Stocks Section

A Selection of Tried & Tested Traded Rules & Ideas

June 2005

The following are some random rules and ideas for trading the markets. You might not agree with all of them but many of them are very powerful and extremely useful.

• The market is a leading indicator and the fundamentals will always lag the price action
  
  
• If you work very hard just to get to the weekend and then spend the weekend getting ready for work, you’re missing the bigger picture
  
  
• Big support (resistance) typically isn’t broken from oversold (overbought) conditions (* below)
  
  
• Negative energy is a drag
  
  
• Endeavour to have no preconceived opinions as far as the expected future performance of the financial markets is concerned. Your goal is not to be unswervingly bullish or bearish, but to position yourself in sync with the major trend
  
  
• Even a forecast built on the most solid of foundations will sometimes be shattered by an unforeseen event or a market that simply does the unexpected. In other words, forecasting the markets can be a humbling experience so it is important to be humble to begin with
  
  
• We believe that great investment opportunities will exist for many years to come in the stocks of companies that are able to improve the speed and efficiency of the Internet. We are also interested in companies that have developed profitable (or potentially profitable) Internet-based applications
  
  
• In the twilight zone, the best thing to do is the hardest thing to do – wait for real evidence and exhibit patience. In this zone, try to take advantage of market opportunities as they present themselves vs. trying to force opportunities to happen. At times like this, I believe it is more important to listen to the market instead of telling it what to do – because frankly, it doesn’t care what my opinion is!
  
  
• What’s the path of maximum frustration? That, Mon Frere, is where the market is going
  
  
• As you know, tapes that are heavy all day typically end that way but we must always put an asterisk on that thought when the tape is oversold and sitting on support
  
  
• The worst thing you can do when trading is outthink yourself
  
  
• When the investment community is fascinated by a major investment theme, outstanding opportunities arise outside the sphere of the major investment that theme.
  
  This is so, because when everybody’s attention is focused on one sector of the market, an under-valuation must take place in the sectors of the market to which nobody is paying any attention. In other words, the greater the mania in one sector of the market or in one stock market in the world, the more likely it is that there are numerous neglected asset classes elsewhere that offer a huge appreciation potential. This is one of the cardinal rules of investing, and will always work for the patient long-term investor. My second observation with respect to major investment themes relates to the following. Whereas we have seen that a major investment theme which is accepted by the majority of investors leads inevitably to an over-valuation of the theme sector and to an under-valuation elsewhere in the investment universe, the timing of the leakage from the popular and expensive sector into the neglected sector of the investment universe is difficult, if not impossible, to predict. A popular sector, such as Japan in the late 1980s or the US market in the late 1990s, can captivate the imagination of the investment community for far longer than one might think, even after the prices of such a theme may have peaked out, as we are now seeing with the renewed speculation in high tech stocks

• Light and declining volume is bearish. Heavy volume is bullish until it reaches climactic levels. Volume always declines on bear market declines, and increases as intermediate and final bottoms are approached. It's common sense
  

• DISCIPLINE TRUMPS CONVICTION
  • No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. It will differentiate your performance over the course of time
• OPPORTUNITIES ARE MADE UP EASIER THAN LOSSES

  It’s not necessary to play every move, it’s only necessary to have a high winning percentage on the trades you choose to make

• ZIG WHEN OTHERS ZAG

  Sell hope and buy despair. In other words take the other side of emotional disconnects in the market

• MAXIMIZE YOUR REWARD RELATIVE TO YOUR RISK

  If you’re patient and pick your spots, edges will emerge that provide a more advantageous risk/reward profile

• PERCEPTION IS REALITY IN THE MARKETPLACE

  Identifying the prevalent psychology is a necessary process when trading. It’s not what is, it’s what’s perceived to be that matters