Kenny Polcari
KennyPolcari.com
It’s all too easy to get caught up in the mania. When stocks are ripping to new highs, trading can feel downright easy. But it’s important to take a step back and hone your trading rules.
Today, we’re going to analyze five trading rules one of the most successful traders who has ever lived: Jesse Livermore. These were some of the rules Livermore used throughout his career to help him book millions in profits.
If you follow them closely, they will lead you to consistent profits. Of course, you don’t have to take my word for it. Ask any successful trader and they’ll tell you they’ve concocted a set of rules that have helped them succeed.
Don’t wait another minute. If you haven’t started developing your own trading rules, here are five strong candidates you can add to your list:
1. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.
This rule sounds a lot more complicated than it is. An easier way to think of this rule is that you should only bet your trading dollars on market action—not what you think is going to happen.
Everyone has opinions. We have biases. We see actions taken by central bankers, politicians, and CEOs and can’t help but guess how it will affect the markets. But these thoughts and feelings are worthless until we get confirmation from market movement that our guesses are correct.
2. As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
Well before most speculators discussed the market in terms of trends, Livermore possessed a deep understanding of the madness of stock market participants. He knew the trend was his friend—and he was more than content to ride it until it stalled out.
These days, it feels like traders’ timeframes are getting shorter and shorter. Instead of letting a trade run its course, speculators are taking profits in a matter of hours—or even minutes. Sure, they might make some spare change here and there. But the real money is made by grabbing onto a big trend and not letting go until the market shakes you off…
3. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
The financial media is guilty of breaking this rule at least three times a week. You’ll see some story about how the major averages are due for a fall because a household name stock is tanking on poor earnings.
In fact, since we’re finally wrapping up earnings season right now, I suspect we’ll see a few of these headlines spring up over the next couple of weeks…
Earlier this year, we were told the rally might be in trouble because Amazon was slaughtering brick and mortar retail stocks left and right.
But in reality, these stocks went their own way. Amazon and the rest of the FANGs pressed higher, while a handful of traditional retailers pressed to new lows. None of this action interrupted the movement of the major averages.
4. Wishful thinking must be banished.
I know this trading rule sounds pessimistic. I promise this sentence isn’t scrawled on the entrance to trading hell. But it is important for you to heed its message…
Wishful thinking is poison when it comes to your open trades. If a trade hits your stop loss, but you are hoping for a strong earnings report next week, you cut your losses. You can’t wish the market higher. If you try, you’ll drive yourself crazy (and to the poor house).
Approach your trades unemotionally. If it’s time to sell, cut the cord and move onto your next play.
5. The leaders of today may not be the leaders two years from now.
Quick! Name all the stocks that were listed on the Dow back in 1960!
You can’t do it. Neither can I.
Investors tend to lose sight of the fact that major averages are actively managed. Every few years, new and better companies are selected to replace the laggards so the averages better represent the best stocks on the market.
As a trader, you shouldn’t get too nostalgic about the stocks that posted unbelievable runs higher over the past decade. Instead, be on the lookout for the next potential market-leader you can add to your portfolio…
General Disclosures
Information and commentary provided by ButcherJoseph Asset Management, LLC (“BJAM”), are opinions and should not be construed as facts. The market commentary is for informational purposes only and should not be deemed as a solicitation to invest or increase investments in BJAM products or the products of BJAM affiliates. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. There can be no guarantee that any of the described objectives can be achieved. BJAM does not undertake to advise you of any change in its opinions or the information contained in this report. Past performance is not a guarantee of future results. Information provided from third parties was obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness.
Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will be profitable. The price of any investment may rise or fall due to changes in the broad markets or changes in a company’s financial condition and may do so unpredictably. BJAM does not make any representation that any strategy will or is likely to achieve returns similar to those shown in any performance results that may be illustrated in this presentation. There is no assurance that a portfolio will achieve its investment objective.
Definitions and Indices
The S&P 500 Index is a stock market index based on the market capitalization of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor’s.
UNLESS OTHERWISE NOTED, INDEX RETURNS REFLECT THE REINVESTMENT OF INCOME DIVIDENDS AND CAPITAL GAINS, IF ANY, BUT DO NOT REFLECT FEES, BROKERAGE COMMISSIONS OR OTHER EXPENSES OF INVESTING. INVESTORS CAN NOT MAKE DIRECT INVESTMENTS INTO ANY INDEX.
BJAM is an investment advisor registered in North Carolina and Arizona. Such registration does not imply a certain level of skill or training. BJAM’s advisory fee and risks are fully detailed in Part 2 of its Form ADV, available upon request.
Editors’ Picks
EUR/USD holds steady above 1.1850 as markets eye Eurozone GDP, US CPI inflation releases
The EUR/USD pair trades on a flat note near 1.1870 during the early Asian session on Friday. The major pair steadies amid mixed signals from the latest release of US economic indicators. Traders await the preliminary reading of the Eurozone Gross Domestic Product for the fourth quarter and US inflation data, which are published later on Friday.
GBP/USD consolidates around 1.3600 vs. USD; looks to US CPI for fresh impetus
The GBP/USD pair remains on the defensive through the Asian session on Friday, though it lacks bearish conviction and holds above the 1.3600 mark as traders await the release of the US consumer inflation figures before placing directional bets.
USD/JPY rebounds above 153.00 ahead of US inflation data
USD/JPY stages a comeback and regains 153.00 in the Asian session, snapping a four-day losing streak amid some repositioning ahead of the US CPI report. However, expectations that Japan's PM Sanae Takaichi could be more fiscally responsible, along with bets that the BoJ will stick to its policy normalization path and the risk-off mood, could support the safe-haven Japanese Yen, capping the pair's upside.
Editors’ Picks
USD/JPY rebounds above 153.00 ahead of US inflation data
USD/JPY stages a comeback and regains 153.00 in the Asian session, snapping a four-day losing streak amid some repositioning ahead of the US CPI report. However, expectations that Japan's PM Sanae Takaichi could be more fiscally responsible, along with bets that the BoJ will stick to its policy normalization path and the risk-off mood, could support the safe-haven Japanese Yen, capping the pair's upside.
Gold: Will US CPI data trigger a range breakout?
Gold retakes $5,000 early Friday amid a turnaround from weekly lows as US CPI data loom. The US Dollar consolidates weekly losses as AI concerns-driven risk-off mood stalls downside. Technically, Gold appears primed for a big range breakout, with risks skewed toward a bullish break.
AUD/USD consolidates below 0.7100 as traders await US CPI report
AUD/USD consolidates the previous day's retracement slide from the vicinity of mid-0.7100s, or a three-year high, holding below 0.7100 as traders move to the sidelines ahead of Friday's release of the US consumer inflation figures. In the meantime, the divergent RBA-Fed outlooks might continue to support spot prices amid subdued US Dollar demand, though the risk-off impulse could act as a headwind for the Aussie.
Top Crypto Gainers: River faces resistance, Humanity Protocol steadies, Polygon rebounds
Altcoins, including River, Humanity Protocol and Polygon, rank as top-performing cryptocurrencies in the last 24 hours, defying the broader market pullback as Bitcoin dropped below $67,000.
A tale of two labour markets: Headline strength masks underlying weakness
Undoubtedly, yesterday’s delayed US January jobs report delivered a strong headline – one that surpassed most estimates. However, optimism quickly faded amid sobering benchmark revisions.
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