“We test our criteria to make sure they are timeless and universal” – Ray Dalio
In your journey to becoming an accomplished trader, you will try many things.
It’s easy to get distracted by the latest technology or technique. But the more you trade, the more you will find this is not where the answer lies.
Instead, the search for truth will eventually lead you towards timeless principles. You will come to recognize universal rules that apply across time and markets – and learn to adapt and fit them to your own unique style and personality.
When you cultivate the mindset of a great trader, the results will follow.
This leads us to Dickson G. Watts.
Mr Watts was President of the New York Cotton Exchange between 1878 and 1880. At the time, the now deserted Cotton exchange was a great bastion of speculation, and Watts was one of the most respected speculators of the era.
Mr Watts penned a tome that very nearly passed into obscurity called “Speculation as a Fine Art”.
In this classic work, he outlined his thoughts on trading (and life).
And surprise, surprise they are just as relevant today to Forex traders as they were 150 years ago to cotton traders.
So what did Mr Watts have to say that has stood such a test of time?
The essential qualities of the speculator
These are the (abridged) mental characteristics Mr Watts saw as necessary to the successful trader.
- Self-Reliance. A man must think for himself,must follow his own convictions….Self-trust is the foundation of successful effort.
- Judgment. That equipoise, that nice adjustment of the faculties one to the other, which is called good judgment, is an essential to the speculator.
- Courage. That is, confidence to act on the decisions of the mind. In speculation there isvalue in Mirabeau’s dictum: “Be bold, still be bold; always be bold.”
- Prudence. The power of measuring the danger, together with a certain alertness and watchfulness, is very important. There should be a balance of these two, Prudence and Courage; Prudence in contemplation, Courage in execution.
- Pliability. The ability to change an opinion, the power of revision. “He who observes,” says Emerson, “and observes again, is always formidable.”
These are Mr Watts inviolable rules of trading.
- Never Overtrade. To take an interest larger than the capital justifies is to invite disaster. With such an interest a fluctuation in the market unnerves the operator, and his judgment becomes worthless.
- Never “Double Up”. That is, never completely and at once reverse a position. Being “long,” for instance, do not “sell out” and go as much “short.” This may occasionally succeed, but is very hazardous, for should the market begin again to advance, the mind reverts to its original opinion and the speculator “covers up” and “goes long” again. Should this last change be wrong, complete demoralization ensues. The change in the original position should have been made moderately, cautiously, thus keeping the judgment clear and preserving the balance of the mind.
- “Run Quickly,” or not at all. That is to say, act promptly at the first approach of danger, but failing to do this until others see the danger, hold on or close out part of the “interest.”
- When doubtful, reduce the amount of the interest. For either the mind is not satisfied with the position taken, or the interest is too large for safety. One man told another that he could not sleep on account of his position in the market; his friend judiciously and laconically replied: “Sell down to a sleeping point.”
These are Mr Watts (abridged) rules “that are subject to modification according to the circumstances, individuality and temperament of the operator”.
- It is better to “average up” than to “average down.” This opinion is contrary to the one commonly held and acted upon; it being the practice to buy, and on a decline to buy more. This reduces the average. Probably four times out of five this method will result in striking a reaction in the market that will prevent loss, but the fifth time, meeting with a permanently declining market, the operator loses his head and closes out, making a heavy loss – a loss so great as to bring complete demoralization, often ruin. But buying at first moderately, and, as the market advances, adding slowly and cautiously to the “line” – this is a way of speculating that requires great care and watchfulness, for the market will often (probably four times out of five) react to the point of “average.” Here lies the danger. Failure to close out at the point of average destroys the safety of the whole operation. Occasionally a permanently advancing market is met with and a big profit secured. In such an operation the original risk is small, the danger at no time great, and when successful, the profit is large. The method should only be employed when an important advance or decline is expected, and with a moderate capital can be undertaken with comparative safety.
(Sam: This is one of the better ways to trade Forex, considering the strength of the trends we have so I have his full description in.)
- To “buy down” requires a long purse and a strong nerve. Ruin often overtakes those who have both nerve and money. The stronger the nerve the more probability of staying too long.
- Buy at once an amount that is within the proper limits of capital, “Selling out” at a loss or profit, according to judgment. The rule is to stop losses and let profits run. If small profits are taken, then small losses must be taken. Not to have the courage to accept a loss, and to be too eager to take a profit, is fatal. It is the ruin of many.
- Public opinion is not to be ignored. A strong speculative current is for the time being overwhelming, and should be closely watched. The rule is, to act cautiously with public opinion; against it, boldly.
- Quiet, weak markets are good markets to sell. They ordinarily develop into declining markets. But when a market has gone through the stages of quiet and weak to active and declining, then on to semi-panic or panic, it should be bought freely. When vice versa, a quiet and firm market develops into activity and strength, then into excitement, it should be sold with great confidence.
- In forming an opinion of the market, the element of chance ought not to be omitted. There is a doctrine of chances – Napoleon in his campaigns allowed a margin for chance – for the accidents that come in to destroy or modify the best calculation. Calculation must measure the incalculable. In the “reproof of chance lies the true proof of men.”
The wisdom of “Old Dickson” applies today
Mr Watts approach to trading would be just as successful today as it was in the 1800’s.
So take heart in the timeless nature of the markets, and consider: how you can apply his rules in your trading?
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com. If you like Sam’s writing you can subscribe to his newsletter.