20 Golden Rules for Stock Traders

[ready2go]

I got this one from the net. I was hoping I could have a good discussion with people here in PEx regarding the following rules. First of all, some of these rules are rather vague, can anyone in the trading industry explain them in more comprehensible terms? Secondly, I want to know if these points can really hold water. Thanks in advance.

r2g :coolhat:

===

20 Golden Rules for Traders

Want to trade successfully? Just choose the good positions and avoid the bad ones. Poor trade selection takes a heavy toll as it bleeds your confidence and wallet. You face many crossroads during each market day. Without a system of discipline for your decision-making, impulse and emotion will undermine skills as you chase the wrong stocks at the worst times.

Many short-term players view trading as a form of gambling. Without planning or discipline, they throw money at the market. The occasional big score reinforces this easy money attitude but sets them up for ultimate failure. Without defensive rules, insiders easily feed off these losers and send them off to other hobbies.

Technical Analysis teaches traders to execute positions based on numbers, time and volume.This discipline forces traders to distance themselves from reckless gambling behavior. Through detached execution and solid risk management, short-term trading finally "works".

Markets echo similar patterns over and over again. The science of trend allows you to build systematic rules to play these repeating formations and avoid the chase:

1. Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming.

2. Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat.

3. Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool.

4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.

5. Don't buy up into a major moving average or sell down into one. See #3.

6. Don't chase momentum if you can't find the exit. Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can.

8. Trends test the point of last support/resistance. Enter here even if it hurts.

9. Trade with the TICK not against it. Don't be a hero. Go with the money flow.

10. If you have to look, it isn't there. Forget your college degree and trust your instincts.

11. Sell the second high, buy the second low. After sharp pullsbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.

12. The trend is your friend in the last hour. As volume cranks up at 2:30pm don't expect anyone to change the channel.

13. Avoid the open. They see YOU coming suck3r.

14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.

15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.

16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.

17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.

18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.

19. Bottoms take longer to form than tops. Greed acts more quickly than fear and causes stocks to drop from their own weight.

20. Beat the crowd in and out the door. You have to take their money before they take yours, period.

All written materials-© 1999 Brooke Publishers, Inc

[roadrage23]

I suddenly remembered the MD of the equities brokering firm that my old company owns. During the boom years, he would jokingly quip to his traders "He who makes the gold makes the rules." :D

[mac_bolan00]

1. Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming.
more correctly, no knows how news WILL affect trading. therefore, it's better to look at charts since everyone else does. and if everyone has the same sentiment(s) you'll get a better feel.

2. Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat.

this means don't push your luck. one cycle for buying and selling should be enough.

3. Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool.

a support line is an alignment of several actual lows in a price chart over time. the consistency of alignment tells you how 'strong' this support is. since it's a line, you can project it to future periods. same thing for resistance (an alignment of actual highs).

4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.

i don't follow this. in a rally, you take a long position but make sure you get out early (no telling how long this rally will last). don't short it! you're not sure if it will go down before the t+4 period ends!

5. Don't buy up into a major moving average or sell down into one.

a moving average gives a significant lag in indication. 'centering' the MA will help but the lag can never be eliminated . the longer the interval of averaging, the bigger the lag. better to superimpose two MAs for the same stock: one very long and one very short. an impending convergence/divergence will give you a LEAD indicator.

6. Don't chase momentum if you can't find the exit. Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble.

BUZZZ! not familiar with momentum/oscillation charts.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can.

can't commetn on this either.

8. Trends test the point of last support/resistance. Enter here even if it hurts.

a 'trend' is a long-term direction (denoted by a line whether straight or curved), regardless of deviations due to cyclicity (every few years) or seasonality (changes within a year). its limits, long-term support and long-term resistance, will definitely be a good guide when to buy or sell.

9. Trade with the TICK not against it. Don't be a hero. Go with the money flow.

uhhhh.. what are TICKs?

10. If you have to look, it isn't there. Forget your college degree and trust your instincts.

bummer... if this is true then why do they prefer ivy leaguers in the US and top-4 schools here. maybe what he's saying is a funadamental analysis may not come quick enough when trying to decide a trade within the day.

11. Sell the second high, buy the second low. After sharp pullsbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.

inulit lang nya.

12. The trend is your friend in the last hour. As volume cranks up at 2:30pm don't expect anyone to change the channel.

refer to #8

13. Avoid the open. They see YOU coming suck3r.

they'll see you only if you post your transaction long before the bell sounds off. post only when you're ready and make sure it gets done quick.

14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.

not sure. i think he's referring to a head-and-shoulder or even a multiple-shouldered head.

15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.

this is wall street standard. in the phils, there's nothing to forecast beyond 30 days.

16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.

not always. it's the minds of people who move the prices. and often, people have short memories.

17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.

not familiar with this jargon.

18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.

again, a trend is a long-term thing and does not reverse easily. don't confuse it with cycles or seasonal changes.

19. Bottoms take longer to form than tops. Greed acts more quickly than fear and causes stocks to drop from their own weight.

this is correct. that's why it's better to sell when it's still fallling and to buy only when its going up strong.

20. Beat the crowd in and out the door. You have to take their money before they take yours, period.

no-brainer.

[Spyfrat]

in my humble opinion. sensya lang medyo nd rin ako magaling mag explain.
remember though these r the golden rule nang mga traders.


1. Forget the news, remember the chart. You're not smart enough to know how news will affect price. The chart already knows the news is coming. <-- yup ignore the news. market makers (mm) like to fool around on emotionally driven investors. emotionally driven stocks r very short term n nature. one way to have a very objective technical analysis is to refrain or exclude oneself to noise (news). the less you know the company the better for you to be objective. sa technical analysis all we need r the numbers. what the company does, whos the ceo, what product it sells r not important. a good technician doesnt marry his stock, in fact it threat the stock as a pos (piece of s) so that it wont have anyhesitation to dump if his scenario doesnt met. good example TEL et al (MPC,DGTL,JGS) re news of takeover.
for educational purposes only re News/Emotions thinggy: http://www.philstocks.net/ubb/Forum2/HTML/000304.html

2. Buy the first pullback from a new high. Sell the first pullback from a new low. There's always a crowd that missed the first boat. <--usually this is emotionally driven, and as explained in #1, such scenario r very short term in nature. good example (after the fact) Erap's resignation, most stock opened 40-50% higher from their pp's (previous prices). greed is the primary driver on any ist attempt "breakout" (making new high) and fear naman sa "breakdown" (making new low). there's this thing we called false breakouts or breakdowns, whereas nd na sya mag attempt ulit sa high/low.


3. Buy at support, sell at resistance. Everyone sees the same thing and they're all just waiting to jump in the pool. <--not everyone sees the same thing. there's this thing we called bounce (thus the idea buying on support), like sa #2 yung sinasabi na pullback. (btw yung term correction/pullback applies sa isang stock na tumaas o bumaba). same applies sa "sell at resistance", may pullback rin.

4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover. <--- apllicable to #1 sa pullback. sa isang pullback its usually short coverings.

5. Don't buy up into a major moving average or sell down into one. See #3. <--200 day MA is the usual major moving average. usually eto ang ginagamit nang mga instituional investors/ fund manager na basehan kung meron major reversal sa market.


mamalengke pa ako... 2 b cont. :glee:

[Hulk]

Sorry pero contrarian ako eh! *okay*

Guys, quick situational question lang. If a regular coin was tossed a hundred times, and it always came up heads, and you were asked to bet on the 101st toss, what would be your bet? Heads or tails?


:frank:

[mac_bolan00]

i'd say head but only because i keep seeing the head. probability would still be 50:50 with no historic considerations.

[Spyfrat]

hay labada natapos na rin ;)

6. Don't chase momentum if you can't find the exit. Assume the market will reverse the minute you get in. If it's a long way to the door, you're in big trouble. <--advising investors to set loss stops.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don't. The old traders' wisdom is a lie. Trade in the direction of gap support whenever you can. <-- see enron & worldcom charts.

8. Trends test the point of last support/resistance. Enter here even if it hurts. <-- buy the trend not the price.

9. Trade with the TICK not against it. Don't be a hero. Go with the money flow. <-- ride the trend.

10. If you have to look, it isn't there. Forget your college degree and trust your instincts. <-- :glee: no comment, baka may magalit na fund manager ;) but reality bites na most "well-educated" fundman think they can unsmart the market. ego has no place in the street.

11. Sell the second high, buy the second low. After sharp pullsbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try. <-- i don't buy this one. he must be talking about penny stocks.

12. The trend is your friend in the last hour. As volume cranks up at 2:30pm don't expect anyone to change the channel. <-- depends on the market. the theory that most buy specialist eat their lunch around 1pm and back an hr later is pure bs.

13. Avoid the open. They see YOU coming suck3r. <-- 30 minute rule applies. spreads on the pre market r volatile.

14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom. <-- dunno if it tries to preach us about elliot waves. 5 waves up, 3 waves corrective. the pattern though look slike a breakout from a triangle.

15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it. <-- well explained already.

16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again. <-- hala pagagalitan ka nyan nang mga funnymentalist :)

17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action. <-- same climax blow-offs sa open prices if may news yung stock, kaya the 30 min rule inaapply. kala nyo tao lang ang horny, market rin :glee:

18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers. <-- short covering on the first sharp dip as well, sama na yung bottom seekers. sa first sharp rise, short positioning naman and profit takers.

19. Bottoms take longer to form than tops. Greed acts more quickly than fear and causes stocks to drop from their own weight. <-- takes time to "base build". which take longer, to build a house or to set it on fire?

20. Beat the crowd in and out the door. You have to take their money before they take yours, period. <-- beat yourself first. tuldok.

:P

emotions i like :)

[Spyfrat]

Originally posted by Hulk
Sorry pero contrarian ako eh! *okay*

Guys, quick situational question lang. If a regular coin was tossed a hundred times, and it always came up heads, and you were asked to bet on the 101st toss, what would be your bet? Heads or tails?


:frank:

100 out of 100. percentage wise, head.

[ready2go]

thanks for the input everyone...

anyway, can any of you explain the technical tools which are commonly used in analyzing the stock market? what are the principles behind them and how do you use them. thanks in advance.

lastly, in that coin problem... i'd bet on head... since it's a 50:50 chance in reality, theoretically, it will not matter which side i choose, but going with the trend (i.e. heads) is a smarter bet IMO

r2g :coolhat:

[mac_bolan00]

i'm basically a chartist. i look for trends, cycles and seasonalities. first i chart the composite index itself, then the index stocks. support and resistance lines are estimated on a daily, monthly and annula basis.

since people look at the composite index for indications of highs and lows in the market, i simply reverse the equation for estimating it and compute the probable closing prices of the 30 index stocks for a given closing of the composite index. this baby of mine works beautifully whenever the big players are trying to sell the market down. once, when the index fell more than 100 points, i guided our brokers when to bottom pick the index stocks. our house netted 3.6 million from house profits and commissions that day. :)

[Spyfrat]

galing ah :)
tamad ako e hehe sa akin ayala stocks & p6 for the overall trend. then individual stocks na for punting.

gamit ko customized oscillators augmented with wedge theory on 15min up to weekly charts. :)
before nung may meta pa ako, customized na on balance volume.

i dont use money flow & 200MA.

[dekster]

about the coin thing, would it really be wrong to bet on tails? I mean if the coin is truly fair i.e. the event is perfectly random, diba masusunod yung probability niya as time increases? Sooner or later, magsusunod-sunuran na ba yung mga tails?

[Hulk]

I would bet on tails too. Statistics tell us that 50:50 yung probability on the 101st throw and previous outcomes should be ignored. However, looking at it as a whole, the probability of having 100 consecutive outcomes of heads is really small so that you eventually expect the law of averages to catch up, and things to reverse soon. The only problem is knowing when it will reverse.

Of course there is no right or wrong answer here, it's all psychological. People who chose heads probably believe that the trend will continue, while those who bet on tails are contrarians who believe that the trend would eventually reverse itself.

I usually use contrarian strategies sa big and small tables. If I see big or small win 5 or more consecutive times, I bet on the opposite side. :D

Now back to the technical discussions. Sorry wala ako masyadong ma-contribute kasi, I'm what you techies call... funny-mentalists! :lol:


:frank:

[dekster]

yey I'm not the only one who bet tails! heheh :D

[dekster]

I just remembered something about the central limit theorem. It goes something like this: in random events, there can be manifestations of patterns within the first 30 outcomes. After that, the random nature of the event takes over.

Could this apply to stock trend reversals? Ceteris paribus of course... ???

[mac_bolan00]

quite simply, the normal distribution curve. t-tests can only be applied to samples less than 30.

with reard to stock reversals, it's hard to monitor 30 purely random occurrences of reversals. that's what you need for a normal distribution analysis. stocks move deliberately. that's why, the most effective method of analysis is not funnymetal or technakal analysis but MARKET ANALYSIS. put a handle on what people think. if you can predict that consistently, you'll become the richest man in the world in just 2 years.

[dekster]

Just to add to the CLT thing I said previously and partly to answer my question, it was said under the premise that the market was efficient. Therefore it would not apply to our stock market which has often been linked to things like insider trading etc. (i.e. imperfect circulation of information) which is basically a major characteristic of market inefficiency.

Having said that, market analysis would probably be the more accurate tool.

:)

[Spyfrat]

Originally posted by dekster
about the coin thing, would it really be wrong to bet on tails? I mean if the coin is truly fair i.e. the event is perfectly random, diba masusunod yung probability niya as time increases? Sooner or later, magsusunod-sunuran na ba yung mga tails?

duno bout da coins pero kung sa stock market yan it would be catching a falling knife if ull bet against the trend. i dont mind positioning at a high price as long as the trend is up. buy low sell high is a falacy to actual stock market trading. i do bottom fish if i see a gud entry/support level (re: double bottom scenario).

[richyuppie]

ready2go, this one's better:

TIME TESTED CLASSIC TRADING RULES FOR THE MODERN TRADER TO LIVE BY
by Linda Bradford Raschke

This is a list of classic trading rules that was given to me while on the trading floor in 1984. A senior trader collected these rules from classic trading literature throughout the twentieth century. They obviously withstand the age-old test of time.

I'm sure most everybody knows these truisms in their hearts, but this list is nicely edited and makes a good read.

1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don't take the market home.
5. Continually set higher trading goals.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Successful traders have a well-scheduled planned time for studying the markets.
9. Successful traders isolate themselves from the opinions of others.
10. Continually strive for patience, perseverance, determination, and rational action.
11. Limit your losses - use stops!
12. Never cancel a stop loss order after you have placed it!
13. Place the stop at the time you make your trade.
14. Never get into the market because you are anxious because of waiting.
15. Avoid getting in or out of the market too often.
16. Losses make the trader studious - not profits. Take advantage of every loss to improve your knowledge of market action.
17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
18. Always discipline yourself by following a pre-determined set of rules.
19. Remember that a bear market will give back in one month what a bull market has taken three months to build.
20. Don't ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you must follow your program.
22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
23. Split your profits right down the middle and never risk more than 50% of them again in the market.
24. The key to successful trading is know yourself and your stress point.
25. The difference between winners and losers isn't so much native ability as it is discipline exercised in avoiding mistakes.
26. In trading as in fencing there are the quick and the dead.
27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
29. Accept failure as a step towards victory.
30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don't let ego and greed inhibit clear thinking and hard work.
31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.
32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.
33. It's much easier to put on a trade than to take it off.
34. If a market doesn't do what you think it should do, get out.
35. Beware of large positions that can control your emotions. Don't be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
36. Never add to a losing position.
37. Beware of trying to pick tops or bottoms.
38. You must believe in yourself and your judgment if you expect to make a living at this game.
39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be - up or down.
40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss - that is what does the damage to the pocket book and to the soul.
41. Never volunteer advice and never brag of your winnings.
42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.
43. Standing aside is a position.
44. It is better to be more interested in the market's reaction to new information than in the piece of news itself.
45. If you don't know who you are, the markets are an expensive place to find out.
46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word - Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don't torment yourself if a trade continues winning without you. Chances are it won't continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.
48. When the ship starts to sink, don't pray - jump!
49. Lose your opinion - not your money.
50. Assimilate into your very bones a set of trading rules that works for you.

[Spyfrat]

6. Successful traders buy into bad news and sell into good news. <--- emotions i like.
7. Successful traders are not afraid to buy high and sell low. <--- wag lang araw arawin hehe
20. Don't ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point. <--- if u hear ur fundman says, long term tayo, ignore short term volatility. then eto yun.
27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success. <--- time to throw away those books.
32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed. <--- respect the market...always.
36. Never add to a losing position. <--- dollar cost averaging or averaging down sounds familiar.

[richyuppie]

Hey spyfrat! ---> Indeed!:lol:

[Spyfrat]

hehe
dude ano valits sa rfm, huge cross kanina.

[richyuppie]

RFM??? Pinapansin pa ba yun?? hehehe joke.:lol: Anyway, I forgot who the broker was. I'll ask my friend in the floor tomorrow.

Indeed!