Category: Trading Rule

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 pullbacks, 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 3:00pm don’t expect anyone to change the channel.

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

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. Fear acts more quickly than greed 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.

1. Everything flows from this first rule and this is the only rule you really need to know. The Federal Reserve ALWAYS wins. The Fed can make the rules, change the rules or simply choose to ignore the rules and you can’t do this. The game we’re playing is a Zero Sum game and the object of this game is simply for the Fed to take more money away from the cows than the cows take away from the Fed. You can either bet like the Federal Reserve does and be a winner or be a cow. These are your only choices. The Federal Reserve takes trillions away from cows each and every year and if you just take a small piece of that action the Federal Reserve certainly isn’t going to miss it. It is the Fed’s job to make you think the Fed is doing something they clearly aren’t doing and it’s your job to figure out what the Federal Reserve is truly up to and place your bets like they do.

2. Yes, Virginia, you can time the market, in fact if you want to take some of what the Fed is taking that’s the ONLY way to make money. Being diversified ONLY guarantees that you’re going to be a loser. Some things go up, some things go down and some things go sideways. You can profit from the market going up or down and conserve your assets by the market going sideways. These are the only directions the market is going to go, betting up when the market is heading down is why the Fed spends billions of dollars on misleading advertising called editorial to make sure cows are betting the wrong direction. Remember the Fed is making Trillions and spending tens of billions on misleading advertisement is a good investment for them.
Two easy cow timing formulas both have over a 90% chance of working each year.

• 1. Sell in May and go away is the best timing rule a cow should follow, meaning come May you sell your positions and revert to cash. Come October you take your cash and start buying stocks again. Had you followed this one simple rule this year you’d probably be up about 6%-10% right now instead of down about 3%-5%.
• 2. Never buy in December, December is historically a 90% up month. If your need to sell some stock December is a very good month to do so. This requires that you do your tax planning in October or November but it is well worth doing so. Resume buying in January.

3. Don’t sweat getting in a little early or getting out a little early this is better than getting in too late or out too late. What this means is at the beginning of your investment cycle you should be prepared to take some loses and by getting out a little early you should be prepared to be happy with the profits you made and not worry about what you could have made. Set targets and if you exit after you made your target of 40% and the stock goes up 50% who gives a shit. Set a loss target and be prepared to say you got in too early or you misread the direction all together. Get out at a 2 or 3% loss before it turns into 10 or 20%.

4. Limit your investment choices, there is too much out there to choose from and trying to follow them all will only screw you up. Don’t buy penny stocks or funds; the definition I follow is if it’s not selling for at least $15 don’t buy it. This makes things a lot easier, because it removes a lot of the noise and distraction from your investment choices. I’ve recently added funds to this $15 limit and in the past I violated this rule. I used to buy BEARX which is a short fund I used when I felt the market was heading lower that sells for about $6. In the future I’ll be using one of the Rydex funds to short the market.

5. Everything that you read in a newspaper or magazine, everything you listen to on the radio and everything you watch on TV is either an advertisement or a paid for editorial. There is no investment advice to follow in the newspaper; your 50 cent investment for knowledge is not going to get you any. Every outlet of mass media is a set-up to get you to invest the wrong way with your money. Certainly there are short-term opportunities, Buffett says to do something and maybe for a few weeks there can be some gain to be made. There is nothing I have read from Buffett for over the last five years that I’ve been paying attention that it wasn’t abundantly clear six months later that Buffett was unloading at the time whatever it was he wanted you to purchase. There is NO other way to read a paper than with a contrarian point of view. If the paper says buy, you should sell and if the paper says sell, you most certainly should buy. If they’re hyping it you should be getting ready to sell it and if they’re trashing it you should be getting yourself ready to purchase. In a zero sum game this is the ONLY way for the big money to make money, they don’t steal a billion from each other to make a billion they steal $10 from hundred million cows in order to make a billion.

6. Make sure to keep all your eggs in one basket and make sure to keep a very close eye on that basket. The brokers and the financial advisors will preach diversification and diversification just means more fees for the brokers and smaller returns if any for you. Currently I have only three things going on, cash, one stock and a bond fund, I try to always have cash, because who knows when a real bargain is going to present itself. If I’m in the process of a rotation I might have up to eight different things going on. I know my company’s 401K advisor recommends having eight to ten different funds going all the time, I know of no one making much of a return with eight to ten funds.

7. Know what you are going to do in many different types of environments. You should have a plan if you believe the market is heading lower, direction is all you need to know and there is just as much money to be gained in a falling market as there is a rising market, maybe more so. Do you have an inflationary strategy? A deflationary strategy? Rising or falling interest rates you should have a plan for as well. If the market is going sideways you should have a plan. Everything is an opportunity and the trick is recognizing which environment the market is in. Typically if you asked ten cows what they thought was going on eight of them will tell you the same answer, from this you know to do the opposite. Have a financial plan and always work and refine your plan.

8. ALWAYS play with somebody else’s money and never create a lot of money for somebody else. If you’re a cow there is only one way to play with somebody else’s money, your trading account needs to be in your tax deferred savings account. If you have a 401K plan check with the plan administrator to see if there is a brokerage option for your plan. Why make 40% on something only to pay the government back about 40% of that gain in income tax? A 40% gain in a 401K plan costs you nothing and on top of that your gains should be compounding at a much higher rate. Make sure to check and understand fees, if you’re the one doing the work you certainly shouldn’t be paying a full service charge. Having someone taking 2% of your action in fees is insane, especially when the advice they’re peddling is bad to begin with.

9. Never buy stock or bonds over the fifty day moving average, just as you should never short a stock when it is selling below it’s fifty day moving average. Once again the banksters will tell you to cost average your investments, this is a guaranteed method to lower your returns and help your broker earn more fees. Your 401K contributions should be set-up to flow 100% into cash and you purchase the investment options when they are a good deal for you, not a good deal for whose selling them to you. When you realize that the cows money is flowing into these funds on the 1st and 15th of each month and on Fridays as well you know that buying when all the cows are buying will only get you ripped off. This also means you should never buy anything that can’t be charted. If the 401K plan that you’re in doesn’t offer funds that can be charted talk to the plan administrator to find out which chartable fund the one you’re buying is trying to emulate and chart that. The best choice still is to have a trading account in your 401K so that you can purchase anything you want to, not what they are making you purchase. Buy low and sell high is what you’re trying to accomplish and you certainly can�t do that when you’re paying too much for something from the get go.

10. Don’t get caught up in either the doomsayer’s advice or the market only goes up super bullish advice, because this will only lead to heartache. As far as the doomsayer’s go there is nothing going on in the economy that real money can’t fix. History teaches us that when things get bad enough, real money has always been created and added to the economy, over 50 times in our nations history this has occurred with the last time being 1973 and surprisingly the president wasn’t shot for doing this. Sorry but once again the world is not going to end and even our adversaries have no desires to crash the US economy. On the other side of the coin the super bullish crowd is just plain silly. One need only look at a long-term chart of the market to see that this is not going to happen. The Jim Cramer’s of the world will only end up costing you money and the reality of the situation is that if you would have followed Cramer’s advice for the last four years you would have lost money. Once again, up, down and sideways are the only directions the market can go and there’s money to be made from any of these directions.

Entry rules

1. Get in on a 20-bar breakout
2. Before reversing the trend using the 20-bar breakout, there must be a losing trade in the opposite direction.
3. Always enter on a 55 bar breakout
4. (subjective) If the market is sideways, use a 55 bar breakout
5. Once there is a profit in one direction, you can continue to trade in that direction, but to trade in the opposite direction, there must first be a loss.

Stop rules

1. On the day of entry, use a 1/2 (Average True Range) ATR stop. If the trade gets stopped out during the intraday trading, then get back in if the intraday market gives a new signal (makes new lows or highs).
2. Use a 10 day trailing stop
3. The day after the entry, use a 2 ATR protective stop. Sometimes the 10 day trailing stop is too far away. The 10 day trailing stop assures you will not be risking more than 2-ATR on a trade (except when there is a gap open against your trade).
4. When the trade is at a 2.5 ATR profit, move the protective stop to breakeven.
5. Once the 10 day trailing stop or the 2.5 ATR rule moves the stop to breakeven, start using a wider trailing stop of 20 bars.
6. Once you are ahead by 10 ATR, use a 3 bar pivot as a trailing stop and the 20 bar breakout as a trailing stop.

Additional Techniques

1. Enter additional positions at a 55 day breakout, provided the protective stop on the first positions have been moved to breakeven.
2. After a big profit of 10 ATR or more, do not trade in the opposite direction for 45 bars using the 20 bar breakout method. Use the 55 bar breakout instead.
3. Wait for a sideways market to start trading and get in on a 55 bar breakout.

Money Management Rules

1. Do not risk more than 1% of your account per trade.
2. Do not expose your account to more than a 2 ATR risk at any time.
3. Use fractional entry technique
4. If in one trade, wait for that trade to be moved to breakeven before adding any new trades.
5. Trade the strongest commodity within a complex, such as grains and currencies.
6. Trade when the volatility shrinks. When the volatility shrinks by 50%, it allows more contracts to be used for the same dollar risk.

Frequently Asked Questions

Q. How many periods for ATR?
A. The ATR is based on a 10 day average of the ATR

Q. Explain fractional entry technique.
A. Enter 1/2 to 1/3 of all contracts initially. Once the trade moves to breakeven, buy/sell the next 1/2 or 1/3 of the contracts. Most losing trades are losers from the start. This method reduces risk and allows for maximum profits in a long term trade.

1. Never, under any circumstance add to a losing position … ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercanary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positionss costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is “low”. Nor can we know what price is “high”. Always remember that sugar once fell from 1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. “Markets can remain illogical longer than you or I can remain solvent,” according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds … they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect “gaps” in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and agressively when trading well; trade small and modestly when trading poorly. In “good times” even errors are profitable; in “bad times” even the most well researched trades go away. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technican. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then and only then, can we or should we, trade.

11. Respect “outside reversals” after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more “weekly” and “monthly” reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen …. just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven be human beings making human errors and also making super-human insights.

15. Establish initial positions in bull markets and on weakness in bear markets. The first “addition” should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom …. and the ignorance … of all of those who deal in it; and we dare not argue with the market’s wisdom. If we learn nothing more than this we’ve learned much indeed.

19. Do more of that which is working and less of that which is not: if a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; now lows sold.

20. The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy don’t. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach! This is the “winning” new rule submitted by our friend Tom Powell.

22. All rules are meant to be broken: the trick is knowing when … and how infrequently this rule may be invoked!