TRADER'S CHECK LIST


"The best way to predict the future is to 
invent it."
				   -- Alan Kay

"Too burdensome.  The smartest way to profit 
from the future is to accurately predict it 
[sans labor of inventing]."
				   -- T.K. Lin

The following check list is provided for your 
information only and by no means exhaustive.  It is 
presented to help you avoid potential mistakes and to 
improve your performance and profitability in the stock, 
futures, index and derivative markets.

1.  Without accurate forecasts, the clich "cut your 
losses but let your profits run" is only an illusory 
rule because it presupposes that you already know 
whether price is headed lower or higher. Without 
reliable timing (i.e. price forecasting), it is 
impossible to know if one is cutting losses (or 
profits), or letting profits (or losses) run.

Diversification without timing is a placebo for 
ignorance.  Unless one is born lucky, an effective 
timing system is an essential pre-requisite to winning 
in the market.  Sound strategy and risk management are 
also very important.

2.  Risk only what you can truly afford to lose.  Always 
have reserve buying power and always start by buying 
only a fraction of what you can afford in opening a 
position.  Always start small.

Whatever the amount of cash you wish to commit to a 
position, divide it by an integer greater than 1.  Then 
divide it again into multiple trades, and gradually 
build up your position.  It is not a bad idea to risk no 
more than 5% of your risk capital in any one market or 
industry.

If you do not have sufficient capital to fully implement 
your trading plans, then you are not quite ready to 
begin.  You either must wait until you have accumulated 
the necessary amount of risk capital, or you must 
forsake even the "very good" trades and wait until you 
have the "extremely and exceptionally good" ones, when 
the situation is overwhelmingly in your favor.  
Otherwise, one setback will take you out of the market.  
In either case, patience and preparation are your best 
friends.

3.  Learn to avoid, prevent, or minimize potential 
losses before worrying about maximizing profits.  Take 
care of potential problems and the profits will take 
care of themselves.  

Think through each potential trade thoroughly and have 
ready plans to handle different contingencies.  Those 
who use a good timing system should also use a time 
stop.  If prices are not moving sufficiently within the 
time you allocated, be prepared to begin liquidation.  
Write your ideas and plans down before you initiate your 
trade.  Review and reevaluate them to find ways of 
improving your approach.  This will help you progress 
rapidly in your trading effectiveness.

Don't average your losers, unless superb timing dictates 
otherwise.  Avoid and prevent double-digit losses like 
the plague, through discipline and loss control.

4.  Always limit your losses.  Note that this is 
different from cutting your losses.  Limiting losses 
does not presuppose the ability to forecast prices.  
Even those who have no idea where prices are headed can 
limit their losses by using a stop order (mental or 
otherwise).  Remember that it is easy to recover from 
10% loss (requires only a comparable 11% gain) or less.  
Where losses are severe, e.g. 50% or more, it can be 
very difficult to recover (requires 100% or more gain).

The proper way to limit losses is not to set a tight 
stop, but to limit the total dollar commitment to any 
position.  Set a stop sufficiently large such that if it 
is approached or triggered, it is an indication to you 
that your position is wrong, i.e. your price forecast is 
in error. 

It may occasionally be OK to use limit orders to open a 
new position, but it can be deadly to use limit orders 
to close out an unfavorable one.  Sooner or later, a 
limit order will cause you to miss the market and your 
failure to close out an unfavorable position may lead to 
very substantial and avoidable losses. 

5. Trade only when the odds are overwhelmingly in your 
favor.  Patience in waiting to open a position is often 
a virtue in the financial arena.  Patience in holding on 
to a losing position in the hope that time will 
eventually bail you out of a bad decision is not.  
Therefore the rule: "Be reluctant to open a new 
position, but be quick to close an unfavorable 
position."  

Do not overtrade.  Wait for a very clearly advantageous 
opportunity when the odds are overwhelmingly in your 
favor, before you risk your capital.  Even if you trade 
infrequently, remember that a gain as small as 20% to 
30% will eventually make you millions.  Safety must 
always overrule greed.  Patience must always take 
precedence over rigid percentage goals.  

In financial markets, fortune favors the prepared and 
the patient, not the bold.  Boldness must be the result 
of foreknowledge, ability and skill, or it's suicidal.  
Ironically, in financial markets, the impatient and the 
anxious regularly lose because they violate the 
important rules presented here.  

Remember, as an individual you cannot, do not and must 
not create trading opportunities and markets on your own 
-- it's just too expensive and fraught with risks, as 
the Hunt brothers learned after losing $billions in 
silver.  You can however be fully prepared to take 
advantage of the opportunities of price peaks and 
bottoms as the market or other billion-dollar players 
present them.  That's the safest and most profitable way 
to be.

Since the market moves on greed and fear, you should 
remain detached from such emotions in order to take 
advantage of it.  To have peak performance, you yourself 
must be stress free.

6.  There are no true "defensive stocks" to buy long in 
a bear market; either go short or stay in cash.  The 
best defense is to be able to aggressively take 
advantage of a bearish situation after potential losses 
are limited with appropriate investment strategy.

Even when you are right and prices are moving in your 
favor, you should have a realistic price goal which, if 
reached or approached, will cause you to begin profit-
taking.  If you do not have clear cut price objectives 
for liquidating your planned position, then you are not 
ready to open it.

7.  Be prepared to go short (but protect with a call 
option) in a bear market.  To try to make money going 
long in a bear market is harder than finding needles in 
a haystack.  Always trade in harmony with the prevailing 
trend.  Never have an emotional preference for either 
long or short positions.  Your bias or preference should 
be the result of market condition, based on reliable 
price forecasts, not personal habit, belief or other 
emotional attachments.

8.  Avoid qualitative (dis)information.  The more rumor 
you allow to enter into your thinking, the worse you're 
likely to perform.  Remember that you are among the last 
to hear of any "news" and the price has already 
reflected that.  Never invest on hope or wishful 
thinking, for the results will depress you.

Make sure that you have done your homework and that you 
are totally calm and unperturbed emotionally before you 
trade or you might act impulsively, which in the long 
run may lead to financial ruin.

9.  Learn to be courageously independent in your 
conviction (backed by solid, objective forecasts), 
particularly when your view differs from the 
overwhelming majority.  Remember, at major price turning 
points (though not necessarily prior), the overwhelming 
majority is always wrong.  In financial markets, 
loneliness and profitability tend to be cousins.

Track your equity, if it is not trending up, it is 
warning that your timing or/and strategy is/are off, and 
it is time to cut back or get out of the market 
altogether for a reevaluation and a fresh start later.  
When uncomfortable or in doubt, cut back, or liquidate.  
The market is always there when you are ready to start 
with a clean slate.

10.  Unless you have a knack of buying at bottoms and 
selling at tops, do not trade illiquid markets.

11. Be flexible.  Be open-minded and objective.  And be 
prepared to make changes and improve your approach.  All 
great traders are seekers of truth and intellectually 
scrupulously honest with themselves.  You should be too.  
Always trade with the attitude that you are still 
learning, and that you should learn something new or 
valuable from each trade.  Always consider yourself a 
student rather than a master, that way, you'll tend to 
trade small and conservatively, particularly when 
uncertainties exist.  Become better by improving on this 
Check List.  We'll be glad to receive your feedback and 
suggestions for improvements.   

Send your letters to: R.M.C., P.O.Box 60842, Sunnyvale, 
CA 94088-0842, U.S.A.





Copyright (C) 1990-1994 by R.M.C.  All rights reserved.


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