Trading Wisdom Via John Templeton

  1. There is only one long term investment objective, maximum total after tax return.
  2. Success requires study and work. It’s harder than you think.
  3. Outperforming the majority of investors requires doing what they are not doing.
  4. Buy when pessimism is at its maximum, sell when optimism is at its maximum.
  5. Therefore, buy what most investors are selling.
  6. Buying when others have despaired, and selling when they are full of hope, takes fortitude.
  7. Bear markets aren’t forever. Prices usually turn up a year before the business cycle hits bottom.
  8. Popularity is temporary. When a sector goes out of fashion, it stays out for many years.
  9. In the long run, stock index prices fluctuate around the EPS trend line.
  10. Stock index earnings fluctuate around replacement book value for the stocks in the index.
  11. Buy what other people buy and you will succeed or fail as other people do.
  12. Timing: buy when short term owners have finished selling and sell when they’ve finished their buying, always opposing the fashion.
  13. Stock prices fluctuate more than values. So stock indexes will never produce the best total return performance.
  14. Focus on value because most investors focus on outlooks and trends.
  15. Invest worldwide.
  16. Stock price fluctuations are proportional to the square root of the price.
  17. Sell when you find a much better bargain to replace what you are selling.
  18. When your method becomes popular, switch to an unpopular method.
  19. Stay flexible. No asset or method is forever.
  20. Stock market investing takes more skill than any other kind of investing.
  21. A person can outperform a committee.
  22. If you begin with prayer, you will think more clearly and make fewer mistakes.

Wine and Trading

Like a fine wine the surety of a trend reversal gets better with time. The more a trend has aged, the more likely you are to get a valid reversal.

The older a trend gets the more ripe it is for falling off, and the more likely a new more robust trend will take over. A trend that is young and vigorous maybe side tracked briefly, but is not very likely to be defeated. The end of the uptrend says that the last of the big buyers are gone and the end of a down trend says that the last of the big sellers are gone and that trend has now become ripe for a take over.

Think of a trend like a young lion protecting his pride, another lion is not likely to usurp his authority. As he gets older, he is much more likely to lose his pride in defeat to a younger more energetic lion. The same is true with a trend as it gets older it becomes much more likely to be taken over. When considering whether or not to take a reversal (especially in the short term) gauge the age of the trend first. If the trend has just begin then you are not likely to have a legitimate reversal on your hand. If the trend is still very close to the trend line then it is not likely to be a valid reversal.

There are no absolutes in the market, but you do need to keep an eye out for things that put the odds the most in your favor.

Where Most Of Your Time Should Be Spent

Selecting the one or two super trades should consume most of your time. There’s a great deal of work and thinking to be done in comparing markets, finding the best Open Interest play and carefully reviewing the premiums. The average tendency is to rush over this section of trading simply because it seems more productive to look at all the technical wiggle-waggles.

In actuality, as I’ve said so many times, unless you are fundamentally right in your initial selection decisions, all the technical tools will do is get you in trouble. Please devote all your concentration and energies to the selection of your commodities before you give the technical data any consideration at all. Technical data is secondary to screening out the potential big winning trades.

The only technical tool to look at during this screening is the ten week moving average trend line. For a bullish situation it should be slanting up; for a bearish market, it should be slanting down.

by Larry Williams, excerpt from his book, How I Made $1,000,000 Trading Commodities Last Year.

Technical Analysis

  • Reduce or dispose your position if a trend line you are watching is violated, especially with heavy volume. Don’t hope that the trend line break is a fake one.
  • Never trade based on indicator divergence (with price) alone. Divergences can go on for a while, with price continuing to make higher highs and the indicator continuing to make lower highs (or price making lower lows with indicator making higher lows).
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