Long time lurker, part-time swing trader here I have made 5 simple rules (for myself) to always keep in mind. What do YOU think of them? Do you think some are just plain wrong? Am I missing something? 1. Only trade within long-term valuable companies. If you wouldn’t hold a stock for 1+ years, don’t buy it. 2. Sleep in. Avoid the early market, it is far too volatile to trade with any certainty 3. Don’t hope. Follow the established direction, never guess at a trend reversal. 4. Let it go. You are already late if the stock has gained or lost a significant amount. 5. Be informed. Analyze the technicals, read the media coverage - both are unfortunately intertwined.
Thingon1, I can't even begin to relate to your rules, probably because our trading is entirely different. These may work perfectly with your style of trading, however. For example, your number 1 is to only trade long-term valuable companies. My strategy totally rejects this in that I only trade ETF's and indexes (primarily SPY and SPX). I could live with you number 2. I normally only enter one opening trade per day and I like to do it after I see which direction the market is heading. Your rule number 3 looks good. I have specific profit/loss targets on each trade and I don't deviate from them. Number 4 does not apply to me in that I enter a trade daily, regardless of any technical setup. Your rule number 5 is like hunting unicorns. I don't analyze the technicals and I don't read medica coverage. It simply does not apply to my style of trading. As you will probably see, you will establish rules and then change them along the way. Just stay small and learn from every trade. Best wishes!
The only judge is your P&L. How do these rules affect your P&L ? #1 is entirely subjective. It's an heuristic that has no proven value. In practice some Scalpers are wealthier than value investors. I don't think it helps to find good investment. IMHO. However it can add consistency to your trading. But I'd prefer to buy what I breath daily. You don't want to marry with them ! #2 is subjective too. I trade only the open. That's my bread & butter. If it doesn't suit you. Ok. Meaning that it's not good business for you to trade it. Some business needs volatility to grow. Think of Amunition, steel, aircraft brands & Co. #3 is good. Don't fight the trend. But don't buy the top or sell the bottom. #4 is relative too. What does late means ? Maybe you think it's late. But 2 years after the stock is still trending strong in the same direction. You don't know if it's too late. Like waiting or not for the bus to come anymore. #5 Fundamental & technical analysis. Well ... this is data. Information has to be created. Information renders a probability distribution non uniform. You can be informed, drawing inference from data, but plain wrong. That's why you got to tinker. Conjecture, If - Then & test these rules. See what the bottom line (P&L) think about your conjectures. Formulate, Test, Trash or Improve precise inference (Rules) ! Taleb once said : I've never met a rich journalist ! Even if they got the news before it's public. Are these derivatives from your experience ? Or you've read them somewhere ? Build up from experience ! Piece by piece. If I had to invest long term, I'd invest in new technology (Solar, Electric cars .....) Buy a little of each of the competitors, some will go bankrupt, Then stay & scale up if the winners... That's a rough & crude strategy.
The thing is, all 5 of your rules are subjective. You can easily arrive at the opposite trading decisions, depending on how you interpret each one of the rules. To make the rules more objective, they must be stated in a much more specific manner, which would allow for an automated backtest. For example, rule "Avoid the early market, it is far too volatile to trade with any certainty" can be stated as "Do not take any positions before 10am EDT. Close all open positions by 3:45pm EDT. Do not hold any positions overnight." Similarly, rule "You are already late if the stock has gained or lost a significant amount" can be stated as "Do not go long if the stock has gained more than 3% since the last daily close. Do not go short if the stock lost more than 3% since the last daily close." Most importantly, it does not matter what you or any of us think whether the rules make sense. The only thing that matters is whether the rules stood the test of time (and whether they will continue to perform favorably in the future). Finally, while you may get a lot of praise for your rule #3 ("follow the established direction, never guess at a trend reversal"), I consider it too outdated. There are successful trend following strategies, and there are successful mean reversion strategies. Verify everything by yourself. Consider this: 95% of the amateur traders are trend followers. 95% of the amateur traders fail. I hope this rings a bell. P.S. There is a big gap in your set of rules: there is nothing in there about position sizing. This is a very important aspect of the game.
Yep, try to backtest them. It's good exercise to formulate concise rules. Plus it gives you an idea of what they could be worth. It's easy to backtest for long term trading & Data is free.
Isn't all stocks/ETFs long term? Yes, I know traders swing or day trade them. How about your definition of what is trend? As this will help out great deal with #3, #4 and #5. If you going with long term, are you using weekly bar charts? You don't mention stocks that have free money for owning them called dividends, and you only want to sell short companies that don't pay dividends or you end up paying them. I don't understand "Sleep in" at all if you plan on keeping it a year plus. #3 is cause you don't know what trend is or you didn't have a protective stop? If you make a mistake, reversing doesn't mean too often you going to get funds back. But being able to read charting well, you can have education where reversal might happen and tighten protective stop from breakeven, trailing stops often removes you from huge profits for sake of small profits. #4, how high is high? I much rather be a buyer after sizeable loss if price not broken Triple bottom on weekly chart. #5 Am not fundamental in stock buying, too easy to change numbers, I rather go by charting. Saying you go in late really depends on reading the chart. If you had gotten into QCOM at 3 bucks and it went to $14.97, would have you gotten out or bought more on retracement?
Nothing should be etched in stone; because for every point...there is an equal opposite counterpoint that can be just as true. Every style and trading instrument in completely different. You mention you're a swing trader...so that in of itself has its own set or variables to consider. Talk is cheap -- just master your own game
rules in trading and investing require specificity specific rules applied easier (than non specific), and it is easy to determine their limitations another point to keep in mind: trading rules in many aspects similar to the rules of grammar - specific, but still not very easy to apply, because of many variations of the situations so any trader can go wrong in two ways: 1. if he applied his own rules incorrectly - that is an error 2. if trader fail to apply his own rules - that is a mistake there is another, most common problem - your rules do not work, or stopped working (probably never worked).