Some market rules to look out for
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I wrote this in a forum about two years ago. While searching for inspiration on what to write today, I thought I will just reproduce the whole piece for your reading pleasure. Do note, I'm an advocate of marrying both fundamental and technical aspect of investing together, but what I'm going to highlight here are rules from a technical perspective. So here goes:
The market is quite an unforgiving yet fascinating and challenging place. It rewards handsomely when one is right, and dishes out stern punishments when one is careless and underestimates it. Quite like the principal in school ain't it?
It can be indeed a humbling experience. Don't despair if you make mistakes and make losses. No one can make money all the time. Not even Warren Buffett if that is a consolation.
Taking this into perspective, even institutional fund managers, floor traders and professionals make mistakes too. You are not alone in this challenge. Important thing is to not focus on how much you make, but rather on how much you don't lose. Capital preservation should be your no. 1 priority. After all, you need to make 100% just to break even from a 50% loss.
Don't be too anxious to cash in on your winners too early. So long as the chart is showing a series of higher highs and higher lows, everything is well, fine and good. Sell off your losers as soon as the market proves you wrong.
Sure danger signs are failure to break to a new high and inability to hold above a prior low. In another words, think of getting the hell out when it shows a series of lower highs and lower lows. An appropriate stop loss order will help protect profits.
Buy intelligently. Safest time to buy is always at the end of a selling climax, when pessimism is at the most extreme. Look for formation of long base at bottom. It's a good sign of a possible market turn-around. With a strong base as support, we can then look out for any breakout, and when it comes, make sure the volume is high, which is an indication of strength. If we can limit our buying to such situations, sure you may miss some odd winners, but among such purchases there will be almost some which will show definite significant gains, and far less mistakes.
Be wary of buying tempting stocks that are already well in progress upwards. You may just be buying near the top. Majority are bullish near the top. The later the purchase, the greater the odds against you. Of course, price could still go higher, but maybe its better to let someone have the last few gains. Market will always fluctuates back down again, and a time will come when it is safe to enter. Patience is the key.
Look at news objectively. It's not the news that matter but rather how the stock reacts to it. Generally, buy on bad news, sell on good.
Don't try to rationalize market movements. Accept it. If market indicates nothing, do nothing. No good buy, don't buy. Curb the temptations. Responsibility is to your capital. Not to your broker or the person beside you giving you the next hottest stock 'tip'.
Don't bottom fish. Let others have the luck. You are not a fisherman. So let it stay that way. Don't buy more stocks than you can watch. It's no good having your hands too full. Follow big volume on breakouts and low volume on dips. In bear market, low volume is dangerous, as high volume declines could lie ahead. Low volume is only bullish when the stock is able to hold at a support.
You can always buy a stock back. So don't get married to it. A free falling stock won't give you any love back. Stay faithful only to your wife (or mistress). Lastly, Mr Market is an elusive unpredictable egomaniac. Let him tell you. Don't try to tell him. Heck, I don't even know who he is even if I could!
tag:bear market, bull market, Finance, Investment, market bottom, market top, Mr market, speculating, stock investment, stock market, stop loss, trading Warren Buffett
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