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W. D. GANN MONEY MANAGEMENT ADVICE

Sunday, 28 January 2007

W. D. Gann is one of history’s most noted Wall Street successes. During his commodity and stock trading years in the early part of this century, he supposedly amassed tens of millions of dollars while documenting his trading techniques in a market newsletter and numerous books. He summarized his money management techniques for stock trading into 24 rules. In the following pages, these 24 rules have been revised to apply to commodity trading. W. D. Gann is one of history’s most noted Wall Street successes. During his commodity and stock trading years in the early part of this century, he supposedly amassed tens of millions of dollars while documenting his trading techniques in a market newsletter and numerous books. He summarized his money management techniques for stock trading into 24 rules. In the following pages, these 24 rules have been revised to apply to commodity trading. 1. Determine the proper amount of capital to use. Divide the amount of risk capital that you are devoting to the commodities markets into 10 equal parts and never risk more than one-tenth of this risk capital on any one trade. 2. Use stop-loss orders. Always protect a trade with a protective stop. 3. Never overtrade. One often makes this mistake after reaping a considerable profit from a recent trade. Overtrading also occurs when a trader tries to recoup losses. 4. Never let profit run into a loss. Once you have a profit, raise your stop-loss order so that you will not lose capital on the trade. 5. Never buck the trend. It is particularly important to know the trend of the market before you buy or sell. 6. If you don’t know why you are in a trade or are not confident of the market’s direction, it is best to abandon your position. Never enter a trade when you are in doubt. 7. Trade only liquid markets. Those are the active commodities traded. There are plenty of good, viable commodity markets you can trade that offer profit without your having to go into left field and trying to trade the markets that are thinly traded and dominated by commercial or local interests. 8. Diversify your risk. Trade commodities from various groupings (grains, meats, metals, financials, food and fiber) to balance your account. Try to avoid tying up all your trading capital in one commodity or commodity grouping. 9. Trade only with market orders. Fixing a buying or selling price can be dangerous and should only be used when you have a specific purpose in entering a limited price on your order. 10. Don’t close out your trades unless you have good reason. Following the trade with a stop-loss order will protect your profits but will not allow you to exit the market on a whim. Let the market tell you what should be done. If you are wrong, let the market kick you out by hitting your stop. 11. As you produce profits, place these profits into a surplus account to be used only in an emergency. This will help you to avoid becoming egotistical about your commodity trading and will discipline you to stay on the original track that you have set out for yourself. 12. Never enter commodity trading for tax purposes alone. 13. Never average a loss. If you have a loss in the market, do not increase the size of your position to lower your average loss. This is one of the worst mistakes a trader can make. 14. Do not lose patience in your positions. Don’t exit the market simply because you have lost patience or because you are anxious from waiting. (This is particularly true for options traders.) 15. Avoid taking small profits and large losses. 16. Never cancel a stop-loss order after you have placed it. 17. Avoid churning your account. Avoid getting in and out of the market too often. Position your trades and stick with them. 18. Don’t be a one-way trader. Be willing to sell short just as often as you are willing to buy. Let your object be to keep with the trend and make a profit. 19. Don’t buy because you think the commodity is oversold or too low, and don’t sell just because the price seems too high. 20. It is dangerous to pyramid at the wrong time. The best time to pyramid is when the commodity has broken resistance levels and has become active. Treat a pyramided position as a totally new position. If you would not buy if you didn’t already have a position, then you should not be pyramiding the position. Remember that at the bottom of all the great pyramids, there’s a dead pharaoh. 21. It is best to pyramid on the buy side if the open interest has dipped, and it is best to pyramid on the sell side after the open interest has risen. 22. Never spread off a loss. If you are in a loss position, get out. Do not spread the position and compound your error. 23. Never change your position in the market without good reason. 24. Avoid increasing your trading after a long period of success or a period of profitable trades. Besides money, another type of asset is just as vital. Only you can manage “yourself” and function as a disciplined investor. To review, follow all the money management rules. Money at risk is, of course, a very serious source of stress. If those rules are violated, following the other ones described below will not do you much good. Experiencing losses in the futures market is not failure. It’s the normal course of business. Don’t run your mind through the wringer on every trade. Once you make up your mind on a position, stay with it unless you uncover some overwhelming reasons to abort the trade. Closely related is the ability to live with your trading decisions. You must accept full responsibility for them. At the same time you’re accepting responsibility for your actions, you cannot marry positions. Stay impersonal. Be prepared to cut losing positions early through the use of stops. When you feel the market is dragging you down, walk away for a while. Take a trading vacation. Take pride in yourself and your trading skills, but control your reaction to success and stay humble. Pride often induces over, trading, which can result in serious financial damage. Maintain the maximum amount of self-discipline. Set concrete rules for yourself and stick to them. Master yourself. Start a trade journal and include remarks about your behavior. Then work at correcting any flaws. You must work against natural instincts to be stubborn, emotional, and inflexible. Find your character flaws and overcome them. Always be open and responsive to changes in the marketplace, particularly changes in the basic facts on which your decisions have been made. When necessary, change your mind and reverse your position. Eliminate all distractions. Never trade when you are physically or mentally not up to it or under stress from non-trade-related pressures. In summary, there are three areas of discipline every success- ful trader must master: (1) trading system discipline, (2) money management discipline, and (3) personal discipline. Discipline is training intended to produce a specific character or pattern of behavior, or, more simply, controlled behavior. To be successful, it is important to train to do something as nearly perfectly as possible. Most traders lose what they gain through lack of commitment. Written goals, written plans, follow-up procedures—all are fine, but without wholehearted commitment they mean little. Studies seem to indicate there are a wide variety of systems that can make money in the markets. All trading systems have a few functions in common. They give specific trade entry and exit signals, along with some type of a timing mechanism. Your function is to take the appropriate action. Discipline keeps you focused. Discipline also makes sure you do your homework updating the system regularly, reviewing it, and following the signals. Money management is covered in W. D. Gann’s 24 money management rules. However, you need to be sure that you adopt rules applicable to your trading style. You need to put them in writing and keep them in front of you. The last area refers to personal performance. You must discipline your emotions—particularly your pride, greed, hope, and fear. These are the emotions that lead you back to your old losing ways.