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to the mean is found everywhere in the financial jungle, for the mean is a powerful magnet that, in the long run, finally draws everything back to it.

      9. The hedgehog bests the fox.

      The Greek philosopher Archilochus tells us, ‘the fox knows many things, but the hedgehog knows one great thing.’ The fox - artful, sly, and astute - represents the financial institution that knows many things about complex markets and sophisticated marketing. The hedgehog - whose sharp spines give it almost impregnable armor when it curls into a ball - is the financial institution that knows only one great thing: long-term investment success is based on simplicity.

      The wily foxes of the financial world justify their existence by propagating the notion that an investor can survive only with the benefit of their artful knowledge and expertise. Such assistance, alas, does not come cheap, and the costs it entails tend to consume more value-added performance than even the most cunning of foxes can provide. Result: The annual returns earned for investors by financial intermediaries such as mutual funds have averaged less than 80% of the stock market’s annual return.

      The hedgehog, on the other hand, knows that the truly great investment strategy succeeds, not because of its complexity or cleverness, but because of its simplicity and low cost. The hedgehog diversifies broadly, buys and holds, and keeps expenses to the bare-bones minimum. The ultimate hedgehog: The all-market index fund, operated at minimal cost and with minimal portfolio turnover, virtually guarantees nearly 100% of the market’s return to the investor.

      In the field of investment management, foxes come and go, but hedgehogs are forever.

      10. Stay the course: the secret of investing is that there is no secret.

      When you consider these previous nine rules, realize that they are about neither magic and legerdemain, nor about forecasting the unforecastable, nor about betting at long and ultimately unsurmountable odds, nor about learning some great secret of successful investing. For there is no great secret, only the majesty of simplicity. These rules are about elementary arithmetic, about fundamental and unarguable principles, and about that most uncommon of all attributes, common sense.

      Owning the entire stock market through an index fund - all the while balancing your portfolio with an appropriate allocation to an all bond market index fund - with its cost-efficiency, its tax-efficiency, and its assurance of earning for you the market’s return, is by definition a winning strategy. But if only you follow one final rule for successful investing, perhaps the most important principle of all investment wisdom: Stay the course!

      Lewis J. Borsellino

      Lewis J. Borsellino is the founder of www.TeachTrade.Com, an educational web site for stock and futures traders.

      Mr. Borsellino has traded at the Chicago Mercantile Exchange since 1981. He appears regularly on CNN-FN, Reuters Financial Television, Bloomberg TV and WebFN.

      Books

      The Day Trader - From the Pit to the PC, John Wiley, 1999

      The Day Trader's Course: Low-risk, High-profit Strategies for Trading Stocks and Futures (Patricia Crisafulli), John Wiley & Sons Inc, 2001

      The ‘ten commandments’ of trading

      Introduction

      In the 20 years I’ve been trading, I’ve discovered one truism that is valid whether you’re trading stocks, fixed income or futures: trading is 90% psychological. All the rest – technical analysis, trade execution, etc. – is the other 10%.

      That’s not to say that technical analysis of the markets isn’t important. It’s vital. You can’t trade without a plan based on technical analysis that encompasses support and resistance, trend lines, moving averages, momentum, volatility and the like. But you can’t possibly execute that plan consistently if your mental game is off. That’s where the ‘ten commandments’ of trading come in.

      1. Trade for success, not for money.

      Your motivation should be first and foremost to make a well-executed trade. If money alone is your motivation you will severely limit your chance of success. Why? Because focusing on money will raise all kinds of emotional issues, from fear to greed. It will make you afraid of losses to the point that you will abandon your discipline. It will tempt you to trade too often, too large and with too much risk. Whereas if you focus on making solid, well-executed trades - even if the result is a losing trade that you exit quickly - you will reinforce your discipline and increase your trading potential.

      2. Discipline is the one quality that all traders must possess above all others.

      The ability to master your mind, your body and your emotions is the key to trading. The disciplined trader - regardless of profit or loss - comes back to trade another day. A great intellect, the ability to take on risk, or even a sense that you’re somehow ‘lucky’ mean nothing without discipline. For a trader, discipline means the ability to devise a trading plan, execute according to that plan, and to never deviate from that plan.

      3. Know yourself.

      Do you break out in a cold sweat at the mere thought of risking something - such as your own capital? Do you think of trading like ‘gambling,’ a long shot to make a million? Or can you handle risk in a disciplined fashion, knowing how much is ‘too much’ for both your capital and your constitution?

      Trading is not for everyone. If risk makes you ill, on the one hand, or if taking a risk brings out the recklessness in you, then trading is probably not for you. But if you can handle risk with discipline, then perhaps you can find a vocation or avocation as a trader. Only you can answer that question.

      4. Lose your ego.

      No matter how much success you enjoy as a trader, you’ll never outsmart the market. If you think you can, you’re in for a very humbling experience. The market rules, always, and for everyone.

      You need to silence your ego in order to listen to the market, to follow what your technical analysis is indicating - and not what your intellect (and your ego) think should happen. To trade effectively, you need to put yourself aside. At the same time, you cannot be so emotionally fragile that unprofitable trades shatter your confidence. Don’t be crushed by the market, but don’t ever think you’ve mastered it, either.

      5. There’s no such thing as hoping, wishing or praying.

      I’ve seen too many traders staring panic-stricken at the computer screen and begging the market to move their way. Why? Because they have lost their discipline and allowed what was a small loss to turn into a much bigger one. They keep hanging on, hoping, wishing and praying for things to turn around. The reality is on the screen. When the market hits your stop-loss level (the price at which you’ll cut your losses at a pre-determined level), get out.

      6. Let your profits run and cut your losses quickly.

      When the market goes against you and you hit your pre-determined stop, exit the trade. Period. Exit when the loss is a small one. Then reevaluate your strategy and execute a new trade. Keeping your losses small will keep you in the game. Profits take care of themselves, as long as you execute according to your plan. When you place a trade, know in advance where you’ll exit for a profit. When the market reaches that level, exit the position. If your technical analysis tells you the market still has some room to move, then scale out of the position. But execute according to your plan. Remember, you’ll never go broke taking a profit.

      7. Know when to trade and when to wait.

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