William Eckhardt is a commodity and futures trader and fund manager...Born in 1955, William Eckhardt is a commodity and futures trader and fund manager. Eckhardt has published several academic papers. In 2006, he published "Causal time asymmetry" in the journal Studies In History and Philosophy of Modern Physics. In 2013, he published a book "Paradoxes in Probability Theory".

William Eckhardt Trading Rules


Don't think about what the market's going to do

An old trader once told me: "Don't think about what the market's going to do; you have absolutely no control over that. Think about what you're going to do if it gets there."


You must feel the pain of losing

Traders who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. They are also able to feel the pain of losing. If you don't feel the pain of a loss, then you're in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will bum off. There is no way to survive in this world without pain Similarly, in the markets, if the losses don't hurt, your financial survival is tenuous. As a general rule, losses make you strong and profits make you weak.


■ If a trader is constantly losing money

I can address two situations. If a trader doesn't know why he's losing, then it's hopeless unless he can find out what he's doing wrong. In the case of the trader who knows what he's doing wrong, my advice is deceptively simple: He should stop doing what he is doing wrong. If he can't change his behavior, this type of person should consider becoming a dogmatic system trader.


Be contrarian to weak hands

The market behaves much like an opponent who is trying to teach you to trade poorly. Basically, I would buy when weak hands were selling and sell when weak hands were buying.




The success rate of trades is not important

Trading can be a positive game monetarily, but it's a negative game emotionally. Human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.


The false call of the countertrend

There is what I refer to as "the call of the countertrend." There's a constellation of cognitive and emotional factors that makes people automatically countertrend in their approach. People want to buy cheap and sell dear; this by itself makes them countertrend. But the notion of cheapness must be anchored to something. People tend to view the prices they're used to as normal and prices removed from these levels as aberrant. This perspective leads people to trade counter to an emerging trend on the assumption that prices will eventually return to "normal." Therein lies the path to disaster.


■ Don't wait for retracements to buy the market

If the market is going up and I think I should be long, I'd rather buy when the market is strong than wait for a retracement. Buying on a retracement is psychologically seductive because you feel you're getting a bargain versus the price you saw a while ago. As a general rule, avoid those things that give you comfort; it's usually false comfort.


Transaction costs matter a lot

The major factor that whittles down small customer accounts is not that the small traders are so inevitably wrong, but simply that they can't beat their own transaction costs. By transaction costs, I mean not only commissions but also the skid in placing an order. As a pit trader, I was on the other side of that skid.


Never override your system

You should try to express your enthusiasm and ingenuity by doing research at night, not by overriding your system during the day. Overriding is something that you should do only in unexpected circumstances -and then only with great forethought. If you find yourself overriding routinely, it's a sure sign that there's something that you want in the system that hasn't been included.


2% maximum allocation to any trade

You shouldn't plan to risk more than 2 percent on a trade. Although, of course, you could still lose more if the market gaps beyond your intended exit point.


Selecting indicators and trades by following a binary principle, not weighing

How do you most effectively combine multiple indicators? Based on certain delicate statistical measures, one could assign weights to the various indicators. But this approach tends to be assumption laden regarding the relationship among the various indicators. In most circumstances, the best strategy is not some optimized weighting scheme, but rather weighting each indicator by 1 or 0. In other words, accept or reject. If the indicator is good enough to be used at all, it's good enough to be weighted equally with the other ones. If it can't meet that standard, don't bother with it. The same principle applies to trade selection. How should you apportion your assets among different trades? Again, I would argue that the division should be equal. Either a trade is good enough to take, in which case it should be implemented at full size, or it's not worth bothering with at all.


William Eckhardt Trading Rules


Source: Dialogues from the New Market Wizards {Jack D. Schwager}




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