Today's Quote: “If you are patient in one moment of anger, you will escape a hundred days of sorrow.” Anon.

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

“12 Trading Laws of Success” –

LAW #11 : KNOW WHEN TO BOW OUT GRACEFULLY

The ability to sidestep or reduce one's activity in a timely manner during periods of erratic market behavior is the hallmark of a professional trader. Too many uninformed market players assume that a supertrader is one who combats and successfully overcomes even the most treacherous market environments. This couldn't be further from the truth. The astute trader understands that above-average performance is more a result of keeping losses small than making profits big. Therefore, being skilled at bowing out of the market at the right time is an integral part of successful trading. Consider the following fact. If a long-term investor happened to be out of the market during the 20 most positive days of the past 14 years, about 30 percent of the total Midyear gain would have been missed. Amazing, isn't it? A very powerful argument for the buy-and-hold approach, right? Wrong! What is missed in that statement is the flip side. If that same investor stayed fully invested, but instead managed to sidestep the worst 20 days of the 14-year period, profits would have more than doubled. Avoiding the bad periods is more profitable than capitalizing on the best periods. But let me say this. Being able to do both, side step the worst, and play the best, is what makes a supertrader. So stay on the sidelines when the odds are not in your favor, and rest in the fact that "missed money is better than lost money."

If any one or more of the following occurrences take place, perhaps it is time to bow out gracefully:

1. You've lost two times in a row after an enduring winning streak.

   Tip: Traders often undo themselves by self-destructing immediately after a winning streak. In other words, our biggest failures often follow our biggest successes.

2. The market, as measured by the S&P futures contract, violently turns negative.

   Tip: The S&P futures contract is a key market-leading indicator. It often gives watchful traders advanced notice of market turns.

3. You feel off base, uncertain, confused, disoriented, and you don't know why.

   Tip: Over time traders tend to develop what is called a trader's "gut." This gut, developed over years of seasoning and experience, speaks via our emotive and intuitive faculties. The master trader with a well-developed gut learns to respect these "hints."

4. Your predetermined trade plan is shattered by some sudden market event.

   Tip: It is always best to step aside whenever a monkey wrench gets thrown into your trade plan. Many novice traders try to fight the inevitable need to bow out, when something like an unexpected negative news item is released, but this often results in the trader gambling, which in turn leads to bigger losses.

5. You feel ill.

   Tip: Traders are like professional athletes. They must Keep themselves in good physical and mental health. If you feel ill, you will not perform up to par.

6. Your frame of mind is frazzled.

   Tip: The trader's most potent weapon is a serene mind-set. If mental equanimity is absent, sound-trading decisions will be absent.

7. You are dealing with a personal problem.

   Tip: Personal problems affect the mental equanimity, which in turn affects trading decisions. The market acts as a near-perfect mirror image of who and what we are. Our personal problems have a funny way of manifesting themselves through our trading.