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Self-taught market wizard Richard Dennis took a $1600 loan and turned it into an estimated $200 million. He shares the (10-15) trading rules that turned his performance parabolic.

  • Richard Dennis, a legendary commodities trader profiled in Jack Schwager's classic "Market Wizards" series, got his official start in trading by borrowing $1,600 from family. 
  • After a sizable loss, Dennis revisited this strategy, which was admittedly unrefined at the time.
  • He stumbled upon a trend-following approach, and stuck with it ever since. 
  • According to Schwager, Dennis eventually turned that initial $1,600 capital injection into an estimated $200 million.
  • He shares 13 trading rules that contributed to his success.
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Completely oblivious to sound strategy, Richard Dennis, a legendary commodities trader profiled in Jack Schwager's classic "Market Wizards" series, entered the market fray the way most most plebes do: by throwing some things against the wall in hopes that something sticks.

"After graduating high school, I got a summer job as a runner on the floor and I dabbled in trading a little bit," he told Schwager. "With my minimum-wage salary, I was making $40 a week, and losing $40 an hour trading."

He continued: "I didn't know what I was doing."

What had originally seemed like a failing endeavor turned out to be a blessing in disguise. It was during this time, Dennis learned precisely what not to do. While others may have perceived this strenuous, money-losing period as a stark harbinger of what was to come, Dennis saw things differently. In his mind, he was receiving a grade A education at a discount. 

Luckily, he'd only spared a few thousands in the process.

"Yes, in retrospect, I would say this to new traders — although it may not be a reassuring thought — when you start, you ought to be as bad a trader as you are ever going to be," he said. "You shouldn't be too surprised if you really screw up."

Although Dennis was placing trades in a haphazard and unpredictable manner at first, he'd soon start to notice patterns, develop systems, and pickup on nuances in the market that often go overlooked. It was a battle and process he'd work through alone.

"I would say I am self-taught," he said. "I had very pale ideas, rules, and attitudes about the market then. But a few that I learned were right, like go with the trend."

Dennis seems to be underplaying the significance of his affinity towards trend following — a market approach that leverages momentum and moving averages to discern buy and sell points. In time, the strategy would serve as the cornerstone of Dennis' entire trading methodology.

Once Dennis found his niche, the floodgates opened. 

Here's how Schwager describes what came to be of the original capital — a $1,600 loan from Dennis' family — he started his trading career with. The seat that Schwager refers to below is in reference to Dennis' seat on the MidAmerica Commodities Exchange.

"The seat cost Dennis $1,200, leaving him a scant $400 for trading," Schwager said. "Incredible as it may seem, he eventually transformed that tiny stake into a fortune, which has been estimated by some to approach $200 million."

Eventually, Dennis would retire from trading altogether after suffering large losses in the late 1980s, but his legacy lives on.  

Here are the 13 trading rules that helped Dennis reach legendary status.

13 rules for success

1. The trend is your friend

"The market being in a trend is the main thing that eventually gets us in a trade," he said. "Whatever method you use to enter trades, the most critical thing is that there is a major trend, your approach should assure that you get in that trend."

2.  Friday's market action matters for the next week

"Yes, at a minimum, it is important not to have a short position with a loss on Friday if the market closes at a high, or a long position if it closes at a low."

3. Get out

In his early days, Dennis lost about 10% his capital on a trade that quickly turned against him. He then reversed his decision, lost more, reversed it again, and lost even more. What could've been a 10% loss, spiraled into about a 33% drop.

"Since then, I have learned that when you have a destabilizing loss, get out, go home, take a nap, do something, but put a little time between that and your next decision," he said. 

4. Don't play catch up

"I learned to avoid playing catch up or double up to recoup losses," he said. "I also learned that a certain amount of loss will affect your judgement, so you have to put some time between that loss and the next trade."

5. Wait for your pitch

"After all is said and done, you have to minimize your losses and try to preserve capital for those few instances when you can make a lot in a very short period of time," he said. 

To Dennis, sound money management a key component of successful trading. If you've you've blown through your capital on suboptimal trades, you'll be kicking yourself when a big opportunity is served up on a platter.

6. Consistency is king

"The key is consistency and discipline," he said. "Almost anybody can make up a list of rules that are 80 percent as good as what we taught our people."

7. Reflect

"When things go bad, traders shouldn't stick their heads in the sand and just hope it gets better," he said. "The trading experience is so intense that there is a natural tendency to want to avoid thinking about it once the day is over."

As various market events would unfold, Dennis would jot down his thoughts and revisit them in the future to see if his thinking was in fact correct. Subsequent adjustments were made as needed.

8. Prepare to be humbled

"There is another point I think is as important: You should expect the unexpected in this business; expect the extreme," he said, adding, "the unexpected and the impossible happen every now and then."

Dennis' instruction rings true today. After all, how many investors were expecting a global pandemic to shutter swaths of the economy and upend markets?

9. Always have a worst-case stop

"You should always have a worst case point," he said. "The only choice should be to get out quicker."

10. Keep emotion the outskirts

"Trading decisions should be made as unemotionally as possible," he said. "You have to maintain your perspective."

11. Bet small (specifically for novices)

"Trade small because that's when you are as bad as you are ever going to be," he said.

12. Don't let a mistake go to waste (specifically for novices)

"Learn from your mistakes," he said.

13. The process is key (specifically for novices)

"Focus on whether what you are doing is right, not on the random nature of any single trade's outcome," he said. "Don't be misled by the day-to-day fluctuations in your equity."

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