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Rules, Rules and More Rules

If you are a follower of my weekly journal, you would understand that my approach for successful investment in the stock market is rules based and mechanical.

The SPA3 methodology forms the basis for my trading decisions, risk management and money management but I have additional list of “Golden Rules” that I use to trade with.

If you are an Active Investor managing your capital in the market, I encourage you to adopt and commit to the following “Golden Rules”.

The list is not meant to be exhaustive and it is a list that we share with all our SPA3 customers.

  • Do not start trading unless you accept that everything about successful active investment is rules-based. You must create an environment of total consistency especially as far as the mental approach is concerned.
  • Do not start trading until you have developed and committed your own Trading Plan on paper.
  • Do not start trading until you have devised or obtained a Trading Methodology to determine your entry and exit price.
  • Do not start trading until you have gained a full understanding of the processes that are required to execute as part of your strategy.
  • Do not start trading until you have confidence in your Trading Methodology and are prepared to commit yourself to the role of active investor.
  • If you apply inconsistent and subjective criteria to your list of potential stocks to purchase…stop!
  • Do not start trading until you are prepared to take responsibility for all your actions as an active investor.
  • Commit yourself to running an active portfolio and get your money into the market, i.e. be fully invested according to the Risk Profile you have formalised in your Trading Plan.
  • Overcome the fear of experiencing loss trades and accept them as part of the business of an active investor.
  • Understand that if you have followed the rules, there is no such thing as a “wrong” trade even if it turns out to be a loss trade. At worst it is confirmation of your ability to trade mechanically and one more trade that will bring you closer to achieving consistency and the expectancy of the methodology.
  • Understand if you have not followed the rules, there is no such thing as a “good trade”. While you may have made a profit in the short-term you may have started along the road of subjective and ad-hoc trading which will have an unhappy ending.
  • Never fool yourself that you know what the market is going to do. No one does! Always accept whatever the market does and know what you are going to do in response.
  • Detach yourself from all subjectivity, noise, emotions and other distractions and trade in the “now moment”.
  • Do not try to beat, fight or take revenge on the market. The market does not care!
  • Detach yourself from the money, which is merely a by-product of the process.
  • Never ignore a sell signal – you have to avoid the large loss trades from which it is so difficult to recover.
  • Always assess the current direction of the market and react based on your risk management rules.
  • Avoid “analysis paralysis” and avoid “let’s find a reason why we should not buy this stock”! Do the analysis as per your Trading Methodology and Trading Plan and then “pull the trigger”.
  • Always trade the “strong stocks”, i.e. those that are outperforming the market and leave the “dogs” to others.
  • Remember successful active investment is not an ego trip. You have nothing to prove.
  • Always know your term and make sure your actions are always consistent with that term.
  • If you happen to lose, do not miss the lesson.
  • You cannot expect a different outcome by continuing to do the same things.
  • It does not matter what happens, it is how you take it and what you do about it that counts.
  • Remember the three R’s of active investment: Respect your method, Respect the market and be Responsible for all of your actions.

We wish you consistent and objective active investment! Achieve this and you will be profitable in the market over the long term.


  • Ray Hazelhurst says:

    That is fantastic Gary. We can all learn from that and I will print the rules out and spend sometime measuring how I am trading now against those rules. Keep well and thank you.

  • Bob Costello says:

    Very Good set of Rules.


  • DV says:

    Some of these rules are based on a great book on trading psychology by Mark Douglas, “Trading in the Zone”, I have read over 150-200 books on trading and investing and I still rank this book as my #1 and have read it 3 times…
    Focus on flawlessly executing the process, not the individual outcomes of single trades, it is the results of the larger sample that matter most i.e. the 100 trades, not the 1…

  • Rick Cronshaw says:

    Thanks Gary

    If I may, I’d like to add my golden rule:


  • Gary Stone says:

    Response to Comment by DV:

    In the SWS Members Zone we have nearly 3 hours of exclusive video content of Mark presenting his material to a live audience.

    Even our long standing customers (10 yrs +), some of whom attended our customer Retreat in 2004 at Hamilton Island and saw Mark Douglas present live, continue to learn from these videos.

    So DV, I’m in violent agreement with the need to continue to read and reread (or watch) Mark’s material. Everybody will learn a little more every time and will grow as a trader as their ongoiing experiences confirm his material, and vice versa.


  • jane says:

    These are very sound rules and some of them exceptional “life” rules. I am tossing up between your SPA program or subscribing to a newsletter from some, I think exceptional, guys who really think about what is going on in the financial markets – and let them do a large amount of the thinking for me. Or maybe I should try both. Either way I’m tired of doing nothing.

  • Ralph says:

    HI Jane,
    If you decide to follow a newsletter be carefull some give entry recomendations but forget to give exit recomendations.
    Also you would need a letter that included some advice on money management.
    There are some good operators out there that have trading systems they will share and give advice via a letter , but make sure you get the complete system and not just a few buy signals

  • jane says:

    Thanks Ralph I’ve been following The Daily Reckoning and Money Morning for the last few months without any paid subscription. It certainly makes interesting reading but if you’re a believer in mainstream media then probably not for you. So far haven’t found anything negative on them. My understanding is if you subscribe they make both entry and exit recommendations

  • Gary Stone says:

    Response to Comments by Jane:

    Firstly, I have read quite a bit of the Money Morning’s writings and they definitely are not ‘mainstream’, some of their stuff is very good – thought provoking and challenging, some just opinions and some controversial (and maybe a bit sensational) which is required to differentiate themselves from what they call the ‘mainstream’. Calling the rest of the press ‘mainstream’ is an excellent marketing tactic to differentiate themselves.

    In general, be careful not to confuse good journalism with good investing. Money Morning and Port Phillip Publishing are excellent copy writers and emotional writers (when I was at school we actually did a subject called emotional writing in our English classes).

    Secondly, you should try to understand exactly what their newsletter actually offers. As Ralph says, most newsletters do not offer exit signals nor money management. If they offer exit signals then that is much better than most newsletters. However, it is very difficult (maybe impossible) for newsletter providers to offer a money management solution because they simply do not know how much capital their readers have nor do they provide a portfolio management tool to assist customers to do so. This gives them an easy out from the most important part of making profits in the market – money management. The same applies for all newsletters.

    Thirdly, newsletters typically just offer stock tips. What I mean by this is that they don’t provide a complete solution to manage a portfolio, only to buy (and maybe sell) a stock (or a few) from time to time. How much of your investing capital should you put into each stock tip, and if not all (which you definitely should not do), how do you manage your remaining investing capital that you don’t invest in a stock tip? You should understand how often stock tips are provided and whether you would be able to manage an entire portfolio with a newsletter service.

    Continuing the money management explanation, do not confuse a newsletter’s stock tip performance record with how well your investing capital will do. Again, it comes down to money management. The following scenario could mean that you lose money even if you win 75% of the time: Assume that a stock tipping newsletter makes 10 tips a year (to keep the arithmetic simple) and 7 of them are winners. A reader takes the 1st tip with $2,000 and makes a profit of 40%. The 2nd tip taken with another $2,000 position is also a 40% winner. The 3rd tip is another $2,000 position is another 40% winner. At this stage the reader becomes confident and decides to place $20,000 into the next tip. This is a 30% loser. The newsletter reader has lost $3600 with a 75% winning record of trades. In summary, how much profit you make from newsletter tips is dependent purely on how much capital you put into their tips not on the tips themselves and the win rate. And they leave the position sizing entirely up to you!! But they will always be able to defend their track record based on a the win rate of their picks.

    Lastly, it’s not just the win rate that counts, it’s also the size of the winners relative to the size of the losers (profit ratio) that is also important. The combination of win rate and profit ratio helps you determine whether an edge exists or not.

    I have been requested to run a stock tipping newsletter many times since we started this business 16 years ago and we have even seriously considered doing so but have always decided against it. I have extreme difficulty offering such a service because it is all care (about the stock tips and the revenues derived) but no responsibility for the investor’s overall portfolio performance and improving their investing skills and understanding. The SPA3 solution is about providing an overall solution to managing a portfolio, including risk management and money management, and teaching active investors how to do it and why it works. “Give a man a fish and you feed him for a day, teach him how to fish and you feed him for life.”

    I’m not sure what their newsletter subscription rates are but typically such newsletters are not highly priced. I trust that you can see that following tips from a newsletter subscription is a totally different solution to what is required to manage one’s own portfolio responsibly. They certainly are not mutually exclusive, so you could do both, but care will have to be taken regarding the money management side of just following tips.


  • Graham says:

    i like this rule of yours: “You cannot expect a different outcome by continuing to do the same things.”

    It’s actually Albert Einstein’s definition of insanity:
    “The definition of insanity is doing the same thing over and over again and expecting different results”.

    Keep up the great work, Gary

  • Stephen says:

    Agree with Jane’s comments – am in the same position. Have been educating myself with help of a trading friend plus reading newsletters & experiencing a couple of systems. I just need a good push to take that first step in committing my hard-earned (& I don’t have a lot). There is definitely some good systems out there that are pretty disciplined. I will take that 1st step!! Gary’s people have taken me through his system & it too looks pretty good, & has been proven.

  • Gary Stone says:

    Response to Comment by Graham:

    Put yet another way in American English:

    “If you always do what you’ve always done you’ll always get what you’ve always got.”


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