Hi Rob,

I really appreciate your comment, and I'm glad you found those rules useful.

You know, you are the first person to agree with or show gratitude for my analysis in over a month.

Thanks again for taking the time to write your comment.