1) React rather than predict
- Rich traders know they don't know; new traders don't know that they don't know
- Forecasts, market calls, projections etc... are not what I do
2) Price itself is the best indicator
- The current price of a stock contains the collective wisdom of thousands. If a stock is making new highs, it is probably because people who know more than you are buying
- I only buy stocks that are making new 52 week highs
3) Identify the general market trend first
- I only buy stocks when the general market is rising, hold cash in sideways markets, and sell short when the market is falling
- I use a 100 and 150 day moving average to define the long term trend
- I use a 20 and 50 day moving average to define the short term trend
A: Summer: The S&P 500 is in a bull market. I buy strong stocks making new highs in this environment.
B: Fall: I go into cash or bonds in this environment.
C: Winter: The S&P 500 is in a bear market. This is the season for shorting weak stocks.
D: Spring: I cover my shorts and go into cash.
4) Buy strong stocks in bull markets
- I scan for stocks making new highs after breaking out of consolidations.
5) Short sell weak stocks in bear markets
- Trend followers, embracing volatility, make money in up and down markets.
6) Do not lose more than 1% of your account equity on any given trade.
- If you risk much more than 1% you will go bankrupt eventually. As Larry Hite says, "If you don't bet, you can't win. If you lose all your chips, you can't bet".
- I continue to add stocks, one per week, until a maximum of seven stocks are added.
7) Stops are placed according to stock's volatility
- Each stock I buy is a unit of risk. Volatile stocks have wider stops and smaller positions; less volatile stocks have tighter stops and larger positions: