I have found that an amazingly high percentage of traders are forced out of positions because of over trading. Over trading tends to put traders on thin ice, and can eat into valuable trading equity.

Experience has taught me to always have at least 100 percent additional capital available to protect a position. In other words, when establishing a position, risk only ½ of your available capital to avoid over extension or a potential margin call.

Remember, the un-predictability of the markets is stressful in its own right-don’t add to the stress with something you can control.

2. DON’T TRADE TO MANY MARKETS AT THE SAME TIME

Just as you shouldn’t over extend your capital, be cautious also not to over extend your attention span.

Computerization has allowed us to now watch more markets than was once possible. Regardless of this technology, however, greed can often cause us to take more than our mental energies will allow. Even the most sophisticated system cannot produce the best results if you have your hand in eight different markets.

I cannot stress the importance of finding a personal trading niche and staying focused. The markets are not a candy store. Successful trading requires work. Make sure you get the best return for your efforts by not spreading yourself too thin.

3. DON’T TREAT ALL MARKETS THE SAME

Learn to adjust the size of your positions and the frequency of your trades for different markets.

In soybeans, for example, your goal may be a 50 cent move - $2,500 per 5000 bushels - over the next two or three months. The S&P markets, on the other hand, frequently make the equivalent of a $2,500 move in one day. You probably would never want to trade as many S&P’s as soybeans unless you increase your trading capital to accommodate such a risk.

The same is true with margin requirements. If you are trading 5-10 bonds, it is unwise to start trading 60 contracts of corn merely because the margin requirements are the same. (Oh, how many times I have done this one!) Just because you are comfortable trading 10 bonds, don’t believe you’ll feel at ease trading 300 corn.

As you progress in your trading, you will develop a comfort level I refer to as the sleeping position. (An overnight position which does not disturb your sleep). For me that would mean sleeping soundly with 500 beans (100 contracts), but tossing and turning with 50 bonds.

Remember, don’t fit your trading size to margin requirements. They have nothing to do with one another. And always, always trade within your capabilities.

4. DON’T TRADE WHEN YOU DON’T UNDERSTAND THE MARKET

Many novice traders are deceived into thinking that the successful trader is always in the market. But when you don’t understand what is happening in the market is when it is best to leave it alone. You do not need to trade all of the time. The market will open tomorrow, next month, and next year. There is no law that says you must trade today.

How many times I have thought “I really don’t know what’s going on, but the market is acting well, I should jump in.” but the difference between this thought and active action can be very expensive.

Keeping a safe distance from the market is always prudent when you are in doubt. Unless you are reasonably sure of your conviction to either buy, sell or hold, it is better to observe the market from the sidelines until your confidence improves.

5. NEVER TRADE PRICE-ALWAYS TRADE THE MARKET

Once I refused to buy soybeans because they were seven dollars. I was bullish and so was the market, but seven dollars was a price I had never seen before in beans. Subsequently, I watched the market go to 13 dollars.

Put your trust in the markets, and do not be afraid when they reach historic highs or lows. Markets are where they are for a reason. Evaluate that reason on its own merits, and except the inherit unpredictable qualities of speculation.

6. PAY ATTENTION TO MARKET CONSENSUS

When too many market participants are moving the market in any one direction, the market becomes very vulnerable.

Also be sure to pay attention to the makeup of these participants. For example, is the activity due to public or commercial trading?

Never underestimate the makeup and volume of the market participants.

7. IGNORE THE MINOR FLUCTUATIONS AND PLACE POSITIONS IN HARMONY WITH THE BASIC TREND

Minor daily or day today market moves cannot be anticipated with sufficient accuracy, or traded with any level of consistent success. Only when put in the perspective of the basic main trend do minor fluctuations have any significance. The key, therefore, is to ignore minor fluctuations and to trade with the trend.

Trading against the trend and solely to play the part of the contrarian has wiped out more profits and traders than any other single violation of basic trading principles. One can make many errors of judgment in establishing positions in harmony with the basic trend of the price movement. But to deliberately trade against the trend requires a conviction in opinion, precise timing and price level judgment and that can be difficult for even the nimblest of pros.

We are all in the markets to make money, if you feel that your contrary opinion is indeed the best way to achieve this goal, then you should follow your instincts. But no one has made and kept profits by becoming addicted to either the action in minor fluctuations or to opposing the majority for opposition’s sake.

8. BELIEF IN YOURSELF

I think by now we all know what this means.

THE MARKET’S ANSWER TO THE OLD WISE TALE: TRADING RULES TO DISREGARD

The following are some of the most common trading rules. But sometimes the most well- intentioned advice can be unrealistic, unproductive, or just plain outmoded-which is how I feel about the following:

1. BUY ON THE LOW AND SELL AT THE TOP

Guessing at reversal points can be risky and very frustrating. Trade with the trend, and let the market tell you by patterned reverse in direction, when it’s over. Always buy when the market is on the way backup, and sell when it is on the way back down.

Be sure to watch the volume of the market carefully at Price extremes. Declining volume usually means the market is not accepting these higher or lower prices and could indicate a turn. A market that is topping or bottoming out does not spend much time at the extremes, so there will be little volume at these points. I cannot stress the importance of daily volume enough.

Remember: let the market determine the trend, and trade with the trend by buying on the way up and selling on the way down.

2. ALWAYS REMAIN TRUE TO YOUR TRADING PLAN

The only plan you should have is a plan to know yourself and to follow the trading stop that works best for you.

I’m not criticizing the careful planning that goes into the development of trading goals. Instead, I am advocating a flexibility that will not prohibit your growth as a trader. When you establish goals for yourself, leave room to alter your plan as it suits your increasing knowledge of the markets.

The key to any plan is how well it holds overtime. So be sure that the goals you develop are reflective of who you are and what you wish to accomplish. And always be yourself and trade naturally.

3. ONLY TRADE WITH RISK CAPITAL AND BE AWARE OF THE RISK OF LOSING

I would never suggest that anyone trade with the rent money. This is a risk business, however, and once you have decided that you are in the financial position to open a futures account, it is best to concentrate on trading and not on risking.

Of course in concentrating on trading, you want to be sure to avoid spreading yourself too thin. How often I have seen traders jeopardize the profits from years of hard work by pyramiding a position when they cannot truly afford it!

Be sure to accept the risk inherit in futures, but never let greed become a substitute for the courage to take risks.

PERSONAL BELIEFS: TRADING RULES I DEVELOPED THROUGH MY OWN EXPERIENCE

To offer only positive or negative responses to common trading maxims without devoting my own personal convictions would be unfair.

My own personal trading beliefs reflect the flexibility that I feel has contributed to my success in over 30 years of trading. And although on the surface they appear to be quite simple, they are principles that nonetheless have stood the test of time over three decades of changing markets. The difficulty is not in their concept, but in the discipline required to implement them properly:

1. START SLOWLY

Why do beginners rush in where experts fear to trade? Maybe it’s because novices don’t know the dangers awaiting the unwary. There’s absolutely no rush. The markets will be there tomorrow. Just be sure you are there to trade them and in the proper frame of mind.

The rewards of successful trading do not come easily. There’s a price you must pay. There are skills you must develop. That’s why you must be patient and allow yourself sometime.

2. LEARN FROM YOUR MISTAKES

You must never have a losing trade and fail to ask yourself why. Maybe you were wrong in your assessment of the market. That would be easy to correct. But suppose you were right in your judgment of the market and still lost money? Was your timing wrong? Did you over trade? Did other information change your opinion? Was your management of your account wrong? Did another position in your account force you to liquidate? These and other questions must be asked and answered if you are to learn and if you are to ever turn your trading account into a profitable venture.

Never make a mistake without asking yourself why.

3. UNDERSTAND THAT TOO MUCH MARKET ANALYSIS CAN LIMIT YOUR SUCCESS

Everyone has a different view of the markets, but your view is the only one that counts. Use as little market analysis as possible. Find just two or three things that work for you and stick with them.

Don't get "paralysis of analysis"  

4.LEARN TO LOOK AT ALL SIDES OF THE MARKET

One of the best traders I know refers to it as thinking in 180 degrees. If you are bullish and trading from the long side, don’t ignore bearish thinking. Being aware of the bullish thoughts as well as the bearish ones will allow you to become more flexible and a much better trader.

There is success to be found in both bullish and bearish views of the market. I believe that the trader who becomes active in both bullish and bearish positions has more fun and finds more opportunities for success.

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Updated 02/22/08:

Even though these rules were written in 1977, they still hold true unto this day. However, when options on futures contracts were introduced around 1980, my leverage increased and risk decreased... It's now much easier to profit from the markets than ever before.

A little common sense goes a long way in this business, and if you add just a small amount of technical analysis to it, you will be way ahead of the crowed.

Refer your trading friends to this page, These are trading nuggets that will help them regardless of their method of trading.

Thanks for reading, 

Archie Johnson

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