Trading Axioms: An A to Z of Market Wisdom and Trading Psychology
Chapter 9 is the fun one. After eight chapters of yield curves, credit derivatives, and inflation swaps, the authors decided to end the book with something completely different: a collection of trading wisdom organized from A to Z.
No formulas. No diagrams. Just hard-won lessons that read like notes scribbled on a desk after a bad day in the markets.
Let me walk you through the highlights and share which ones actually hit home.
A: Fear and Greed Rule Everything
The first axiom sets the tone. People will pay more to get out of the theatre first than they will for the best seat. Markets are not rational. Fear and greed are the real drivers.
The authors also ask whether markets are efficient. Their answer: markets frequently overshoot. Prices look silly, then get sillier. When volatility spikes, use tighter stop losses to keep losses from piling up.
B: The Market Always Wins
If you are right and the market is wrong, you lose. That is the whole axiom. You can have the best analysis in the world and be fundamentally correct. But if the market disagrees with you long enough, your P&L does not care about your thesis.
C: Do Not Be Too Clever
Positions that are too intelligent lose money. The market is too basic to understand them. If your trade requires a 20-minute explanation, it is probably too clever.
D: Discipline Without Dogmatism
The Keynes quote appears here: “Markets can remain irrational longer than you can remain solvent.”
The authors say to always abide by your principles and be disciplined. But do not be dogmatic. Be prepared to change your mind. Then they add this gem: lemmings believe that the sea is filled with carrots and jump into it.
The balance between conviction and flexibility is one of the hardest things in trading.
E: Prices Move Without Trades
Prices can move significantly even when nobody is actually trading. Supply and demand curves shift because expectations change, tastes change, technology changes. A new equilibrium can establish itself without a single transaction.
F: You Cannot Explain Every Move
Do not even try. Investors buy and sell for reasons that are not obvious. Some fund is rebalancing. Some bank is hedging an exotic. Some pension fund just got new mandate guidelines. You will never have the full picture.
This is freeing if you let it be. Stop trying to narrativize every tick.
G: High Risk Does Not Mean Bad Risk
A high-risk trade with a massive expected payoff can be better than a low-risk trade with a tiny payoff. Rule of thumb: 3-to-1 reward-to-risk ratio. Your potential profit should be at least three times your potential loss.
H: Knowledge Versus Wisdom
Knowing that a tomato is a fruit is knowledge. Wisdom is knowing not to put it in a fruit salad.
The authors clearly had fun writing this chapter.
I: Do Your Homework
Good sources for analysis: personal research, leading financial institutions, informed market participants, and taxi drivers. Bad sources: politicians and political party millionaires.
The taxi driver line is great. There is a reason that “when your taxi driver gives you stock tips” is a classic market indicator.
J: Back It Up
Every view you express should be supported by fundamental analysis. Do not just say “rates will fall.” Say why. Build the case. The authors give a hypothetical example about the US trade deficit and the dollar.
Having a reason for every position is basic discipline. But you would be surprised how many people skip it.
K: Ignore Unrealistic Rumors
Presidents only die once, and little green men from Mars do not buy Bolivian stocks.
Another classic line. The market is full of rumors. Most of them are garbage. Learn to filter.
L: Expect Crises
Economies are not linear. We do not understand enough about their complexity. Crises will form. We cannot avoid them. The authors point to chaos mathematics for the skeptics.
This was written before the 2011 European debt crisis really kicked off. It aged well.
M: Respect Technical Analysis (Even If You Hate It)
Even if you think technical analysis is reading tea leaves, enough people believe in it that it moves markets. Be aware of support and resistance levels, open interest, and key technicals. You do not have to believe in it. You just have to know that others do.
N: Cross-Market Thinking
Be creative with cross-market correlations. The examples: buy pork bellies, sell cattle. Short EUR/USD, buy out-of-the-money puts on Spanish Treasury bonds. Most traders specialize in one or two markets and miss these opportunities.
O: Learn to Go Short
Everybody knows how to make money going long. Fewer investors use short positions. But shorts can be extremely profitable when the longs panic.
There is a whole generation of investors who never learned to think about the short side. That is a blind spot.
P: Every Trade Has Two Sides
If you buy gold, you are long gold and short cash. If you short Treasuries, you are short Treasuries and long cash. Always think about both sides of the position.
This sounds obvious but it changes how you think about portfolio construction.
Q: Beat the Forward
All fixed income trading strategies revolve around beating the forward. But the forward price and the expected future price are not the same thing.
This is the core message of the entire book, distilled into two sentences. If you only remember one thing from this series, make it this.
R: Scrape Value With Options
Sell short-dated volatility (like a strangle) when no major data is expected. Take advantage of time decay and a probable drop in implied volatility.
This is a bread-and-butter strategy for many traders. Small, consistent gains from selling premium when the market is quiet.
S: Manage Your Losses
Take losses. Or use options to repair positions. For example, sell out-of-the-money calls against long positions in certain market conditions.
The key word here is “take.” Do not sit on losses hoping they will come back.
T: The Framing Effect
The authors describe a classic behavioral finance experiment. In one scenario, people choose between a sure gain and a gamble. In another, the same expected outcomes are framed as losses instead of gains. People’s choices flip completely.
84% chose the sure gain in scenario one. 69% chose the gamble in scenario two. Same math, different framing. People are risk-averse with gains and risk-seeking with losses. The correct approach is the opposite: run your profits and cut your losses early.
U: Trade the Panic
Take advantage when the market panics or when prices look truly silly. But always trade with a plan. Do not gamble. And remember the herd can trample you.
Buying when there is blood in the streets works. Until it does not. The plan part is what separates trading from gambling.
V: Only Add to Winners
Never add to losing positions. If you add to a winner, make each addition smaller than the last. And move your stops to breakeven.
This is position management 101 and yet so many people do the opposite. They average down on losers and take quick profits on winners.
W: Consensus Is Dangerous
If everyone is bullish, they have already bought and the price is still there. They need the next buyer to bail them out. If they have not bought, they are probably either liars or broke.
Crowded trades are dangerous. When everyone agrees, the risk is that there is nobody left to push prices further.
X: Understand Volatility
20% implied volatility means prices can move about 1.26% per day without it being unusual. That is just one standard deviation divided by the square root of 250 trading days.
The second part of this axiom is just as important: do not be afraid of missing the boat. There will be another one tomorrow. But make sure the odds are in your favor before you jump on.
Y: Never Reach
That is the whole axiom. Never reach. Two words and a trail of dots.
Do not chase. Do not stretch. Do not force trades that are not there.
Z: There Is Always More to Learn
There is always one more principle you still need to learn.
A humble way to end. And probably the truest thing in the whole chapter.
Which Axioms Hit Hardest
If I had to pick the ones that matter most, it would be B (the market always wins), C (do not be too clever), T (the framing effect on risk behavior), and V (only add to winners).
These are the ones that separate people who survive in markets from people who blow up. The chapter reads like advice from someone who has made every mistake and learned from it. It sounds obvious when you read it but is incredibly hard to follow when real money is on the line.