The Main Factor Is
The Trend. If you work in harmony with the trend of the market, your
chances for success are three or four times what they would be if you
buck the trend. That is, if you buy in a bull market, the trend will,
under ordinary circumstances, give you a profit; but if the trend of
the market is downward, and you take a long position, the only way you
can get out is on the incidental rally.
…even when a
purchase is not well-timed, it is likely to show a profit at sometime
or other if the broad tendency of prices is upward. Even poor weak
stocks advance to some extent in a bull market.
Dealing Should Be
in The Active Stocks. In order to make a profit, a stock must move. A
great deal of money and many opportunities are lost by traders who
keep themselves tied up in stocks which are sluggish in their action.
About Stops
Risk Should Almost
Invariably Be Limited.
The best way to
limit your risk is to form a habit of placing two- or three-point
stops behind any trade which is made for the purpose of deriving a
profit from the fluctuations…The most successful traders have followed
this rule and its importance cannot be overestimated.
Profits can often
be protected by moving stop orders up or by selling one-half of the
commitment in order to mark down the cost of the remaining half.
Unless a stock
shows … a profit within two or three days after he buys or sells it
short, .. close the trade, on the ground that his judgment was wrong
as to the immediate action of the stock, and he cannot afford to be
tied up. Whenever I find myself hoping that a trade will come out all
right, I get out of it.
Cut your
losses…(have) a mental stop and when it is reached close out the
trade.
I can trace most of
my principal losses to my failure to place stop orders when the trades
were made…I have very often delayed placing a stop order until the
opportunity was lost, and in some cases these losses have run into
five or ten points when they might just as well been limited to two or
three.
About Risk
Anticipated Profits
should Be At Least Three or Four Times the Amount of the Risk.
About Short
Selling
One Should Be Able
To Deal Freely On Both Sides Of The Market. Any one who is unable to
do this had better become an investor instead of a trader, buying in
panics or in big declines such securities as appear to be selling
below their intrinsic value.
About Trading
You should either
make a business of trading or else not try to be a trader. You cannot
be successful at trading any more than you can be at mining,
manufacturing, doctoring or anything else, unless you are trained for
it…unless you are peculiarly adapted to the business you are better
become an intelligent investor instead of an unintelligent trader.
Wall Street history
shows that securities more often reach their low point when some
danger or disaster is threatened, than upon the actual occurrence of
these incidents, and the reason the low point is made just prior to,
or at the time the event actually occurs is: By that time every one
who is subject to fear-of what-will-happen, has sold out. When the
thing does happen or is prevented, there is no more liquidation, and
the price rallies on the short interest, or else on the investment
demand created by the improved situation
I have yet to find
a man, in or out of Wall Street, who is able to make money in
securities, continuously or uninterruptedly. My experience is no
different from that of many successful Wall Street men. Like every one
else, I have my good and bad periods. Sometimes it appears as though
everything I touch pans out well, and at other times everything seems
to go wrong. It is much like any other line of business.
The best work I
ever did in judging the market was when I devoted one hour a day in
the middle of each session. I did not come to Wall Street. I had no
news ticker. I seldom read the news items but judged solely from the
action of the market itself; hence I was not influenced by any of the
rumors, gossip, information or misinformation with which the Street is
deluged day after day.
But all he needs is
the highest, lowest and last prices of the stocks which he is
watching. Without being at all egotistical I believe I could go around
the world and having arranged to have these few details of a stock …
cabled to me daily, I could cable my orders and come back with a
profit. It would not be necessary for me to be advised of the volume
of trading in that stock or the general market, although in some
instances this might help. Certainly I would not care to have any news
of any kind included in the cables.
Most people make
their mistake when averaging (down), by starting too soon; or if they
are buying on a close scale, say one point down, they do not provide
sufficient capital to see them through in case the decline runs two or
three times as many points as they anticipate.
Eight-five or
ninety per cent of business, investment and speculative mortalities
are due either to over-trading or lack of capital, which when boiled
down are one and the same thing. And those who average their
investment or speculative purchases supply in a great many instances,
glaring examples of the causes of failure.
Everyone should
occasionally sit down and take account of stock – not securities, but
his own ability, judgment, and what is most important, results thus
far obtained. If he finds that the past few months or years have been
unsatisfactory and unprofitable, judging from the amount of time,
thought, study and capital employed, he should suspend operations
until he ascertains the cause; then he should set about and cure it.
This can be done by study and practice (on paper or with ten share
lots … if necessary) until he is confident that he has overcome the
difficulty.
It may be that he
is a chronic bull and finds himself in a bear market. I have
frequently discovered that I was out of tune with the market, although
I am never a chronic bull or bear, but always the kind of an animal
the situation seems to call for.
It has been a great
advantage to me, however, to have gone off by myself at times and
figured out just where I stood, and, if things were going wrong, why?
I find that it is more important to study my misfortunes than my
triumphs.
No one can avoid
having his capital tied up at times in mediums which are not
satisfactory. But there should be no hesitation about switching, even
though it necessitates the taking of a loss in your present holdings.
A good security will make up this loss much faster than one which is
mediocre.
I cannot afford to
let my money sleep, nor have it work slowly. I am a merchant: I must
turn my money over as often as I can, so that the average yearly
return will be at its maximum.
One’s capital
should be made to do the greatest service in the shortest length of
time. … I have found that it is best to use only a small part of the
total available capital for trading. To employ all or most of it is a
fatal mistake, for in the case of an unforeseen situation, causing a
large loss, one is obliged to begin over again; whereas if the bulk of
the capital is invested where it is safe, returns an income, and will
probably enhance in value, then in case of a calamity a part of it can
be turned into cash in order to renew trading operations.
When a man finds
that he has a certain sum invested and that this sum is diminishing on
account of his pulling it down for trading purposes, he is on the
wrong track and had better stop short and take account of himself
before he travels further. A person who cannot be successful in
trading with a small amount of capital, will unquestionably lose a
large amount if he employs it.
It is better to
depend on your own judgment than on that of any other person. If you
have not reached a point where you can do this, better continue your
studies and practice until you can form a sound, independent judgment
on which you can base your commitments.
The longer your
experience, the better background you have for comparison and the
greater your ability to judge and forecast correctly. As conditions
are constantly changing, no two markets are alike and no two daily
sessions are similar; but markets and sessions and panics and booms
all have certain characteristics which should be carefully studied and
intimately understood.
