daily market presence must include proper rest. By that I don’t mean justa good night’s sleep, although that goes without saying. I mean you shouldtake time to recharge your mental batteries. Only you can determine whatthat means for you personally, but you need to make regular time to getaway from the markets and rest. While you are doing whatever it is thatworks for you, consider maybe that would also include no access to themarkets  as  well.  Perhaps  part  of  your  trade  plan  would  be  a  regularweekly, monthly, or quarterly time for something else, and that includesleaving your laptop at home.
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For me personally, I discovered that regular time away from the mar-kets allowed me to relax and take a fresh perspective on things. I usuallyinclude a long four-day weekend every two or three months. If I have beendoing well enough I might make it an out-of-town trip, but I always take afew days to recharge. I have a lot of hobbies that I try to enjoy more often,like building model airplanes. All of these little and larger ways of gettingaway from the markets does one very important thing: It frees my thinkingand preserves a sense of balance. I discovered that trading, although veryexciting and interesting, cannot be done to my optimum performance if Iam not properly balanced. There is more to life than what we do for a liv-ing, no matter where we fall on the scale of success.
If  you  have  a  spouse  or  children,  a  sense  of  balance  is  even  morecritical.  Many  marriages  have  suffered  when  one  spouse  or  the  othergets so involved with what they do to earn income that there is no timeor energy to care for what really matters—our relationships, family, andphysical health. Don’t be one of those traders who climb the ladder ofsuccess only to ﬁnd that it was leaning against the wrong wall. Show re-spect for your personal state of mind and the emotional health of thosearound you by properly balancing the intense world of successful trad-ing  with  the  inﬁnitely  more  valuable  world  of  people  and  personalhealth. No truly successful  person will allow his life to  fall out of  bal-ance.  Trading  can  require  more  creativity,  passion,  commitment,  andenergy  than  most  professions;  trading  also  has  the  potential  to  leavenothing left at the end of the day for anything else. Part of a well-roundedmarket presence is doing something regularly that preserves your senseof balance.
Daily exercise is a great way to keep your sense of balance. Taking atleast  one  day  on  the  weekend  to  do  something  that  requires  little  or  nothinking is another great way to remain balanced—something like takingthe kids to the zoo or a ball game. Planning a vacation at least once a yearfor more than just a day or two is another great way to recharge. Person-ally, I take the last two weeks of the year off for the holidays. Anything re-lated to the markets I leave at the ofﬁce and I head to the islands to dosome sailing. I come back completely recharged and ready to tackle thenext year’s opportunities.
I’m not saying that these things will work for you, but there are doubt-less  things  that  you  personally  enjoy  very  much  that  are  often  excludedfrom your life due to the pressures of trading. Doing those things regularlywhile disconnecting from the markets will help keep your head clear. Youwon’t be run down, tired, lacking energy, burned out, or juggling too manyballs  in  the  air  when  the  right  opportunity  comes  along.  Also,  you  willhave the mental resources free to manage those trades better, and you willsee more of them.
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The important thing to remember is that this rule is about improvingyour performance. You really don’t need to trade every day. You aren’t go-ing  to  miss  anything.  The  markets  will  never  end  and  they  will  be  herewhen you are back from getting tuned up again. You aren’t going to missanything so spectacular that a game of tennis will ruin your whole year.When you feel your performance start to slip a bit, take some time to stepback, turn off the noise, and get balanced again.
The trader who tries to do it all, all the time, is the one who will make
a mistake. Don’t be that trader. Know when to take a break.
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RULE #20
Don’t Tradethe News
A danger foreseen is half avoided.
—Thomas Fuller, Forbes Thoughts 
on Opportunity
O ne  of  the  more  interesting  phenomena  related  to  price  action 
is  the  relationship  between  news  (fundamentals)  and  a  trader’sparticipation.  There  is  an  old  trader  saying  that  you  must  haveheard  at  one  point:  “Buy  the  rumor,  sell  the  fact.”  This  rule  developedfrom observations made by traders over the years, and it has evolved intoa more complex kind of timing tool that I call “Don’t trade the news.”
The  psychology  behind  this  rule  is  not  very  complex  at  all.  Nor  isthis rule supposed to encourage traders to ignore fundamentals. Rather,there is a unique relationship between news and timing that makes par-ticipating in the market because of the news very deadly to your equity.Stop  again  and  think  through  the  issue  of  net  order  ﬂow,  open  trades,and traders who want to get into or out of a position. Remember alsothat not everyone in the market can have a proﬁt, due to the nature ofzero-sum trading. As we discussed before, you cannot proﬁt unless youare on the right side of the net order ﬂow. Why does anyone open a po-sition?  Because  they  expect  to  make  money  from  a  perception theyhave about price potential. When the perception is acted on, the traderexecutes. When learning to use this rule, it is this perception that is ourconcern.
Let’s use a very simple illustration to see the value of this rule. Let’ssuppose it is early October of the year and the orange juice crop is about
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to be harvested. October happens to be the height of the hurricane sea-son as well. On Monday of this hypothetical ﬁrst week, weather forecastersalert the media that out in the mid-Atlantic Ocean a tropical depressionis brewing into a hurricane. The expected path of this hurricane includesthe potential for a direct pass over the heart of the Florida Peninsula—directly  through  the  center  of  the  orange  belt,  where  two-thirds  of  theU.S. consumption is grown. Orange juice futures begin to climb in priceas traders speculate that the hurricane might severely damage the orangebelt or even destroy this year’s crop. Some traders wait to see how thisdevelops.
As Monday turns into Tuesday, then Wednesday, it becomes more andmore certain that by Saturday morning, this hurricane will come ashore as aCategory 5 storm right down the center of the orange belt. Orange juice fu-tures continue to climb. On Thursday the weather center declares there is a95% chance that this storm will pass through the orange belt. By the closingbell on Friday, orange juice futures are locked limit up and, to make mattersworse, the market won’t open for two days—not until after the hurricanehas blown away the orange crop on Saturday morning. The pool of unﬁlledbuy orders continues to grow until the end of the day as speculators try toget in on what is a certain higher potential for the following week.
A seasoned trader knows exactly how this plays out, but let’s just fast-forward to Monday’s open. As the news reports come in from the Floridaorange  belt  Saturday  night  and  Sunday  morning,  the  devastation  is  justtremendous.  Not  only  have  people  lost  their  homes,  businesses,  evenloved ones, but the orange belt is estimated to have lost at least half of thisyear’s crop. As soon as the phones are open on Monday morning, the poolof buy orders continues to grow with traders just absolutely certain thatthey  won’t  see  another  glass  of  orange  juice  on  their  kitchen  table  formonths. The market is called limit up on the open.
The bell is rung and yes, the market opens limit up, but then starts trad-ing. It takes about an hour, but by that time the pool of market orders on thebuy side has been absorbed by the willing sellers. Slowly the market startsto quietly tick lower. Suddenly the market breaks. By the end of the day, theorange juice market is locked limit down and the Monday buyers can’t getout of their longs. The market is called limit down on the open Tuesday.
What happened? After all, the orange juice crop is gone!But  that’s  not  the  point.  The  point  is  that  people  were  trading  thenews—or rather their perception of the news. The even better question is,who were the willing sellers?
The willing sellers are the same buyers who bought the market onMonday  a  week  ago.  They  bought  the  rumor.  By  the  time  the  rumor became  a  fact,  the  move  had  already  happened  and,  in  fact,  it  was the  higher  price  action  before the  actual  fundamental  event  that  con-
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vinced the late buyer to buy. His perception was that orange juice washeaded even higher and he waited until he was absolutely certain. Theprofessional trader was following the rule; the amateur trader was trad-ing the news.
It is important to note that traders are smarter now than they were 20years ago, technical analysis is more sophisticated, and trader knowledgeis  greater.  Even  the  most  novice  trader  today  has  access  to  informationand trade help that professional pit traders didn’t have 20 years ago. Themarkets get smarter every year. Most novice traders know or have heardthe rule “Buy the rumor, sell the fact.” The difﬁculty is in separating rumorfrom  fact—knowing  what  fundamental  is  being  closely  watched  by  themarket this week and how susceptible that market is to unexpected newscausing a panic.
In my view, the kind of situation described in this hypothetical orangejuice  market  probably  has  gone  the  way  of  the  dinosaur.  Most  marketswouldn’t react in that way to most of the unexpected fundamentals thatmight drive trader perception. The point is that news and the perceptionof news are what create some traders’ urge to action. When the news is re-leased, these traders form an opinion as to what the news means—theydecided it is either bullish or bearish, right now for them personally. Theythen execute and, more often than not, their open position is on the wrongside of the net order ﬂow.
The  maxim  “Don’t  trade  the  news”  is  about  waiting  until  the  panic/perception of less-informed/less-skilled traders have placed themselves atrisk.  The  unskilled  trader  makes  that  choice  because  he  has  formed  anequal  relationship  in  his  mind  between  fundamentals and  prices.  Thistrader  believes  that  the  prices  will  advance  or  decline  because of  some-thing.  The  major  element  missing  in  this  thinking  is,  of  course,  the  rela-tionship between net order ﬂow and a losing position. If a trader placeshimself on the wrong side of the net order ﬂow, the reason for being thereis not a critical part of the trade. The reason used by the individual traderto get in a market has little or nothing to do with that market’s true poten-tial to move.
The problem with trading because of the news is that by the time afundamental  news  item  is  released,  traders  have  already  positionedthemselves, and the winning traders have only done that from their un-derstanding  of  the  net  order  ﬂow.  If,  for  example,  the  news  is  bullish,the winning trader who is already long liquidates his long by selling tothe new trader who is initiating a long because of the news. The bullishpotential created by the news is absorbed by the trader liquidating intothe  news.  This  is  why  any  fundamental  news  release  is  almost  alwaysfollowed by at least some opposite trade pressure shortly thereafter. Inthis  illustration,  the  market  has  now  run  out  of  buyers.  As  the  longs
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from under the market continue to liquidate and/or new sellers come in,they are competing for a smaller group of fewer and fewer new buyers.Once those late buyers are in, the market has nowhere to go but lower.The market has gone south on a bullish piece of news.
This potential is always there and is almost always certain if the newsis a regular report or a weekly release of some kind. There is more of achance  that  better-informed  traders  will  open  positions  prior  to  the  re-lease, and that once the news is actually released, the remaining traderswho  execute  because of  that  news  are  used  by  the  winners  to  liquidatetheir winning positions.
Obviously,  trading  is  not  that  cut-and-dried.  There  are  times  whenmarkets don’t move countertrend on the news, unexpected things causepeople  to  panic,  or  a  market  breaks  out  huge  on  a  news  story.  I  am  notsuggesting that you should fade the news when you trade. I am suggestingthat a market is more indeﬁnable just ahead of and just after a fundamen-tal news event, expected or not. Your best course of action to reduce yourrisk exposure is to not trade the news.
I ﬁnd that the best way to help deﬁne market price action when the newsis actively inﬂuencing traders is to remember a few basic things. First, if youdon’t have a lead on the market, don’t trade ahead of the news or after thenews for at least one hour. Give things time to settle down a bit. Ahead of thenews, the price range will be very tight anyway, and after the news the initialrush of panicky traders will be washed out. Two-sided violent trade is usu-ally the case for the ﬁrst hour or so after news is released. If the market runsaway in one direction, and it was the direction you wanted, you will just haveto wait for the pullback that is certain to come. Don’t chase the market. Youwon’t be perfectly positioned in any market anyway. Let things settle downbefore acting so you are not the trader getting whipsawed.
Second,  the  news  is  always  factored  in.  No  matter  what  the  report,news, or economic numbers may be when released, every trader has al-ready  decided  what  it  means  for  them  and  how  they  will  behave.  Everytrader  has  decided  that  if  the  news  is  one  thing,  they  will  do  such-and-such;  if  the  news  is  another  thing,  they  will  do  something  else.  Sometraders are in already with a lead, and if the news is such-and-such theywill  liquidate;  if  it  is  something  else,  they  will  add  to  the  position.  Allnews, numbers, or reports are already in the market.
Last, the news can only be one of three things. The news, reports, or
numbers can only be
1. As expected2. Better than expected3. Worse than expected
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Once the news is out, traders will behave not according to the news,but  according  to  their  perception that  the  news  was  either  better  than,worse than, or as expected. Once they execute from that perception, themarket has order ﬂow. How the market behaves with that order ﬂow is aclue to the market’s real nature, not the market’s expected nature.
As an example, if a piece of news is due Thursday, is forecast to bebullish,  and  prices  have  advanced  higher  since  Monday,  but  the  actualnews  released  is  worse  than  expected  (bearish),  whatever  the  marketdoes  next  is  a  great  clue  moving  forward.  If  the  market  just  takes  offhigher,  what  does  that  tell  you?  If  the  market  just  sits  there,  what  doesthat  tell  you?  If  the  market  breaks  hard  but  rallies  back  in  20  minutes,what does that tell you?
The point is simply that observing the market’s actual behavior post-news gives the clearest indication of how traders are currently positioned,how nervous or conﬁdent they might be, and how willing they are to exe-cute. The one constant is that the trader who is making his choice to exe-cute in or out of the market, and basing that choice on the news itself andnot on the net order ﬂow, is usually in the wrong spot. Don’t trade along-side that poorly positioned trader. Let him get out of the way ﬁrst.
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RULE #21
Don’tTake Tips
Tips! How people want tips! They crave not only toget them but to give them. There is greed involved,and vanity. It is very amusing, at times, to watchreally intelligent people ﬁsh for them. And the tip-giver  need  not  hesitate  about  the  quality,  for  thetip-seeker  is  not  really  after  good  tips,  but  afterany tip.
—Edwin Lefèvre, Reminiscences of 
a Stock Operator
O ne  of  my  earliest  trading  experiences  involved  taking  a  tip.  It
was the early 1980s, and the tip was to buy silver and this wasthe  early  1980s.  If  you  have  no  knowledge  of  the  attempted corner in the silver market by the Hunt Brothers, I would suggest youtake a few extra minutes when you have time and look up the details; it is a fascinating story. For me personally it is more than a fascinatingstory  because  somewhere  in  the  world,  there  is  someone  who  has my $500.
I was a sophomore in college and I had a few bucks saved. I was sit-ting in class before the bell and one of my classmates was extolling theproﬁt potential in the silver market. As it turns out, he was from a familyon the wealthier side and apparently his father had made a killing in thesilver market. Maybe it was silver that was paying his tuition. I decided tohead over to the local jewelry store and ask about buying some silver. Icarried $500 worth of silver bullion home one afternoon. That silver lost80% of its value within a year.
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I didn’t consider it a trade; I was not a trader at that point. I had noidea  how  investments,  trading,  or  the  markets  worked  yet.  I  simplybought  into  the  story  that  silver  was  going  to  trade  higher.  I  neverthought for a moment about what creates prices, who told me the data,or whether it was true. I just listened to the common sense of the argu-ment and went with it.
The  whole  experience  became  part  of  the  catalyst  to  become  atrader when I learned about silver futures. I discovered someone couldbe short. As my silver bullion declined in value, someone else was get-ting rich. Wow!
When we choose to listen to a tipster, the problem is not the informa-tion. The problem is not the quality of the stock or commodity market. Theproblem is not even whether the tip is wrong. The problem is within us astraders.  When  we  fail  to  do  our  own  homework  and  let  someone  else’sthinking  become  our  guide,  our  results  will  never  be  any  better  than  thethinking of the tipster. It doesn’t matter if the tip is a winner or how per-suasive the tipster is. When we let someone else do our thinking for us, werun the risk that the quality of that thinking is nowhere near accurate forthe market in question. The problem is in failing to think—not in the tip.
No matter how you choose to participate in the markets, you are ulti-mately responsible. When you ﬁnally decide that now is the time to exe-cute,  it  is  your  money  at  risk.  If  you  have  a  gain  or  a  loss,  the  credit  ordebit is assigned to your account, no one else’s. Why would you let some-one else determine your results?
The  problem  with  tips  is  not  the  data,  because  that  data  is  really  thesame for any point of view. No matter what conclusion you come to, therewill always be another point of view that is created from the exact same setof data. If you and I both compile all the data available in the meat complexand compare it to the technical picture the charts have at that moment, youmay come to a bearish conclusion while I come to a bullish conclusion. Theimportant  thing  is  that  neither  conclusion  matters  to  make  a  proﬁt.  Theonly  thing  that  matters  is  being  on  the  right  side  of  the  net  order  ﬂow.  Ifyour analysis helps you come to a conclusion and it happens to be the cor-rect side of the order ﬂow, money will ﬂow into your account. If your con-clusion is not the correct one, money will leave the account. In either case,putting your account balance at risk without knowing for certain what thepotential is for the underlying net order ﬂow is simply reckless. When youtake a tip, you are increasing your risk because you are accepting the re-sponsibility for a loss without the corresponding knowledge of the market’sunderlying potential. Taking a tip is really just gambling with your money.
If you think about it, any analysis or market data that you make avail-able for your use is actually a sort of tip. When you use a technical indica-tor  like  MACD,  for  instance,  you  are  placing  your  equity  under  the
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thinking process of Howard Abell, the developer of the MACD indicator.Personally,  I  like  Howard.  I  have  attended  his  workshops  and  read  hisbooks, and I think he is a very sharp guy. But I also know that the MACDindicator  is  a  mathematical  formula  that  Howard  developed.  Howardknows that formula best and he will most likely be able to use that indica-tor  better  than  I  ever  could  because  I  don’t  understand  the  thinking  be-hind it like he does. How can I use Howard’s brain to trade my money?
If  technical  analysis  is  a  sort  of  tip,  and  whispers  overheard  in  theCBOT men’s room are tips, and government reports are tips, and articlesin trade journals are tips; where is the real data to trade with?
It’s inside your head. No matter what you read, study, or absorb, youpersonally have to choose the time to execute. The moment you pass fromthinking  for  yourself  to  trusting  something  outside  of  yourself,  you  aretaking a tip. If you trust technical or fundamental analysis past a certainpoint, charts then become a tipster for you. If you compile reams of dataand  economic  fundamentals,  crunch  those  numbers  according  to  someformula, and trade on that data, then government reports are your tipster.If you go to a psychic and ask to see the future waiting ahead in the meatcomplex, you are deﬁnitely taking a tip.
I think we as traders are susceptible to tips because we really wouldlike to believe that there is just one more piece of data that will disclosewhere the winning trade is. We desperately want to feel like we have cov-ered every possible piece of information and haven’t left anything out. Wehave really done our homework and no stone was left unturned. Yet so-and-so said . . .
In my view, the psychology behind this rule is really twofold. First, itprevents  us  from  putting  ourselves  at  a  needless  risk  or  trading  for  rea-sons that are not our own. We need to focus on market structure and tradefrom  a  sense  of  discipline,  not  gamble  and  hope  someone  else  is  right.Second, we need to constantly remind ourselves that our account balanceis ultimately our responsibility and we are fully in control when we exe-cute.  Nothing  determines  our  results  except  our  actions,  and  those  ac-tions  need  to  be  well  thought  out,  proactive,  and  in  harmony  with  themarket we trade, not based on some mumbo-jumbo we overheard at a bar,read in a book, or created for ourselves by running a computer simulation.Successful trading is a function of several things all working at once, not aresult of opinion or conjecture—even if the source of that opinion or con-jecture has an impressive set of credentials. A tip is only one point of view.Right or wrong, the problem with the tip is not the data; it is the fact thatthe choice to assume the risk was not ours.
There  is  one  other  thing  about  tips  that  I  think  is  critical  to  keep  inmind.  As  you  spend  time  in  the  trading  arena  and  become  more  experi-enced,  there  will  be  times  when  a  trade  seems  to  jump  off  the  screen  at
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you. It is abundantly clear which direction that market has potential in and,better yet, you can see it far enough in advance to really hammer the orderﬂow. You are going to make a lot of money on this one and you know it.
Then the phone rings and it is one of your trading associates. A con-versation  starts  about  various  opportunities  you  both  have  working  andwhat you see coming down the pipeline. In a very excited voice you beginto extol the virtues of the trade you have just identiﬁed. With great conﬁ-dence  you  tell  your  friend  exactly  what  you  see  coming  and  why  thattrade will be one of the home runs this year. After you ﬁnish your disserta-tion  your  friend  is  silent  for  a  moment,  and  then  you  hear  a  voice  withmore conﬁdence than your own speak: “You are nuts! That market is dead.I saw a report on CNBC last month about that entire industry. You mightas well stand in the street tearing up $100 bills—you will have more fun.”You are stunned but still conﬁdent, and you restate your argument; afteranother 15-minute heated debate you both hang up.
Now you are in trouble, because the trade that appeared to be so cer-tain  to  you  20  minutes  ago  is  in  question.  Your  friend  raised  some  goodpoints. He is not going to take the trade even though he asked what yousaw  coming.  Basically,  because  you  offered  someone  a  tip  when  asked,you opened your mind up to an argument about the quality of the tip. Youhad to defend and justify your trade conclusion to someone who has nointention  of  seeing  it  objectively.  The  emotional  tug-of-war  leaves  you  abit drained and wondering if, God forbid, six weeks from now that tradewon’t have worked as the way you expected. You will never hear the endof it. Of course, if you are a really weak trader you might decide to skipthat trade entirely after listening to your friend—which is also taking a tip.The rule “Don’t take tips” includes the rule “Don’t give tips.” The mind-set of the tip giver and the tip taker are symbiotic and counterproductive tolasting  success.  If  your  goal  is  to  remain  a  net  winning  trader,  your  dailytrade strategy must include some form of discipline where you neither givenor receive tips. If you are expecting your analysis to provide you trades to-day, you had better reevaluate your analysis. If you are looking for somethingin the daily news to give you the conﬁdence to execute, you had better thinkthrough what you are expecting from the news. If someone asks you whatyou  think  of  a  certain  market  today,  shake  your  head  and  say,  “I  have  noidea.” Give yourself the best possible daily trade presence by reducing andeliminating any tendency to look for or take tips. By doing the same for tipgiving, you also improve your mental toughness. You stop the vicious cycleof opinion-versus-opinion conclusion making, which is not trading. Opinion-versus-opinion conclusion making is called the House and the Senate.
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RULE #22
WithdrawEquityRegularly
