Seven Rules to Trade By

Playing off the themes in Stephen Covey's The Seven Habits of Highly Effective People, the late commodity trader Bruce Babcock, of Reality Based Trading Company (www.rb-trading.com) in Sacramento, Calif., identified the following list of parallel truths about successful commodity traders. Although his audience was professional traders, the rules can help hedgers as well.

ONE. Understand that the markets are chaotic. Mathematicians have conclusively shown markets to be non-linear, dynamic systems. A chaotic market is not efficient, and long-term forecasting is impossible. Market price movement is highly random, with a trend component.

Successful trading involves following trends. If you choose markets that show a good trend and follow the trends with proper money management, you will make money in the long run.

TWO. Be responsible for your own trading, analyze your trading behavior and understand your own motivations. Don't get caught up in trading to have fun and meet the challenge. The kinds of trading behaviors that are the most entertaining are also the least effective.

Be wary of depending on others for your success, and don't blame others for your failures. No matter what happens, you put yourself into the situation. Until you accept responsibility for everything, you will not be able to change your incorrect behaviors.THREE. Before trying a trading system, find a way to test it first. It should allow you to follow the four cardinal rules of trading: (1) Trade with the trend; trend is your only edge. (2) Cut losses short. (3)...