I paid a lot of “tuition” for the University of Stock Market School of Hard Knocks and to create trading rules that work for me. The only time I lose money is when I don’t follow my own rules rigidly.
Lesson #1 – always follow my rules
Lesson #2 – see Lesson #1
Lesson #3 – know when to break the rules
Lesson #4 – cut my losses
Lesson #5 – cut my losses
Lesson #6 – cut my losses
Lesson #7 – never add to a losing position (“averaging down”)
Don’t anticipate. Hope is for religion, not the stock market. Don’t buy a stock in anticipation of it going up (Value Investing); I could wait a long time and tie up capital doing nothing. Hope is not a plan.
Don’t put all my eggs in one basket. Spread the risk by investing in no fewer than 8 and no more than 15 stocks.
Don’t put all my trades on one commodity or metal. Bad news can sink one but not affect others.
Don’t panic!!!! Be prepared to ride a small loss shortly after picking the right stock because my entry rules require following an uptrend which often entails a correction.
Don’t panic when precious metals and their stocks drop with a stock market panic. Gold and PM metals and their stocks are in a bull market. The large cap stock market is in a bear market but neither bulls nor bears go in a straight line and a market panic can momentarily drop both bulls and bears.
Don’t use electronic stop-losses until that stock is in a profit position and the stop is above my entry point and low enough to avoid down-spikes.
Don’t take profit until there’s a major reversal as indicated by the candlesticks. Ride profit$ hard.
Don’t trust “Hot Tips” no matter the source.
Don’t give “Hot Tips.” I’m not licensed. If I give a bad tip, I cause someone else to lose money and we both feel bad.
Don’t listen to the media. By the time the media gets it, it’s old news.
Don’t place entry Market Orders as they can be filled at a high price. Always buy with Limit Orders. If the price gets away, pat myself on the back for having identified a winner and wait for the next one. There’s always a next one.
Exception: when placing a large order on a thinly-traded stock, place a Market Order because a Limit Order results in numerous Partial Fills, Cancellations & Re-orders with increased trading cost. Better yet, consider Staging-in.
Don’t fall in love with a stock because it won’t love me. If it’s losing money, let it go.
A “grinder” stock can sometimes turn into an all-star. If a “grinder” stock goes ballistic, don’t panic and bail out because I know its “going to correct” but ride it hard until it does correct. Remember Geovic: I took a 21% profit when it went ballistic. It peaked at 79% and corrected to 55% which would have been better than 21%.
On the other hand, don’t feel remorse and beat myself up. A 21% profit after one week is better than zero and much better than a loss.
Don’t change horses in mid-stream. Follow my rules rigidly. Stick with the plan.
Don’t feel the market is wrong. I can be wrong but the market is never wrong. The market does not care about my hopes, fears and aspirations.
Don’t be surprised when the market doesn’t do what I think it should. The market is not logical or rational no matter what the experts say.
Don’t ignore psychology; neither mine nor the market’s. Psychology is more important than economics.
Don’t buy more than one stock at a time. Wait until it becomes profitable before buying another. This is similar to Jesse Livermore’s system of staging – buying a small quantity at first, then ensure the price is going the right way before buying more except I’m doing this with the market rather than a single stock. Remember the Sept ’06 TSX Venture meltdown when I had four new stocks doing the inevitable correction – so was the whole market. Cutting one loss is better than four.
I don’t drink and drive, so don’t drink and trade. Record my “brilliant” idea and review next morning when sober.
Don’t think I know it all. I’ll never know it all.
Don’t repeat mistakes: they’re too expensive not to learn from them.
Invest only money I can afford to lose.
Be my own master. Books, texts & courses are guidelines only, not rigid rules. Develop my own rules and follow my rules rigidly. What works for me, won’t work for anyone else and vice versa. Everyone has to develop their own rules according to their personality, strengths, weaknesses, risk tolerance, plans, goals, etc.
Accept responsibility for my actions. As Ann Landers used to say: “no one can take advantage of you without your permission.”
Manage my trades so I can sleep well at night. If a trade keeps me awake that’s a signal I’m doing something wrong.
Find my specialty and stick to it until it doesn’t work anymore. Then, find a new specialty.
Avoid sectors I know nothing about. Remember when Gulf Shore taught me the $1,000 lesson that I know nothing about oil. Stick to what I know.
Learn about oil and the energy market. “Peak Oil” is real and will create an energy bull market but not all energy stocks will benefit (they can’t sell what they haven’t got.) From what little I’ve read, oil is very volatile. Volatility can be profitable, also dangerous.
KISS – keep it simple, stupid. Stick to what works: fundamentals for the big picture such as choosing the market/sector and trends and 3 technicals for trading: candlesticks, Bollinger Bands, volume and moving averages. Avoid complicated stuff like Elliot Waves and Fibonacci that depend on guesswork i.e. which is the first wave?
Ignore noise i.e. tips, media, money-honeys, and free newsletters. There is lots of noise.
Use an on-line discount broker to reduce trading cost. The only advantage to a human broker is advice and if they were smart, they’d be rich and wouldn’t need the job.
Avoid bank on-line brokers as they are expensive, very SLOW to update and very bureaucratic to deal with. The only way to deal with banks is buy their stock during bull markets.
Wait for a stock to start climbing before buying, preferably after a correction from heavy trading volume.
Pay attention to Bollinger Bands. Set at 20 & 2 on a 3 month candlestick chart works well for small cap stocks. Wait for correction at the top of the Band. Best to buy low on the Band.
Do sell a long term holding when a rapid rise sends it well over the top of the Bollinger Band. Watch and re-enter on correction.
Use exit market orders only when I want to bail out quickly from a profitable position otherwise use exit limit orders.
Have confidence in myself. When I see a good opportunity, i.e. Romarco @ less than $.20, rising with high volume, then buy it. Don’t wait for it to get away.
Keep a trading log. Record every buy and sell order: date, price, profit, loss, why I bought it, what my plan is, what went right and most importantly, what went wrong. I learn more from mistakes than success but the lessons are worthless if I repeat my mistakes.
Take only the best opportunities. There’s nothing wrong with sitting on cash and waiting.
Cut my losses if the stock approaches a 15% loss and is still trending down. Cut my losses shorter if the stock trend is down initially and heavy volume fails to stop the downtrend.
Learn to love losing. Successful traders pick the “right” one 38% of the time. That means they’re wrong 62% of the time. They’re successful because they cut their losses short and ride their profit$ hard until there’s a major reversal. Be prepared to re-enter on a correction.
Park my opinions. Strong opinions about a market, a trend or a particular stock will interfere with good judgment. The market loves to destroy opinions.
Be humble, especially after a series of good trades even if it hurts. Pride breeds cockiness which breeds mistakes which creates losses.
Always double check quantities when buying or selling. Don’t forget the time I tried to cut my losses on 5,000 shares and entered a sell order for only 500. Oops! Lost even more on the remaining 4,500.
Use mental stop-losses in early low profit positions rather than be stopped-out by electronic stop-loss price-spikes.
When I can’t follow the market daily, then use electronic stop-losses only when profitable and set them well below volatility. Use tight electronic stop-losses only when preparing to exit high profit positions.
Beware high volume small caps (Free West – FWR) as there’s a gorilla fund in the midst that will take profits early causing much volatility. Buy only at bottoms.
Always take the time to listen to my gut. If a trade doesn’t feel right, then don’t. There’s always tomorrow and another opportunity.
Adding to these lessons is expensive.
Disclaimer: I’m not an investment advisor and these articles are for commentary only. For specific advice you should consult your own investment professional.
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Its funny that theres a greater chance to find a “related” soul on the other side of the globe than among all the people that surround me. Wish you did post more frequently but then diamonds are valuable because they are rare. (I like the long post best.)
There`s a lot I could ask you about. But I choose something trivial like this. Maybe because the devil lives in the details. While I can come up with my own details, solutions on the more philosophical matters this one is practical. And so I am stuck.
Related to this post- how do you recognise when to enter a position. When it bounces of the lower band. But what criteria do you use? The first up day? Do you wait for the 2, 3 day confirmation? Does it matter what the lower band is doing (free fall, horizontal, up sloping)?
On my charts often the candle sticks have climbed for many days before the lower band hits bottom and turns.
I like your method, and rules. A lot is similar to mine. But I have never used BB.
I could find up the wheel a new. I could. But I though I could ask You.
Sorry to bother You.
Good questions, George. I use a combination of fundamental analysis, gut instinct and BB bands. For instance, if the blood’s running in the streets then bouncing anywhere off the lower BB is good but if a stock is already high then I ignore it whether it’s bouncing off the lower BB or not. Don’t forget, the BB changes in retrospect as it’s a moving average so it’s only an indicator, not a hard and fast rule.
Also, I’m usually early and I go into the red for a while before it turns up. I’m sure Jesse Livermore would shake his finger at me for not waiting for an upturn, but I’m a bit of a horror fan and adrenaline junkie so my approach isn’t for everyone.
P.S. having said that, I’m not buying now. Been sitting in cash since May (except for a couple solid dividend-payers). I’m always early, but we’re at the beginning of a major correction now so I plan to wait for bloody streets.
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