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Strategy, System, Discipline, and Tactics

Free Tutorials In Disciplined trading

Disciplines and Strategies
Introduction by Dr. Winton Felt

A single Strategy is not nearly enough.  You need several Strategies.  A single Discipline is not enough.  You need a variety of Disciplines.  You must develop your disciplines around flexibility.  The market changes constantly.  Its biases change.  At one time it favors momentum investors, and at another time it hammers them.  Your rules for buying and selling must be adaptive.  If you develop disciplines that are adaptive to the varying whims of the market, and your strategies are suitable to the prevailing market climate, you will prosper.  Consistent profitability in the market is not about how you “feel,” or about the fact that a company has a great “story” and that its stock should go up.  Emotions have no place in the equation.  Study to learn tactics and tactical considerations.  For example, what are the implications of a “hanging man” candlestick formation after a long uptrend?  What tactics are worth considering in the placement of rising stop-losses relative to a rising trendline for a volatile stock as compared to a less volatile stock?  Remember that there is either a person or a computer on the other side of every trade you make.  That person or thing is betting that you are wrong.  What tactical difference would it make in the placement of your stop-loss if a stock’s pattern suggests the stock is frequently “gunned” near the trendline?  A stock is “gunned” if a specialist sees a group of sell orders (perhaps stop-losses) just below a trendline and he forces the stock down by dumping some shares in order to buy up the shares offered for sale at the lower price so he can resell them later at a higher price.  This is more likely to happen if the stop loss orders for those shares are set too close to the stock’s current price.  If this is a pattern for a particular stock, how would you approach the problem?  What tactics do you use to buy breakout stocks?  Do you buy on the breakout, wait for a pullback, or wait for a pullback and bounce?  Even though it takes time, work, and some losses to develop your skills as a trader, you will find that it can be a very interesting and even a fun way to make a living.  Think of it as the world’s largest computer game.  The money in your account is how you keep score.  Even a beginner can hold his own if he is careful.  There are a lot of people in the market who have no discipline, strategy, or self-protection systems.  Protect your portfolio with a good stop-loss system.  Do your homework.  If you do these two things, you will be way ahead of most of the people in the market. 

Discipline implies “teach” & “train.”  You are not disciplined if you do not study to learn from your mistakes and modify your behavior accordingly.  Discipline means to govern.  You have no discipline until you learn to govern your emotions.  Discipline can involve chastening.  The market will do that for you if you do not exercise the other meanings of the word.  If you are disciplined, you will regulate your behavior so that you do not deviate from your planned procedures.  A Disciplined investor or trader will combine lessons the market has attempted to teach him with lessons gleaned from his past behavior to provide self-generated tutorials that will lead to success-generating behavior.

Strategy suggests at least a general plan.  However, to be a consistent winner (which does not mean always winning) you need more than simply a generalized plan.  Successful stock market strategies are more complex than that.  You need a detailed blueprint that is designed to gain you an advantage over other participants in the market.  “Strategy” involves adapting means to desired ends.  To this end, real strategies must incorporate at least some general rules of behavior.  Think of your strategy as the skeleton of your enterprise.  Think of your “system” as the organs, muscle, and ligaments of your enterprise.  Your strategy maps out the general structure of your endeavor.  Your system gives life to it.

A “system” is more defined than a strategy.  That is, a system has many subsets of rules that address various contingencies.  Like the ligaments of the body, these subsets work in concert with each other to support the goals of the enterprise.  However, “system” often implies more than a set of rules.  The term may be expanded to include external support systems.  That is, the word may include the set of rules, tools, indicators, and formulas that tell the trader what market actions to take.  Top traders learn the rules of their system like a student of karate practices his katas (combinations of positions and movements) so that they become automatic responses in a combat situation.  Similarly, all the rules of your system must be learned so that your behavior becomes automatic.  Otherwise, the danger is that emotion will overrun your rules.  A so-called “system” without contingency rules is not a real system in the sense of being a money-making blueprint.   Without a system to give life to your strategy, your strategy is dead.

Discipline, Strategy, and System  These three are the triumvirate that will lead you to success in the market.  Your overall “strategy” will be made up of various sub-strategies that define your general approaches to investing under various market conditions.  Will you look for breakouts, gaps, surges, use stop losses, or sell short?  Your system consists of the set of rules and procedures you will follow to carry out your strategy (an example would be the set of rules in R.C. Allen’s triple moving average system).  The meaning of “discipline” can also envelop the whole package or overall structural matrix of your enterprise.  However, for our purposes here, we will define discipline to be what holds your system and strategies together.  It is the persistence, care, and accuracy with which you implement your set of rules.  Without discipline, you will not follow your own rules because the market will defeat you psychologically.  Without the correct implementation of your system, you really are not in possession of an effectual strategy.  You may have a strategy of buying stocks that have certain behavioral characteristics.  However, no strategy is fail-proof and all people make mistakes.  Effective systems deal with possible failures.  At any given time, there should be a well-defined answer to the question, “How will you deal with each type of failure that could occur if you take that position?”

We hope you find these discussions (they are actually small tutorials or lessons) to be informative.  Some of these are mini tutorials on various technical indicators that we have found useful and that we may refer to in our larger discussions, lessons, or tutorials.  We expect this list to expand over time.

 The tutorials vary widely in sophistication.  However, we will work on the basics at first.  We are aware that many visitors are beginners.  There is no particular order or progression as you move from one tutorial to the next.  We will simply discuss a variety of issues in a variety of ways.  Some of our content will be taken from our Strategy Updates and other communications that we had with clients when we were managing investment accounts.  Bear in mind that those accounts were not “trading” accounts.  However, we believe that “traders” and “investors” differ primarily in the length of their holding period and in the amount of risk they are willing to tolerate.  To us, holding on to a declining position after it has broken support involves more risk than selling it and moving on to something more promising.  “Traders” and “investors” can learn from each other.  They both must master the principles of buying and selling.

Descriptive Index: Tutorial Links

1.  To Sell a Stock or Hold–When Is it Time?
Is it better to hold a stock through its ups and downs or trade the short moves. What are some of the buy, sell, and hold tactical issues?

2.  Stop Losses: Right Way Where and How
The market will “psych” you out of your stops.  Setting your stops on the basis of mathematical probabilities enables you to distance human emotions from the decision process.

3.  Stocks Cycle Through Four Phases
Accumulation, advance, distribution, and decline. These are the four phases of a stock’s cycle. What are the signs a person could look for that should influence his decisions?

4.  Buy and Sell Signals of a Moving Average System
The moving average can be used to generate buy and sell signals. Here are the patterns that will help you decide whether you should buy, sell, or hold.

5.  A Few Notes on Discipline
There will always be losers in your portfolio.  Keep enough stocks in your portfolio so that your return will reflect your discipline rather than the “luck of the draw.”

6.  One of Many Disciplines That Can Be Created Using the Valuator
There are too many ways to use The Valuator as a tool for disciplined investing to even begin to discuss them all here.  However, here are a few ideas.

7.  The Triple Moving Average Crossover System for Buying and Selling Stocks
While R.C. Allen’s 4-9-18-day moving average crossover system is very popular, another set of averages is likely to be more profitable most of the time.  Use a filter with any moving average crossover system to cut down on false signals.

8.  The Stochastic Oscillator, Chaiken Advance/Decline, and Chande Momentum Oscillator (CMO)
Use of the Stochastic Oscillator, the Chaiken Advance/Decline Oscillator, and the Chande Momentum Oscillator. Explanations found here are a bit more detailed than at most other websites.

9.  Chaikin Money Flow
The flow of money as measured by The Chaiken Money Flow Indicator can give clues about the meaning of price movement. Look for divergence between the indicator and price action.

10.  McClellan Oscillator and Summation Index
The McClellan Oscillator and Summation Index used together, can be useful in evaluating the dynamics of the ebb and flow of the market, and in planning entry and exit points.

11.  Relationship Between Short-Term & Long-Term Interest Rates: What the Interest Rate Spread Tells You
Check the spread between the yield of short-term treasuries and the yield of long-term treasury bonds to get clues about how to invest in the current interest rate environment.

12.  The MACD, its Signals, and the NYSE
Divergence between the market and the MACD, trigger line crossovers, and the distance between the MACD and its trigger line can all be used as decision-making tools.

13.  Stock Buy and Sell Signals With the CCI
The Commodity Channel Index (CCI) can be a great help in spotting trend changes.  It often gives an exit signal at or before the extreme price rather than after it.  It is useful for stocks as well as commodities.

14.  The Market Bias Indicator (MBI)
The Market Bias Indicator (MBI) is useful in evaluating the general status of the market and how best to adapt strategically and tactically to the prevailing market environment.

15.  Prices Relative to “Fair Value” ~ Three Measurements
Three “value” measurement systems give different perspectives. The RAM and RAMT look at earnings yield and interest rates.  The Historical Model looks at historical relationships between earnings and stock prices.

16.  An Outline of Three Strategies for Stock Investing
Three strategies are discussed. One is value-based and focuses on dividend yield, one is a growth strategy that concentrates on “strength,” and one is a mutual fund strategy.

17.  Stop Loss Strategy
No matter how well you plan or how well you screen, you will take stop loss hits.  If you plan well, the hit will be very small.

18.  A Good Intermediate-Term Stock Investment Strategy
A good strategy that uses a readily available composite of several valuation scores, a measurement for velocity, a sorting and filtering routine, and a simple stop loss system for protection.

19.  Looking for Stock Market Signals Is Sometimes Like Predicting the Weather
Market decision-making is like weather forecasting.  Market and weather forecasters speak in terms of probabilities, not certainties. Each has many currents, crosscurrents, and high and low pressure fronts.

20.  Introduction to The Disciplined Growth Strategy
The introduction of the Disciplined Growth Strategy with its muli-layered contingency algorithms and style-transcendent robustness unlikely to be “trashed” by the next stylistic bias of the market.

21.  Investor or Trader?
Are you an “investor” or a “trader?”  It all comes down to your expected time horizon and rate of return.  Is your annual growth rate target 15% or 60%?

22.  Here are Illustrations Showing Stock Alerts and “Setups”
There are illustrations here that show some stock alerts and “setups.”  A “setup” is a chart configuration that often precedes a price surge or new trend.  These configurations can help a person buy at the right time–just before a significant move in the stock and at a low-risk entry point.  This link will take you to a section of the “Stock Alerts” page with the heading “Alerts in the StockAlerts System.”  Illustrations follow.

23.  A Test to Find the Best Moving Average Sell Strategy
We have tested the sell side of several moving average crossover systems to see which is the most profitable. We are now sharing some of our findings.

24.  The Probability of a Stop Loss Being Triggered
 Why the triggering of a volatility-based stop loss is a matter of probabilities.  The Stops tool makes it possible to estimate the probability that such a stop loss will be triggered.

25.  The Market is Rising but Stocks Keep Breaking Down
 During the transition from bear market to bull market, individual stocks are often quite choppy in their price action. Though the market is steadily rising, individual stocks keep breaking down with disconcerting frequency. Here are alternatives to leaving your money in cash.

26.  Do You Sell or Hold After Your Stock Has Dropped?
If you ignored the sell signals before your stock had a big drop, it is not too late to make a good decision. Judging a loss by its magnitude is an arbitrary approach to risk control. Here is a strategy that can not only help you decide whether to sell but also help you avoid those situations in the first place.

27.  How to Invest When Stocks Keep Breaking Down
After a bear market and before a bull market begins in earnest, stocks often break down shortly after beginning a positive move. They break down quickly even while the market is rising. It is hard to find stocks that match the progress of the general market. Here is what investors can do.

28.  Information You Need to Know About Your Mutual Fund  (You Really do Need to Know Your Mutual Fund)
If another fund in the same fund family in which you are invested does poorly, it can have an impact on your fund and on you. Here are some things you need to know about your mutual fund.

29.  An Intermediate-Term High-Performance System
Keeping a portfolio fully invested most of the time in rising stocks is what produces high performance. Use the correct strength measurement to rank the stocks and keep invested in those that rank the highest.

30.  Small Losses Are the Mark of a Disciplined Trader 
The mark of an expert trader is that all his losses are small. Losses are not permitted to grow. Profits are allowed to grow to become larger profits. This results in enhanced profits, lower risk, and greater flexibility.

31.  Control Risk and Loss in the Stock Market
Too few traders and investors buy near support, limit the potential for decline, or control losses through volatility adjusted stop losses. Too few have a plan for limiting risk before making the trade. Here are some considerations.

32.  Timing the Market for Profitable Stock Investment
Is there a legal form of market timing? How does it differ from illegal market timing? The market does indicate what it wants to do. People who align their market decisions with the market’s indicated preferences are much more likely to trade or invest profitably.

33.  Diversification and Stop Loss Placement
Some of the most respected names in the investment world (Granville, Weinstein, Dines, Magee, Zweig, Sperandeo, Schwager, O’Neil, Murphy, and others all agree on the necessity of using stop losses.  Though they do not seem to agree on how much of a stock decline to allow selling, they are much closer in their thinking than is apparent on the surface.

34.  The Best Stop Loss for Long-Term Investors
Wherever the stop loss is placed, there is the chance that the stock will reverse course after the stop loss is triggered. We wondered if there was an optimum stop loss placement that would minimize both the loss allowed by the stop loss and the probability of a reversal after the sale.

35.  What does “Timing the Market” or “Market Timing” Really Mean?
As practiced by professionals, “Timing the market” or “market timing” is about buying and selling with discipline. It is about following the buy signals and the sell signals. It is not about how one “feels” about the market.

36.  The “Fundamental” vs. the “Technical” in Stock Buy and Sell Decisions
In a volatile market, technical signals tend to precede announcements of change in the fundamentals of a company. Understand how this works and how to use both the technical and the fundamental in your buy and sell decisions.

37.  Stock Market Investing: Long-Term or Short-Term?
 To buy and hold stocks for the long-term has been the preferred approach to stock market investing for many decades.  However, in a volatile stock market this approach can be very expensive in terms of risk vs. return on investment. The long-term holder may not be taking the wisest course after all.

38.  The Advantage of Exchange-Traded Funds (ETFs)
In general, ETFs are less volatile than individual stocks, have many of the benefits of sector and index mutual funds, and a relatively low expense ratio. Fraud, as has occurred with standard mutual funds, is virtually impossible. They are worth considering as alternatives to individual stocks and standard mutual funds.

39.  Short-Term Stock Trends and Risk Control
Risk control is more important than being a long-term investor. Stock trends are becoming shorter. Risk is increasing. Riding out all dips
in stock price can lead to disaster.

40.  Be Both a Short-Term Trader and a Long-Term Investor
Short-term traders often assume less risk than long-term investors. There is a right time and a wrong time to own the stock of every great company. The smartest investors base their decisions on the balance between risk and reward, not on a pre-determined holding period.

41.  Select Stocks by Combining Technical and Fundamental Screens
A stock selection strategy designed to find stocks that are likely to appreciate significantly within a relatively short time should include both fundamental and technical screening systems.  The technical is useful for identifying setups and in the timing of purchases and sales. Good fundamentals are the fuel that enable sustained flight.

42.  Where to Put a Stop Loss
Whether you use volatility-based, Fibonacci. Gann, percentage declines, pivot points, or any other method for determining where to put a stop loss, your stop loss will sometimes be triggered just before the stock resumes its climb. Learn to live with it. The alternative can be disastrous.

43.  To Trade Stocks for a Living
If you want to learn how to trade stocks for a living, be prepared to spend several years at it. To avoid substantial financial loss, you must not underestimate the work, time, and discipline requirements.

44.  Why Pick Individual Stocks Over Mutual Funds?
Whether an investor buys individual stocks for his own portfolio, buys a few mutual funds, or hires a professional to manage his account for him, can have a dramatic impact on the way investments are handled and reported. It can also make a huge impact on the bottom line.

45.  Risk Control Through Selling and Diversification
Most people hate to sell at a loss. They also do not want to monitor more than a few stocks. Together, these attitudes are a prescription for disaster.

46.  Bear Market Recovery and Replacing Stock Laggards
Early in the recovery after a bear market, replace weak lagging stocks with stronger stocks that are likely to benefit much more from the new paradigm shift in market psychology. Not doing so can cost you both time and money.

47.  Stop Losses and Avoiding “Significant” Declines
In placing a stop loss, how does a person know the point at which a stock’s decline is not normal? Investors too frequently base their stop loss decisions on the level of excitement that they feel for a new product or discovery. These may be factors that incite interest, but they should have no sway in stop loss placement.

There are other instructive materials, lessons, or tutorials in various locations on this site.  You will encounter them as you browse the site.  Links for an additional 50 tutorials can be found in one place by clicking below on “More Tutorials.”

More Tutorials


Perhaps We Can Enhance Your Performance

     The Stops tool computes trailing volatility-adjusted stop losses that can be adjusted to match your tolerance for risk and investment time-horizon.  Let the stock have just enough room for its “normal” fluctuations as it climbs (each stock is different), but cut losses quickly when it declines more than is “normal” for that stock.
     Our various setup reports can help you find stocks for your watchlist that are more likely to surge within a few days.