In this article, we will explore Dennis Gartman's (a world-renowned trader) 15 basic trading rules. He has over 40 years of experience in trading. Its rules are used by traders all over the world and, although they don't guarantee success, they are a foundation on which your strategies can benefit from greater odds of success.
These principles are the result of Gartman's many years of experience, as he has probably endured all of the ups and downs that professional traders are subjected to throughout their lives. Below are these 15 rules, along with some brief comments on each of them:
1) In a rising market we can only have buy positions and in a falling market we can only have sell positions: this of course means that it is always better to follow the trend than try to profit against it. Sometimes we get lucky and can make money off of a trade that is going against the trend, but usually the opposite happens.
2) Buy what is strong and sell what is weak: According to Gartman, the secret to surviving in the market is not really to buy low and sell high - or vice versa - but instead to buy what has the best likelihood of rising (no matter how expensive or cheap) and to sell what is most likely to decrease (even if it seems cheap).
3) Don't initiate any trades until you've carefully analised them: before you open a position, you need to examine all the possible scenarios and expect the unexpected. Because, at some point you're going to have trades that fail, and you need a back-up plan in case a trade doesn't go as expected. In this case, the best thing to do is to always use a stop loss as a protective measure.
4) Be patient: Patience is one of the qualities that every successful trader needs to have. For example, it doesn't matter if for some reason you miss out on an exciting trade opportunity in the market, it's not the end of your trading career. There will always be other opportunities on the horizon, so be patient and wait until trading conditions are ideal again.
5) Take into account - and accumulate - within minor corrections that go against the general trend, especially those that develop upon major support and resistance levels: in general, professional traders exploit corrective movements (of 33% or 50%) from a previous move (major trend) to accumulate positions and trade in favour of the overriding trend. These two proportions are used because they are roughly equal to two of the natural Fibonacci retracement levels, which represent the levels in which a major trend's correction can go without a reversal.
6) Once you've opened a position, be patient: allow your trade the space and time it needs to grow and generate the profits you expect. It's normal for trades to sometimes take a long time to take off like you expect them to. It's also not uncommon for corrections to occur before the price moves in the desired direction. If you're not patient, you will likely close the position too soon - and then watch with regret as the market soon moves back in your favour.
7) Reduce your losses quickly: If a trade is generating a loss and shows no clear signs of a reversal, it is best to close the trade and take the loss. Successful traders know that the key to success in the market is to quickly cut losses and let profits run.
8) If a position pays off, be patient and let it grow: a sure path to ruin is to take only small profits on each trade for fear of losing rather than letting trades develop to their full potential. Professional traders make a high percentage of their profits via a few winning trades each month (or even per year), which they let run because they are patient and calm enough not to close prematurely in the face of even the slightest market correction. You should never trade for the sake of trading, you should only enter the market when you see a good opportunity that doesn't come around all the time. The practice of closing trades too quickly to take anticipated profits decreases the profitability of your system in the long run.
9) Never add to a losing position: never try to leverage or compensate for a losing trade. Many traders tend to double the size of their position when they have an open losing position, which is known as averaging. What these traders are looking for with this practice is to lower the average purchase price and thus lower the entry price. However, this method is often counterproductive, as the trader usually loses twice as much as he would have lost on his initial position. We should only add to a position when it is winning, i.e. only those positions that work in our favour and generate profits.
10) Simply add to a position that is winning and decrease the one that isn't: a professional trader doesn't just let his profits run, he constantly assesses his open positions and increases the ones that are turning profitable. At the same time, he decreases the size of the trade that earns him the least or makes him lose. Not all traders apply this last principle, but many find it very useful.
11) Don't trade until both fundamental and technical indicators are alligned: While many traders are pure technical or fundamental analysts, some combine the two approaches and take advantage of their various strengths to employ a more comprehensive, scenario-based strategy. This concept isn't embraced by all traders, though, as they sometimes don't trust one of the 2 approaches.
12) If you are going through a losing streak, close all your open positions and stop trading for a few days: when you are on a downward slide, it is best to stop trading, relax and clear your mind (maybe have a drink and listen to some good music!). That way, you will be able to resume your trading activity with renewed vigor and a healthier mindset.
13) If you are on a lucky streak, seize the opportunity and increase the sizes of your positions: if you're going through a period when everything is going well, you should seize the opportunity and try to make as much profit as possible without being dominated by euphoria (which can be deadly to your finances). To do this, you can increase the size of your positions by taking advantage of the fact that you're assessing the market fairly well.
14) If you plan to accumulate (add to your position), do it between 25 and 50% of the previous position: thanks to this practice, the average price of the position moves less than half the price, which allows you to withstand corrections of up to 50% without any problem. However, in this case, it should be taken into account that if positions are doubled in favour of the trend, the average entry price may rise too much and leave a lower margin to support market corrections without incurring losses. For this reason, you should be cautious when adding a position, as you may end up turning a winning position into a losing one.
15) Always try to be on the winning side: if the market is clearly going up or down, why oppose it? In this case, it is better to try to follow the prevailing trend. On the contrary, if neither side wins (there is no clear trend in the market), we should not fight, i.e. it is better to refrain from entering the market until there is a major movement.
As you can see, these 15 principles are quite simple and easy to apply, although the reality is that it's very hard for most traders, mainly due to negative psychological factors. Few traders fully apply these principles, and those who do usually experience some success and make steady profits over time. It can be said that these are ideal goals that every trader should strive to achieve, and the closer you get to them, the more successful you are likely to be in trading.
Dennis Gartman has been directly involved in the capital markets since 1975, just after graduating from North Carolina State University. He was an economist for Cotton Incorporated in the early 1970s, analysing the supply and demand for cotton in the U.S. textile industry.
From there, he went to NCNB National Bank in Charlotte, North Carolina, where he traded currencies and money market instruments. Gartman was an independent member of the Chicago Board of Trade until 1985, where he traded futures contracts on Treasury bonds and treasury bills.
In that same year, Gartman moved to Virginia to head the futures brokerage operations of Soveran Bank, and in 1988 he began producing the Gartman Letter full time. He continues to do so today.
He has lectured to central banks and finance ministries around the world on the creation of capital markets, and has given speeches on derivatives at the FED's examination school.
He served as external director of the Kansas City Board of Trade for two years from 2007 to 2009. He is Chairman of the Investment Committee of the University of Akron, serves on the Investment Committee of North Carolina State University and is also a member of the Suffolk Industrial Development Authority.
Gartman frequently appears in the financial media to discuss commodities and capital markets and speaks to various associations and business groups around the world.