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13 Trading Rules

  • Let winners run. While momentum is in phase, the market can run much further than might be expected.
  • Corollary to that rule: Do not exit winners without reason!
  • Be quick to admit when wrong and get flat.
  • Sometimes a time stop is the right solution. If a position is entered, but the anticipated scenario does not develop then get out.
  • Remember: if one thing isn’t happening the other thing probably is. Historically, this has never been good for me…
  • Be careful of correlations. Several positions can often equal one large position bearing unacceptable risk. Please think.
  • I am responsible for risk management, money management, trade management, doing the analytical work and putting on every trade that comes.
  • I am not responsible for the outcome of any one trade. Markets are highly random. I do not have a crystal ball. I am not as smart as I think I am.
  • Risk management is the first and last responsibility. I can make almost any mistake and be ok as long as I do not violate my risk management parameters.
  • Opportunity comes every day. Do not neglect the work. Must do analysis every day.
  • Opportunity comes every day. Get out of poor positions. Move on.
  • I am a better countertrend trader than a trend trader. Sometimes the crowd is right, and they will run me over at those times if I’m not quick to admit I’m wrong.
  • If you’re going to do something stupid, at least do it on smaller size.

Leibovit, The Trader’s Book of Volume

Mark Leibovit believes that volume analysis is “the closest thing we have to a real working ‘crystal ball’” in the markets. (pp. 425-26) In The Trader’s Book of Volume: The Definitive Guide to Volume Trading (McGraw-Hill, 2011) he outlines the fundamentals of volume analysis and introduces the reader to a broad range of volume indicators and oscillators.

We have all heard the mantra that volume precedes price. As Leibovit writes, “Market price trends do not happen in a vacuum; rather, it is the behavioral or programmed responses of traders and managers that result in the volume shifts that precede a price move. As the crowd mobilizes, as reflected in the volume numbers, its size and conviction will determine the direction and strength of the price movement. As the conviction of the crowd falters and the volume numbers pull back and diminish, so too will this impact the timing and direction of the trend.” (p. 24)

In analyzing the relationships between price and volume under various market regimes Leibovit pays particular attention to divergences where volume doesn’t confirm price action and signals a possible trend change. But he doesn’t rely solely on easy-to-spot divergences. He also introduces the reader to volume overlays, including moving averages, MACD, and linear regression. These overlays can help the trader see volume trends over a longer time frame.

And, of course, there is the plethora of indicators and oscillators, some 33 in all. Thirteen apply to the broad market; the rest can be used in the analysis of individual securities. In each case Leibovit explains the indicator’s or oscillator’s formulation, its use in trend confirmation, its potential divergence with price, and its use with other indicators. He also illustrates its practicality with a sample trade setup and entry. He closes each section with trader tips.

Throughout the book the author stresses that there is no “one size fits all” solution to selecting the appropriate volume indicators and oscillators. Volume analysis is an art, not a science. It depends on the instrument being traded as well as the trader’s time frame.

But The Trader’s Book of Volume goes a long way toward taking the mystery out of volume analysis. In roughly 450 pages, amply illustrated with MetaStock charts, it offers concrete ways to use volume to improve trading results.

The Market Is King

If you are a disciplined, follow the rules trader, then I am sure you are familiar with the many and various ways the stock market can play tricks on you.  For instance, a disciplined, technical trader will adhere to a particular strategy based on current market conditions.  In so doing, trades are assessed and entered based on specific criteria, usually by combining mechanical and discretionary means.

Technical traders base their current trade decisions on past price action, noting distinct historical patterns that have the possibility of replication.  However, the outcome of two strategically similar trades are never exactly alike if for no other reason than those trading a specific stock now are not the same ones who traded it two months, or even two weeks or two days previous.  The elements of uncertainty (e.g., changes in sentiment and differences of opinion) exert such an influence on stock prices that exact replication is impossible.  Therefore, the market enjoys a “King Jester” status. (more…)

Time to Read :Trading Rules !

To me, it’s useful to re-read things like this sometimes, just to remind myself of the obvious.  I hope you find them useful.  (The last rule alone has saved me a lot of money over the years…)

Trade Management

  • Let winners run. While momentum is in phase, the market can run much further than might be expected.
  • Do not exit winners without reason!
  • Be quick to admit when wrong and get flat.
  • Sometimes a time stop is the right solution. If a position is entered, but the anticipated scenario does not develop then get out.
  • Remember: if one thing isn’t happening the other thing probably is. Historically, this has never been good for me…
  • Be careful of correlations. Several positions can often equal one large position bearing unacceptable risk. Please think.

Other thoughts

  • I am responsible for risk management, money management, trade management, doing the analytical work and putting on every trade that comes.
  • I am not responsible for the outcome of any one trade. Markets are highly random. I do not have a crystal ball. I am not as smart as I think I am.
  • Risk management is the first and last responsibility. I can [mess]anything else up and be ok as long as I do not violate my risk management parameters.
  • Opportunity comes every day. Do not neglect the work. Must do analysis every day.
  • Opportunity comes every day. Get out of [crappy] positions. Move on.
  • I am a better countertrend trader than a trend trader. Sometimes the crowd is right, and they will run me over at those times if I’m not quick to admit I’m wrong.
  • If you’re going to do something stupid, at least do it on smaller size.

Trading Wisdom

If we want to be successful as traders it is crucial that we have great filters. We must filter out all the noise that separates us from the actual price action. In the end it is just us versus the market. We need to seek  to learn how to trade from others and not look for trades. We have to play a lone hand because we have our own tolerance for pain, our own goals, and we should have our own trading plan with a robust methodology. Others do not know our time frame and we do not know theirs. Their position sizing may be ten times what ours is.

Before we trade we should have a watch list, a risk percent per trade, a methodology, and a trading plan. We should be running our trading like a business not a casino. Information and opinions can bias our trading. Be very careful about the information that you let into your mind. You should attempt to trade as close to your system and methodology as possible without allowing anyone’s opinions our thoughts to come between you and the charts. Actual price action is the king everyone’s opinions are just that, opinions. (more…)

Trading Mantra's

“Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!

“Thou Shall Not Trade Against the Trend.”

Let volatility work in your favor, not against you.

Emotions can be the enemy of the trader and investor, as fear and greed play an important part of one’s decision making process.

Portfolios heavy with underperforming stocks rarely outperform the stock market!

Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions, scale out instead.

Never let a profitable trade turn into a loss and never let an initial trading position turn into a long-term one because it is at a loss.

It’s not the ones that you sell that go higher that matters, it’s the ones you don’t sell which go lower, that do.

Don’t think you can consistently buy at the bottom nor sell at the top. This can rarely be consistently done. (more…)