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Strategies, Disciplines, and Tactics
Free tutorials: lessons on trading strategies, stock investment, investment strategy, systems & tactics of buying and selling, stop-loss strategy, charts & indicators, support & resistance, trends and trendlines.
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1. Trade Stock Cycles or Buy and Hold?
For decades, market pundits preached that the wise investor bought and held. He didn’t try to “time the market.” Now that stocks often cycle with moves comparable to a year’s gain, it is time to revisit the question. Is it better to hold for a few years or to trade stock cycles?
2. A Stock’s Chart Pattern Reflects What is Known
Stock chart patterns reflect everything that has been made public and some things that have not. The buildup of momentum, the development of a setup, and buy and sell points can be determined by the market technician simply by studying the charts.
3. Increase Stock Market Gains with Less Risk
It is possible to increase your gains by using a short-term to intermediate-term investment approach. Long-term investors are much more dependent upon the performance of the market and of a narrow list of stocks than shorter-term investors. Short-term investing can increase gains and yield far more consistent returns.
4. How to Trade a Sideways Stock Market
When markets are in a trading range, we buy very strong stocks, look for setups, wait for confirmations of support at breakout levels and add a time filter to crossover conditions. With the application of discipline and patience, trend-following systems can be quite profitable in a market that has no trend.
5. Selling Strategies and Stop Losses
There are some simple approaches to incorporating a sell or stop loss discipline in your investment strategy. Selling a stock that has dropped below a certain strength ranking, selling on the crossover of a moving average, and selling based on volatility measurements are among some of the most effective approaches.
6. Are We In A Bull or Bear Market?
We like to share our ideas about the market. However it is a mistake for the serious trader to do so. Being asked to predict the course of a stock or the market is a temptation to form a bias. Traders cannot afford to have biases because they interfere with clear thinking when it is time to make a buy or sell decision.
7. The Folly of “Holding For the Long Term”
A wise investor always has an exit strategy. He will have a sell strategy, a stop loss, or both. To invest without one of these is to subject your portfolio to considerable risk. The stop loss should, if triggered, result in a loss that is acceptable relative to your expected gain.
8. Use Stop Losses To Keep Losses Small
Our research shows that top portfolio performance is not achieved by a buy and hold approach to investing. It is achieved by controlling losses by selling quickly when a stock begins to “Break down.”
9. Selling Stocks That Don’t Rise Can Get Bigger Gains
Just as a gardener must pull the weeds from his garden to prevent them from choking the plants, so a portfolio manager must get rid of stocks that do not rise and stocks that decline in order to free up resources and to be able to keep the portfolio more fully committed to rising stocks more of the time.
10. Invest With the Trend
To invest with the trend, it is important to determine the time frame of the trend that is appropriate for your intended holding period or investment time-horizon. If you are taking a position that you think you will hold for a few weeks to a month, then the direction of a long-term trend indicator like the 200-day moving average is not particularly relevant to the trade.
11. Use Time-Stops on All Stock Positions
When a setup does not deliver on the promised price surge, then the setup ceases to exist and it is time to sell. A time-stop will help you keep your assets available for investments that perform. Without a time-stop, money can be tied up for many months or even years in non-performing investments.
12. Never Let Emotions Affect Investment Decisions
Most investors are not disciplined. They buy because they feel the stock should rise or sell because the stock should fall. A trend is not over until it is over, and you should have a discipline that tells you when that has occurred. Emotions will cause a person to act prematurely. Fear, pride, and greed are the enemies of disciplined investing.
13. When You Buy A Stock, Plan on Being Wrong
In order to avoid significant loss, investor must plan their exit strategy in advance. What will they do if they are wrong? How do you define being wrong? The investor must have clarity about when or under what conditions the stock will be sold and where the stop loss will be placed. Most people prepare much more for buying than for selling. They think more about the benefit than about the possible loss. Prepare to avoid the loss.
14. You Could Trade Profitably Even In A Random Stock Market
Some academics have argued that stock behavior is purely random and that trading is similar to gambling. However, even if the behavior of stock were random, a person could trade profitably by proper portfolio management and the application of a sound discipline.
15. Statistics, Probability, and the Stock Trader
For every transaction, there is a probability for gain and a probability for loss. Even though a stock’s chart pattern shows the existence of a setup pattern and setups have a relatively high probability of success, there remains the possibility of loss. Plan as if your new position will be a disappointment. Planning for a bad outcome will keep the amount of pain you suffer to a minimum.
16. The Need for Discipline in the Stock Market
Only discipline will give you an advantage over other investors or traders in the stock market. Most people do not have a discipline. They are guided by their emotions. They become believers in their decision to buy, and they rarely have an exit strategy. The traders and investors who are most profitable have devised a set of rules to guide their stock market activities.
17. The Best Stock Traders Have Many Small Losses
The most consistently profitable strategies for trading stocks, futures, or currencies, minimize the size of losses. When tolerance for loss is small, there will tend to be many small losses. The best traders will generate a trading record showing a series of small losses intermixed with small and large gains.
18. Expert Traders Have Small Losses
You must always minimize losses and preserve capital through proper portfolio management. A habit of selling portfolio losers quickly increases the odds that you will have money available when a great opportunity arises, and it will keep those losers from neutralizing the good performers in your portfolio.
19. Forget Past Losses and Past Gains When Trading
Trade without letting your past experiences with a stock color your view of that stock or your trading behavior. Every day, ask yourself if you would buy that stock today at today’s price. If you wouldn’t, then sell. Always remain in the present with regard to your analysis of a stock’s attractiveness as a holding of your portfolio. Forget the past losses or gains and maintain a fresh perspective.
20. Avoid Stock Recommendations of “Gurus” and Friends
Learn to do your own thinking when you buy or sell a stock or any other security. Without doing your own thinking from beginning to the end, you will not fully own your investment. Find the stock yourself and determine on your own precisely when and under what conditions you will buy and sell.
21. New Traders, Risk Management, and Position Size
Beginning traders are likely to make more mistakes than at any other time in their trading careers. It is therefore critical that new traders learn as quickly as possible about risk management and correct position sizing. Without learning how to control risk early, a trader has a much greater risk of becoming a casualty of the market rather than a successful participant.
22. Do Not Predict the Market, Trade on What Is
Do not try to predict the market. Thinking you are predicting can become a bad and costly habit. When you think you are predicting future price action, your mind is more rigid in its expectations. Trade on the basis of what is rather than on the basis of what you think ought to be. Your mind will be more flexible and more likely to recognize and prepare for risk.
23. Trading Bear Market Rallies
In bear markets, if you want to participate in counter-trend rallies, plan for the gains to be smaller, the price to change quickly, and the rallies to be of short duration. Use shorter moving averages if you prefer moving average signal generators. Take special care to make sure your exit strategy is sensitive and fast enough for you to capture a significant portion of most rallies.
24. Use Price Envelopes for Trading Stocks
Stock price envelopes can be useful tools for the trader. Here are a couple of ways to create a price envelope and some rules you can use in a trading strategy. The price envelopes are based on the actual price behavior of the stock or security and thus have greater relevance than some approaches based on percentages alone.
25. Stock Chart Analysis or Fundamental Analysis?
The technical analyst can sometimes make good estimates of a stock’s price behavior within a few weeks. The fundamental analyst develops financial data that can give insight about the probable price of a stock 12 to 18 months in the future. Both approaches have something to offer.
26. Risk, Size of Positions, diversification, and Stop Losses
The first step in controlling risk is to limit the size of your positions. You can do this by dividing your portfolio so that it can accommodate no less than ten positions. Each position can be filled by either a stock or cash, but no stock should fill more than one position. Use stop losses to reduce risk further.
27. Plan for Extremes In Stock Price Behavior
Like the student of karate practicing his movements, so the beginning trader must practice his responses to different scenarios. By thinking through his responses ahead of time, they will be more reflexive and more appropriate. He will not have to figure out a response when the pressure of the moment and the flow of adrenaline are both high.
28. Creating a Trader’s Diary
Expert traders have learned most from their mistakes. One of the best ways for accomplishing this is to create a trader’s diary in which you will record every buy and sell decision you make and the reasoning behind those decisions. A periodic review of your decisions and analyses can greatly enhance your performance as a trader.
29. Traders Must Have Flexibility of Mind
Flexibility of mind is a primary characteristic of the expert trader. The trader’s mind, notions, and perceptions must always be open to re-evaluation. The trader must learn to recognize the truth of something that is very hard to accept emotionally. Above all, he must always be ready and willing to adapt.
30. The Importance of “Gut Feeling” to Stock Traders
“Gut feeling” is important in trading. Most top traders have developed it. It is a kind of sixth sense that grows out of a trader’s careful observations of hundreds of stock charts with special attention to stock behavior before and after sell points. The keeping of a trader’s diary is a great way to formalize the process.
31. Learn to Pick Stocks, When to Buy, and When to Sell
The broker cannot involve himself in the details of portfolio management. The brokerage house analyst does not care as much about your money as you do. Learn how to select your own stocks, when to buy, and when to sell. People spend much more time selecting a car than they do in deciding how to invest their life’s savings.
32. Develop Your Own Style of Trading
The trader who depends on the advice of media gurus for his investment ideas, forfeits his own trading identity. The trader must learn to find his own ideas and learn to decide for himself when it is time to buy or sell. In that way, decisions organically evolve from the trader’s own mind, and the process will enable him to find his strengths and weaknesses.
33. Traders Should Limit Losses, Let Profits Grow
Top traders try to limit losses while letting profits grow. It is the losers that are draining value out of your portfolio. Losing is part of the trading experience. Develop a strategy that enables you to populate your portfolio with stocks that generate gains, and eliminate stocks that produce losses.
34. Top Stock Market Traders Do Change Their Minds
If you buy a stock and then a few minutes later feel uneasy about the position, the best thing to do is sell. If you free yourself from the stock, you will be able to think more clearly about it. Avoid telling others about your positions or about your thoughts on the market.
35. Use Fundamental and Technical in Stock Trades
Traders should use both fundamental and technical analysis. Fundamentals can tell you if a stock represents good value. Technical considerations and the chart can tell you much more precisely when to buy or sell. The fundamentals can tell you if a move is likely to endure for long.
36. Fundamentals, Value, Technical, Timing in Stock Trading
Many top traders combine technical and fundamental considerations when creating their list of stock picks. Good fundamentals are like added fuel that can sustain a long trip. A good technical setup makes it far less likely that the trader will have to wait long before the stock surges.
37. Traders Study Stock Price and Volume Patterns
Traders study price and volume patterns in the chart of a stock to get clues about the probable direction of the stock’s next move. These patterns can be very useful, but they are not infallible. Increasing or decreasing volume patterns on minor moves can be used in conjunction with the triangle patterns.
38. Stock Chart Patterns Reflect What is Known by the Market
The stock market technician holds that a stock’s chart pattern of price and volume reflects all that is known by the market. However, different parts of the market learn at different times. Therefore, the strength and duration of trends and momentum evolve as knowledge is disseminated.
39. Greed and Fear: Enemies of Stock Trading Discipline
The trader must control his inclinations toward fear and greed. Either one of these will move the trader away from his discipline. Real discipline is about controlling emotions. The two emotions that do the most damage are lust for gain, which causes excess exposure to risk, and fear of loss, which causes too little participation or poor timing on entries and exits.
40. Develop Your Personal Investment Strategy
Learn to think for yourself rather than depend on the investment ideas of others. Find your own stocks, determine your own buy and sell points. Learn how to buy just before a surge, and how to sell early on in a stock’s decline.
41. Never Average Down as A Stock Declines
Never average down a falling stock. Average up a rising stock. If you buy on the basis of some premise and the stock declines, then the premise was not valid and there is no longer a valid reason for keeping the stock. Never meet a margin call. If you get a margin call, you have already held the stock too long.
42. Buy Strong Stocks in Strong Industries or Sectors
Concentrate on the strongest groups, sectors or industries. In general, buy the stocks of the strongest companies (the “blue-chips”) of their industry. Do not buy strong stocks in weak industries. Wait for an industry to give you a buy signal. Then focus on the buy signals of the leaders in that industry.
43. Stock Market “Sheep” & Stock Market “Shearers”
Stock market “sheep” do not know how to find stocks on their own. They do not have a buy or sell strategy. The stock market “shearer” maintains a “watch list” and buys stocks in a “setup” configuration on a “trigger event.” The shearers shear the sheep.
44. Analyze the Context of Stock Chart Setup Patterns
Stock chart “setup” patterns must be viewed in their context. That cannot be done adequately without reviewing 3-year and 5-year charts as well as the 1-year chart. New traders too often see the pattern only and not the context that can make the setup more or less meaningful.
45. The One-Day Stock Price Reversal Pattern
The one-day reversal pattern can give a warning that at least a short-term trend change is about to occur. In an up-trend (downtrend) a new high (low) on a surge in volume with a close lower (higher) than that of the previous day can serve as an alert. A wider price range, higher volume, and bigger closing difference all add significance to the pattern.
46. Fibonacci Numbers and Stock Retracements (Counter-trends)
Trends consist of moves and counter moves. Many traders use Fibonacci studies to estimate where support is likely to occur (when the counter move is likely to end). Stop losses are often placed just below a Fibonacci level because failure of support at a Fibonacci level implies that the stock is likely to decline further.
47. Use Price Channels to Buy, Sell, or Gauge Stock Strength
Price channels can be used to estimate the strength or weakness of a stock trend before that trend breaks down or accelerates. They can provide entry or exit points for short-term trades and to lock in short-term profits. Finally, they can be used to estimate the price range of a surge or decline if a breakout should occur.
48. Trendline Penetrations, Adjustments, and Price Targets
Steep trendlines are often penetrated without a change in the general trend direction. Sometimes, the angle of ascent is too steep to be sustained and the stock must moderate the angle. The amount of decline that will occur after trendline penetration can be estimated. Extensive penetration will result in resistance at a level that can also be estimated.
49. Gann Retracements, Angles, and Fan Lines
Gann retracements, angles and fan lines can be quite useful when trying to estimate potential areas of support and resistance. Gann fan lines also are helpful in estimating potential reversal points. The most sustainable advance is one in which prices advance at a 45-degree angle.
50. Stock Trends, Trendlines, and Trendline Penetrations
Stock price trends can be used to make objective buy and sell decisions based on the behavior of the stock rather than on the feelings of the trader. There are several precise ways in which to define a valid trendline penetration. Volume can help a trader assess a trendline penetration, and in some cases, warn of a coming reversal in trend direction.