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
AUD/USD remains under pressure above 0.6400
AUD/USD managed to regain some composure and rebounded markedly from Tuesday’s YTD lows in the sub-0.6400 region ahead of the release of the Australian labour market report on Thursday.
EUR/USD faces decent contention around 1.0600
The knee-jerk in the Greenback reignited some buying interest in the risk complex and pushed EUR/USD to three-day highs near 1.0680, rapidly leaving behind the recent yearly low around 1.0600.
Gold eases despite risk-off mood
Gold trades in a relatively tight range near $2,390 in the second half of the day on Wednesday. In the absence of high-tier data releases, investors keep a close eye on headlines surrounding the Iran-Israel conflict.
Ethereum trades around the $3,000 support following a surge in validator queue
Ethereum (ETH) continued a sideways movement on Wednesday as investors seemed to be waiting for an upward or downward price catalyst. Despite the price stagnancy, the ETH validator queue - possibly fueled by the DeFi restaking boom - rose sharply.
Markets stabilize after Powell rules out rate hike, but the signs don’t look good
Markets are volatile right now; however, a relative calm has descended on the market and US. US stocks are down a touch, but the Vix is lower, US Treasury yields are lower, and the dollar is mostly lower vs. its G10 FX counterparts.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.