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LD’s ‘Rules of Trading’

Posted by Larry Doyle on September 2, 2009 3:17 PM |

I loved my 15 years worth of trading experience on Wall Street. I thrived on the energy, competitiveness, and discipline critically important to generating long term profitability.

While many media outlets focus on the energy and competitiveness involved in trading, rest assured the real key to successful trading and investing is discipline. In my opinion, this characteristic receives far less focus and attention than it deserves.

I believe discipline is both an intrinsic and acquired trait. In fact, often the real benefits from a disciplined approach are the lessons learned from being undisciplined. Believe me, I learned many of these lessons early on and throughout my career on Wall Street. I accrued plenty of losses in the process.

How did I develop and maintain a disciplined approach during my 23 year Wall Street career? Very simply, I kept a written list of ‘trading rules’ on a piece of paper typically taped to my computer terminal.

High five to AS with whom I developed these rules back in the mid 1980s. These rules not only helped me generate profits, but more importantly kept me from making trading mistakes and thus avert losses.

Let’s review the rules that I applied to trading mortgage-backed securities in the 1980s and 1990s. In many respects, I continue to apply a semblance of these rules today.

LD’s Rules of Trading

1. Market Goes in the Direction Which Hurts the Most People
I would check the stochastics regularly to monitor when the bond market (typically the government bond market) was approaching an overbought or oversold condition. Assessing this measure is decidedly more challenging currently given the presence of Uncle Sam in the marketplace.

2. Never Short a Specified Bond
How often I would see traders short specified bonds without any appreciation for the available float. Initial short sales may appear to be profitable only to turn into nightmares when the trader had to find the bond for delivery to the buyer.

3. Never Set Up for a Trade
This rule specifically addresses a trader’s inclination to establish a trading position based upon color from a client that the client himself planned to enter into the trade. Experience taught me that often the client would find a reason not to execute the trade and now the trader was stuck with the position.

4. Know Your Customer . . . as Certain Accounts Lie
I would work tirelessly at developing strong customer relationships in order to transact quality business. That said, there were more than a handful of clients who would intentionally misrepresent situations. These customers typically viewed trading strictly as a zero sum game. I would treat them accordingly.

5. Greater Fool Theory
Just because somebody would buy or sell a security at a certain price does not necessarily mean the trader is fully informed and the price is reflective of real value. Similarly, I would not pretend to believe that my opinion was always fully informed. Humility never hurts. Combining these thoughts: never buy something just because somebody else is. Do your homework.

6. Stay Out of Meetings
The point of this rule is that meetings detract from focusing on the markets. If I were involved in a meeting, I would work to keep it brief and on point. I abhorred people who spoke at length in order to hear themselves talk. I would intentionally establish the premise of a meeting prior to sitting down and attempt to drive to the conclusion as quickly as possible. In that manner, I could return to focusing on the markets and trading.

These rules were invaluable. I would never generate the most money that came from swinging for the fences, but by continually hitting singles and doubles I was able to score plenty of runs.

Discipline does not necessarily generate excitement, but it is the key to long term success.


  • Bill

    Money Ball.
    Keep up the good work

  • fiscalliberal

    Larry – how does one know a stock or bond is being shorted?

  • Larry Doyle

    Fiscal…I am referring to when I as an individual trader would short a bond, I knew in advance I did not own it.

    A trader could then assess how badly short a stock or bond was by the rate of money the stock/bond was effectively lent in the repurchase market. If that rate was very expensive it was a clear indication that the bond/stock was in very limited supply and had been aggressively shorted.

    I could go more into the technical nature of the repo (repurchase market) but this is the gist of it.

    Does this make “sense?”

  • fiscalliberal

    I guess, I am comming to the conclusion that shorting is an insiders game and the general public has no idea a stock or bond is being shorted.

    So – by way of example, there is not place where Joe Smuckenheimer could go to see if GE is being shorted (stock or bond). Yet that is critical information as shorting has a canary in the coal mine characteristic. Futhermore, naked shorting is betting with out having owned a contract to return the stock.

    I think this whole complexity is comming to the fore and that is making the lay street very suspicious

  • Larry Doyle

    Shorting stocks or bonds, when properly regulated, is a very healthy part of the market. The ability to express one’s opinion that a security is overvalued is important to having a vibrant market. In fact, the people who short then develop a bid in order to cover their shorts. Again, making sure that shorting is properly regulated is important. In my opinion, regulators never should have done away with the uptick rule for selling.

    Short interest in stocks is actually published information so the public can see just how ‘short’ a stock is. This is more difficult to determine with bonds.

  • TeakWoodKite

    LD thanks for your Wise Five, A financial “Book of Five Rings”.

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