Wednesdays with Wyckoff: Trading Rules

Jul 20, 2011: 6:50 PM CST

What did Richard Wyckoff have to say about general trading rules?

As you develop as a trader, your rules should become automatic and routine, especially during the trading day.

Let’s take a look at another colorful quote from Richard Wyckoff as he discusses Trading Rules in Studies in Tape Reading:

“A friend to whom I have given some points in Tape Reading asked if I had my rules all down so fine that I knew just which to use at certain moments.

I answered him thus:

When you cross a street where the traffic is heavy, do you stop to consult a set of rules showing when to run ahead of a trolley car or when to dodge a wagon?  No.  You take a look both ways and at the proper moment you walk across.”

“Your mind may be on something else or you may be reading your newspaper while crossing – your judgment tells you when to start and how fast to walk.”

“That is the attitude of the trained Tape Reader.”

Do a search for “Trading Rules” on the internet today and you’re likely to find dozens of wonderful lists of advice on trading rules.

You’ll most likely find that some of the advice is contradictory – for example:

“You never go broke taking a profit.” (or “Lock-in profits when you have them.”)

“Let your winners run”

So do I lock-in a profit as soon as possible or let it run?

You can’t be thinking or debating these ‘rules’ in your head when you’re trading.  If you do so, Wyckoff says, you’ll get run over by the market.

Akin to Mark Douglas’ teachings (Trading in the Zone), each trader must craft his/her own rules from past experiences.  It’s likely that your rule-set will change or evolve over your trading career – becoming more sophisticated and perhaps even more specific as you grow in knowledge.

As you develop your own rules as a trader, remember this story from Richard Wyckoff.

Whatever you choose to adopt, know it as intuitively as you would the rules of crossing a busy street.

In market terms, experienced traders understand when it’s safe to put on a position in the context of price flow (breaking strongly resistance, diverging and reversing, etc) and how to manage risk accordingly within that moment (opportunity).

They know what to look for (what type of car is approaching), when to walk across (during calmer market times) and even when to run quickly (during volatile times).

Know that certain behaviors in the market will lead to … unfavorable outcomes, just like crossing a street while distracted or unaware of the danger of traffic will lead to … unfavorable outcomes.

Fighting a powerful trend in motion (think gold) may cost you your trading career – or at least result in considerable losses.

Eventually, most traders learn not to fight powerful trends.  Experience teaches them.

Don’t debate rules when you’re in the heat of the trading day – know what to do and when to do it and how much to risk in advance.  Have big decisions predetermined in advance of the actual trading session.

Stay tuned as we review more stories/lessons from Richard Wyckoff and translate them into today’s markets.

For past lessons, check out:

“A Stock’s Movement in the Broader Market”

“Absorption and Distribution”

“Life Cycle Stages of a Stock Move”

“Mental Poise and Calm”

“How I Select a Stock for Investing”

“Trading a Stock Breaking Through Resistance”

“Trading in Dull Markets and Breakouts”

Corey Rosenbloom, CMT
Afraid to

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Corey’s new book The Complete Trading Course (Wiley Finance) is now available!


7 Responses to “Wednesdays with Wyckoff: Trading Rules”

  1. marketsniper Says:

    Corey, you are the best. Keep putting this stuff in front of us. We will become better traders for it. Going through your book now a SECOND time.

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