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Trading
Rules To Live By
May 1, 2002
To put it mildly, this market is for the birds. I’m not sure if I’m starting
to show my age or what, but I’m just glad that vacation season is just around
the corner. Everyone needs a break - even me. This month’s outrage surrounds
the media and the fact that they have become accustomed to pointing fingers at
us and blaming the investment industry for the fact that folks have lost money
during this bear market. So, it got me to thinking.
In 1982, when I first began
my career, I had a mentor who was a pretty savvy commodity trader. He taught me
a lot about the investment business, but the most important thing that he
imparted on me was that you needed to have a game plan when approaching the
market. Any market! In fact, the game plan that you devise is in fact the most
important facet because this is where you determine exactly how much risk you
are going to take. This principle can be applied to each and every trade or to
an overall investment strategy.
What do I mean by this?
The nuts and bolts of it is
this – when you make an investment, you are putting your hard earned money to
work in an entity that you would like to in time make money in. The timeframe is
irrelevant as well as is the investment. What is important is the plan. You need
to have an upside objective (profit potential) that you would like to achieve
AND you need a downside reevaluation or get out point. Please keep this in mind
at all times – investing is a business and a very serious one at that.
As we wind our way through the summer, I’m going to share some if not all of
my own trading rules with you. These are rules (for lack of a better word) that
I have adopted over the last 20 years and are the ones that I try to follow in
my own personal trading. Please keep in mind that these are mine and they work
for me. I’m in the front row in front of the screen every day. These rules
aren’t hard and fast – but I do keep them close at hand in order to keep
things in perspective.
The basics.
- Keep
a journal or a trading diary. Ask yourself why did we make that trade or
take on that position? What market conditions were present that said pull
the trigger? Did we make or lose money on it? Remember, not all trades are
profitable – if it’s a stinker, what did we learn from it?
- True
bear markets result from the Federal Reserve raising interest rates or the
outbreak of war.
- Historical
performance of the S&P 500 is in the ballpark of 10-12% annually. In
order for that to be the AVERAGE, you must revert to the mean. In other
words, periods of excessive growth will be followed by periods of lesser
growth. My daughter would best describe it this way – in order for
something to be an average – you need to spend as much time on the top of
the line as you do under it. We’ve been graced by several years of high
double-digit growth – expecting it to continue is not an exercise in good
judgment.
- Stock
prices lead the economy by roughly 12-18 months. The best time to invest is
during an economic slowdown and the riskiest is after several years of
expansion.
- Stocks
trading at 52-week highs tend to go higher. Stocks trading at 52-week lows
tend to go lower.
- Beware
the 4th Quarter!
Next time, we’ll continue this in more detail.
If you have any questions, please feel free to contact us at anytime.
R. A. Christy
Please note: The S&P 500 Composite Index is an
unmanaged index that is generally considered representative of the U.S. Stock
market. The performance of an unmanaged index is not indicative of the
performance of any particular investment. Individuals cannot invest directly in
any index. Past performance is never a guarantee of future results.
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