I've been trading financial markets for over 30 years and I've learned a few things about trading along the way. I have not been fabulously successful - yet - but I have made money and I believe I'm getting to be a better trader all the time.

As a commodity broker and as a senior officer of several large brokerage firms I've watches hundreds of clients lose millions of dollars in the commodity markets. A lot of what I have learned about trading has come from watching what they did and trying not to do the same thing.

I believe that nearly any trader - and especially somebody that is new to commodity trading - can benefit from reading, thinking about and applying these rules.

These rules are more about "playing good defense" than learning how to "score" - but in this game if you don't know how to "play good defense" you won't last long enough to learn about "scoring."

Becoming a successful trader isn't easy and it will take time. Industry statistics show that most people who try commodity trading lose money. But I think that people with the right attitude can learn to trade successfully - the rewards certainly warrant giving it a good try.

Losing money is a fact-of-life for commodity traders. Every successful trader I have ever met - or read about - will say that they lose money on more than half of the trades they make.

You absolutely must learn to dump losing trades or you will never be successful.

Every good book or essay or interview about commodity trading will contain the message: cut your losses and let your profits run. Unsuccessful traders always break this rule - they hang onto losing trades too long and take profits too quickly.

You can take courses and read books and listen to all kinds of people talk about trading - and that will probably teach you some valuable lessons and save you some money and some pain - BUT - you've got to actually TRADE - make your own mistakes and find your own reasons for continuing when you want to quit.

I think trading is a way of life and you have to find a way of trading that suits you. The only successful traders I have ever met have all worked out their own way to trade. They all "failed" a number of times and I expect they all know that their current way of trading will have to change as markets change or as they change.

I think of myself as more of a poet than an engineer when it comes to trading. I'm much more interested in crowd psychology than mathematics. I'm not interested in day trading, I will definitely have an opinion about the fundamentals of a market before I put on a trade and I would never enter a trade without first looking hard at the charts. I don't trade for entertainment and I've never had any interest in gambling and as I get older I tend to trade less and hold positions longer. That's what works for me - it might not work for you.

No matter how good you get or how much money you make you're going to keep paying for the continuing education that is the market's way of teaching you about trading.

If you are new to trading, and you accept my rule that you have to find your own way to trade, then it stands to reason that you are not going to find your own way - right away! There is going to be some trial and error involved and that always costs money!

I've watched a lot of people lose a lot of money during my commodity brokerage career - but I've also met and talked with and had dinner with a few people who have made and kept several million dollars as a result of their trading.

I'm sure that it is the prospect of being able to make lots money - starting with very little - that draws people to commodity trading. Industry statistics tell us that most people lose - and I think that will always be the case because so many people drop out when they discover that winning takes a sustained commitment while enduring losses, frustration and failed expectations.

Really CONFESS what happens to you - what goes through your mind - as you trade. Keep it secret so that you can really tell the truth - the diary will be much more useful if you know nobody else will ever read it.

Keeping a trading diary can be a very powerful learning tool. Write down why you made a trade -or why you didn't. Write down why you thought the markets were doing what they were doing. Write down where or how you plan to get out of your trade if you are wrong - and then write down whether or not you stuck with your plan.

Include charts in your diary to illustrate what you are writing about.

Write about your expectations and your motives and your frustrations.
Experiment with your diary - use it to become a better trader.

I got the idea about a trading diary from George Soros' book, The Alchemy of Finance (1987). It certainly worked for him.

As I wrote above I've seen hundreds of people lose millions of dollars - and this is the number one rule they get wrong.

I believe that if I took 100 people off the street and tried to teach them how to trade that only a handful would really understand - would really GET what they need to do to protect their capital. I believe that most want-to-be traders can't accept the level of personal responsibility that is required to become successful traders.

I think truly great traders are gifted - like truly great performers in any field - but I think that ordinary people with the right attitude - and that would definitely include the ability to accept personal responsibility - can learn how to be successful traders - if they can find and develop a method that suits them.

For the purpose of this rule let's say that there are two kinds of capital:

1) Money - the stuff in your brokerage account, and,
2) Psychological capital - your will to continue trading.

If you get sloppy with your trading habits you will lose money and you run the risk of losing your psychological capital - your will to continue trading - and if you lose that you are finished as a trader. So - avoid psychological damage by controlling financial damage - learn to protect your capital.

One of the good old clichés about trading is: plan your trades and trade your plan. Since you cannot know what the market is going to do - you must plan what you are going to do IF… the market goes up or down….or whatever. That is trading with a plan. Hoping the market will stop going down is not a plan.

A good trading plan allows for the possibility that the market may move against your position - causing you to lose money. A good trading plan will therefore get you out of a trade before you lose too much money.

It has always amazed me how people will be so much more patient with losing trades than with winning trades. If they have a margin call they will liquidate winning trades to meet the call and hang onto losing trades. People hate taking losses.

Actually you should plan that more than half of your trades will lose money. That's just how it goes, accept it, get out of your losing trades and get into winning trades.

If you really understand that half of your trades will lose money then it won't come as a shock to you when you have a losing trade - and it won't be difficult, or traumatic, to get rid of it.

This is about keeping the proper perspective on your current trade - remember it's only a trade. Think of trading success as being the net result of thousands of trades made over a period of several years. In that context no individual trade matters (although we can imagine how one astonishingly big winning or losing trade could affect our wealth or our will to continue trading).

Of course the trade we have on RIGHT NOW commands our attention more than any trades that we made in the past or any trades that we may make in the future - but don't let it be more important than any other trade - don't let it be SIGNIFICANT (this time you know you're right and the market is wrong) - certainly don't allow any one trade to decimate your trading account - I can't tell you how may times I've seen that happen.

Over trading could be taking positions that are too big relative to your trading capital, trading too frequently, trading too many markets, trading compulsively without a plan…..

Think again of trading success as being the net result of thousands of trades made over several years. Think of trading success as being like a marathon race - not a 100 yard sprint.

If you trade with a position size that is too big then sooner or later you will get caught when a market moves dramatically more than you had anticipated and, in floor trader language, you will get "carried out."

Having a strong opinion about a market and having a huge position - and not taking defensive action when the market moves against you - is a very dangerous way to trade. It becomes an even more deadly combination if you did it before and got away with it.

With the leverage we have in the futures markets you can make a lot of money in a short period of time without having to overtrade your capital. Take it easy - reduce your position size to the point where you don't have trouble sleeping at night.

See my article under the MARKET COMMENTARY section for a full explanation of this rule - but in essence a strongly held opinion about a market often gets in the way of prudent risk management.

I made the point above that hoping the market will stop going down is not a trading plan. Intellectually we can probably agree on this rule, but I'd hate to tell you how many times I've heard grown men tell me - in effect - that they were hoping that the market would turn around.

Examples of some of the language I've heard would include, "Well, it's due for a bounce," or, "It's so cheap it can't possibly go any lower," or "don't people understand that this thing has got to go up?" Hoping for world peace is nice; hoping that the market will turn around is denial.

It doesn't care that you want it to rally a few dollars before you liquidate your losing trade. It doesn't care that you want to be proved right on your current opinion. It doesn't care that the money you lost in your trading account was supposed to go to the taxman. It doesn't care that your stop was hit.

Adding to a losing position means that you are not accepting the evidence that your current idea is wrong - at least as far as the market is concerned - at this time.

Having a plan to buy a number of contracts over a period of time around a certain price may not necessarily be adding to a losing position - so long as that was your plan in the first place and you have a defined exit strategy that you will act upon if necessary - but this kind of trading should only be undertaken by very experienced traders - and even then it may imply a dangerously strong market opinion.

"Averaging down" is what salesmen - not successful traders - talk about. Don't do it.

If you want to add to an initial position add when the market shows you that you are right - add to a winning trade.

If you use one method to initiate a trade use the same method to exit the trade. Do not, for instance, buy something because it looks good to you on the hourly chart and then justify holding it as it goes down through your "mental stop" because somebody on CNBC says they like the market. That's denial again and doesn't yield good results. Don't do it.

The full rule is that markets can remain illogical far longer than you can remain solvent. Accept that sometimes the market's behavior just doesn't make any sense to you - that's OK - just don't hang onto a losing position while you wait for the market to see things your way.

Successful traders, regardless of their methodology, incorporate risk management into their trading to such a degree that it becomes their methodology.

A trading program that uses a mediocre trade selection process but has excellent risk management will consistently, over time, beat a trading program that has an excellent trade selection process but only mediocre risk management.

If you do not remain vigilant about protecting your capital sooner or later you will be hit with the BIG LOSS and all of the attendant financial and psychological damage that goes with it. Not surprisingly, it's most likely to happen right after you've been on a winning streak - you're maybe a little cocky, you've been increasing your position size….and WAM - you can't believe what's happening to you.

If you are not paying attention and are not ready to trade - don't. Take a vacation, go to a movie, whatever: you have to stay alert if you are going to trade and you have to be ready to ACT when it's time to act.

Jimmy Dines wrote a great book about Mass Psychology and how important it is to understand it if you want to trade successfully. Robert Prechter wrote several books and he maintains that markets are a barometer of changes in society - not the other way round.

I think markets are the expression of the fear and the greed and the wisdom and the ignorance of the all the people involved. For my trading I try to understand their motives and what they might do if…..

I've heard it said that people would rather be right than make money and I've seen enough examples of that to believe it's true. If your motive in trading is to try to see the world as it is - as expressed by the market - rather than as you think it should be you have a better chance of making money than someone who is in denial about what is really happening.

Full credit to my friend Dennis Gartman for this rule - the full rule being: Do more of what works and less of what doesn't. If a market is strong, buy more, if a market is weak, sell more. New highs are more often than not meant to be bought; new lows are to be sold.

We all make mistakes. We do things imperfectly. We miss most of the great trades. We never buy enough of the stuff that really goes up, and so on…. Get over it. It's done. Stick a fork in it and move on. Every trade we make is preparing us to trade better in the future.

Thanks again to my friend Dennis Gartman for this one. As you develop as a trader you will see that some of your early rules need to be changed or don't apply any more. But as Dennis says, "Be careful - the trick is knowing when…and how infrequently this rule may be invoked!!"