Trading Rules: 18 trading rules by Martin Pring to beat market & fetch big returns


Famous author Martin Pring says there is no easy route to get rich in the financial market as the task of ‘beating ourselves’ which means mastering emotions, thinking independently as well as not being swayed by those around us is extremely difficult.

According to Pring, success based on an emotional response to market conditions is a result of chance, and it does not help investors attain consistent results as objectivity is not easy to achieve because all investors are subject to fear, greed, pride of opinion, and other excitable states that prevent rational judgement.

“We can read books on various approaches to the market until our eyes are red and we can attend seminars given by experts, gurus, or anyone else who might promise us instant gratification, but all the market knowledge in the world will be useless without the ability to put this knowledge into action by mastering our emotions. We spend too much time trying to beat the market and too little time trying to overcome our frailties,” he wrote in his book “Investment Psychology Explained.”

Martin J. Pring is the president of Pring Research and Chairman of Pring Turner Capital group, a money management and sub-advisory firm which provides research to individuals and financial institutions around the world.

He is also the author of over 15 investment books which have turned out to be investment classics.

His book “Investment Psychology Explained,” was cited by Worth Magazine as one of the fifteen best investment books of the last 150 years.

Pring says the principal difference between considering a trading approach and actually entering the market is the commitment of money.

“When that occurs, objectivity falls by the wayside, emotion takes over, and losses mount,” he says.

Pring says adversity should be welcomed because it teaches investors much more than success.

According to Pring, the world’s best investors know that to be successful they must also be humble as the market has its own way of seeking out human weaknesses.

Pring says market crises typically occur just at the crucial moment when investors are unprepared, which eventually causes financial and emotional pain.

“If you are not prepared to admit mistakes and take remedial action quickly, you will certainly compound your losses. The process does not end even when you feel you have learned to be objective, patient, humble, and disciplined, for you can still fall into the trap of complacency. It is therefore vitally important to review both your progress and your mistakes on a continuous basis because no two market situations are ever the same,” he says.

Qualities of a successful trader

Pring says successful traders are those who not only know the workings of the market but who also have the will to put a plan into action and follow it religiously.

According to Pring, since trading in the market is basically a process of dealing with probabilities and beating the odds, investors who participate in the market must make a conscious effort to set up some kind of strategy that can help them master their emotions.

“If you recognize that you have a problem before taking on a trading position or making a long term Investment you will be in a better position to spot potential pitfalls,” he says.

Pring outlines some trading rules that can help investors deal with potential pitfalls to make greater profits.

Rule 1. When in doubt, stay out

Pring says if investors have the slightest doubt in their mind about entering a trade, then they should not initiate it because they will not have the emotional fortitude to stay with it when things begin to go wrong.

“There will always be another opportunity down the road. It is important to remember that the principal reason that you are in the market is to make a profit. If the odds of that happening have decreased, then you have little justification for maintaining the position. After all, this is not your last chance to trade; there will always be another opportunity down the road,” he says.

Rule 2. Never trade or invest based on hope

Pring says many investors hold on to losing positions even after the original rationale for their trade is no longer valid.

He notes the only reason for not selling in this situation is hope and the market usually rewards the hopeful with losses.

“When you find yourself in this situation, sell promptly,” he says.

Rule 3. Act on your own judgment or entirely on the judgment of another person

Pring says investors invariably lose when they follow tips or insider information to trade.

Instead he says it is much better to consider all the arguments, both bullish and bearish, prior to making an investment commitment which can help them to make proper judgement.

According to Pring brokers, friends, and others that investors respect can be helpful in providing ideas but investors themselves are the one who should make the final decision.

“If you cannot make a decision based solely on your own judgment of the facts, and opinions of colleagues, friends, and brokers, you are better off turning your portfolio over to someone whom you have checked out thoroughly for integrity and competence,” he says.

Rule 4. Buy Low (into Weakness), Sell High (into Strength)

Pring says the greatest mistake the majority of active traders make is that they are bullish at high prices and bearish at low prices. Instead investors should buy low and sell high as they are bound to make money using this strategy.

“When prices rise, so does confidence.We tend to downplay our fears at such times and therefore take on more risk. The reason is that rising prices are usually accompanied by positive news making us feel more comfortable. Prices that progressively fall, on the other hand, attract a greater and greater amount of concern,” he says.


Rule 5. Don’t overtrade


Pring says that investors should avoid overtrading as it leads to a loss of perspective and considerable transaction costs.

Rule 6. After a successful campaign, take a trading vacation

Pring says many traders find that accumulating profits is relatively easy but the difficult part is keeping them. He says no trader, however talented, can maintain a super trading performance forever so one can afford to take a break at regular intervals.

“People operate in cycles in virtually every endeavor. Therefore, make sure that you take a break after a successful campaign, returning to the markets six or eight weeks later. Your outlook is likely to be less overconfident, and you will also be able to take a more objective view of the market,” he says.

Rule 7. Take a periodic mental inventory to see how you are doing

Pring says investors quite often get so engrossed in investing that they lose sight of where they are going and therefore it makes sense for them to reflect occasionally on where they are headed and whether they are doing the right thing.

According to Pring, as part of this process, investors might want to ask themselves some questions like-

1. Am I able to afford the risks I am taking?

2. Am I speculating or investing intelligently or am I gambling?

3. Am I following the right System? Am I trying to bück the prevailing trend? Am I too close to the market? Am I overtrading?

“This simple little exercise will help to draw your attention to any mistakes you might be making or rules that are being broken. In addition, it will serve to reinforce those rules in your mind so that they have a better chance of eventually becoming good habits,” he says.

Rule 8. Constantly analyze your mistakes

Pring says successful investors tend to think that their success is due to hard work or good judgment and they rarely attribute it to chance or luck of being in the right place at the right time.

On the other hand, when things go against them, they often blame setbacks on bad luck.

Hence, investors need to introspect and analyse their mistakes constantly.

“This process of self-critique has to be a continuous one. After a brief time, chances are that you will be lulled back into a false sense of security äs profits begin to roll in once again. In this type of Situation, most people will again fall back into their old ways. It will therefore take more losses to reignite the self-examination process. Either the lesson will eventually sink in or your account will be so depleted that you will no longer be trading, he says.

Rule 9. Don’t jump the gun

Pring says in any investing situation investors need to be patient and disciplined as there is always the temptation to make a trade before a particular methodology that investors are using has given them all clear.

“Enthusiasm replaces prudence. This is a poor practice because it means that we are not, in actual fact, following the discipline but have decided that we know better. Rarely does this type of policy pay off. After all, why go to the trouble of researching a methodology or approach and setting up the rules if we are not prepared to follow them?,” he says.

Rule 10. Don’t try to call every market turn

Pring says investors have a natural desire to be market perfectionists so they often feel the need to call every market turn which unfortunately is quite unobtainable.

“If we find ourselves trying to guess every twist and turn in the price action, not only will it lead to frustration, but we will totally lose any sense of perspective,” he says.

Rule 11. Never enter into a position without first establishing a risk- reward

Pring says investors should never enter into a position without first establishing a risk reward and they should use a good dose of common sense, making sure that the ratio is normally at least 3:1.

“Risk-averse individuals should not go into a high-reward high risk venture and vice versa. Risk is always relative. What is a financially life-threatening risk for one person may be beer money for another,” he says.

Rule 12. Cut losses, let profits run

Pring says it is interesting how most investors are risk averse when it comes to taking profits and risk seeking when it comes to losses as they prefer a smaller but sure gain and are unwilling to take a wise gamble for a large gain.

He says on the other hand, they are more willing to risk their capital for a large uncertain loss than for a certain small one.

Pring says cutting losses is a fundamentally important money management technique, because it helps to protect capital and therefore enables investors to fight another day.

Also, letting profits run really involves the same principle äs cutting losses as when the market exceeds their downside cutoff point, it is a warning that they have made a mistake.

On the other hand, äs long äs the general trend moves in their favor, the market is giving them a vote of confidence, so they should stay with the position and let their profits run.

“We need to remember that if the market has gone down when we expected it to go up, it is a warning that the original analysis is flawed. If this is so, then there is no rational reason for still being in the position. We should cut our losses and liquidate. This does not mean that every time we enter a position and see it go against us, we should sell. A good trader will establish a potential reward and acceptable risk before putting on a position,” he says.

Rule 13. Place numerous small bets on low-risk ideas

Pring says since a high proportion of trades unavoidably will be unprofitable, it is a wise policy to make bets small so that a significant amount of capital is not risked on any one transaction.

“As a general rule, it is not advisable to risk more than 5% of your available capital on any one trade. This goes against the natural tendencies of many of us. In our quest for large and quick profits, it seems much easier and more logical to put all our money on one horse. It is also important to make sure that any trade or Investment that you do make is a carefully thought out low-risk idea. The estimated potential reward should always be much greater (at least 3-1) than the maximum acceptable risk,” he says.

14. Look down, not up

Pring says most investors enter a trade by calculating its probable upside and building that assumption into their expectations as a result, they are setting themselves up for disappointment.

Instead Pring says the question to ask when putting on a position is “What is the worst that can happen?”

“By looking down, not up, you are addressing what should be your number one objective: preserving your capital. If you erode your capital base, then you will have nothing left with which to grow. Almost all traders lose äs many times äs they win. The successful ones make more on the winning trades but more importantly lose less on the bad ones. By looking down, they are, in effect, assessing where they should cut their losses ahead of time. If this potential margin of error proves to be too great, they walk away from the trade,” he says.

Rule 15. Never trade more than you can reasonably afford to lose

Pring says investors should never trade more than they can reasonably afford to lose.

“Any time that you risk capital that you cannot reasonably afford to lose, you are placing yourself at the mercy of the market. Your stress level will be very high, and you will lose all objectivity. Decisions will be emotional because you will be focused on monetary gains and the painful psychological consequences of a loss and will not be based on the facts äs they really are,” he says.

Rule 16. Don’t fight the trend

Pring says trading in the direction of a rising market lifts all long positions and going short in a bull market therefore entails considerable risk unless investors are agile enough to take profits at the appropriate time.

According to Pring the opposite is true in a bear market where rallies are often unpredictable and treacherous.

“If you study the results of most trading Systems, you will see that the negative results inevitably come from positions that are put in the opposite direction to the main trend. Obviously, you do not always have a firm opinion about the direction of the primary trend, but when you do, it is much more sensible not to trade against it,” he says.

Rule 17. Wherever possible, trade liquid markets

Pring says investors should always trade liquid markets, that is, where the difference between the bid and ask prices are usually narrow.

He says trading in illiquid or “thin” markets means that in addition to broker commissions, investors are also paying some form of cost because of these wide spreads.

“You may think that this can be overcome through patiently waiting to buy at a specific price, äs opposed to placing a market order. Nevertheless, when you decide to sell, you are more likely to be doing so under pressure, so the wide spread will make the cost of an immediate execution work against you. Illiquid markets can be ascertained by the amount of average daily volume transacted,” he says.

Rule 18. If you are going to place a stop, put it at a logical, not convenient, place

Pring says traders often follow the discipline of predetermining where their downside risk might lie and place a stop-loss order slightly below that point.

According to Pring, if the stop point has been determined with resort to some sound technical or fundamental analysis, this represents an intelligent method of operation.

However, if investors initiate the trade on the basis that they cannot afford to lose more than a certain amount and place the stop at a point that limits the loss, their odds of a winning trade will be greatly reduced.

“In this instance, you are not making decisions based on price action, where the market has the opportunity to tell you if you are wrong. Instead, you are picking an arbitrary point based on your own assessment of how much you can afford to lose. Such stop points represent nothing less than a gamble that the price would not slip to such a level. The chances are that, having been stopped out, you would then see the market reverse direction to a degree that the trade would have ended up in the profitable camp,” he says.

Pring says traders can be drawn into complex mental games where the sheer degree of their optimism causes them to rationalize incorrectly that their stops are in fact logically placed.

“It is not a bad habit therefore to ask yourself, “Is this really the best place to put the stop, or am I placing it here äs a convenient place to limit my losses?”, he says.

(Disclaimer: This article is based on Martin Pring’s book “Investment Psychology Explained”)



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Divyansh Singh

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