Stock Trading Rules
You want to profit from the stock market.
There are a number of ways you can play this game. It’s a rather peculiar game because you’re allowed to choose your own rules.
Despite this apparent luxury, most people still manage to lose! Fortunately, losing is not compulsory.
Provided you’re smart enough to choose the right rules and play the game with your wits about you, there’s no need to lose.
As we’ve already said,
There are two broad methodologies in the market, each with dozens of sub-methods: long-term investing and short-term trading.
Most of our long term investing rules are taken from the Warren Buffett school of investing. Most of our trading rules are Jesse Livermore’s.
Long Term Investing Rules
Here are rules we believe serve long term investors best.
• Become an expert in business analysis and valuation. Learn to read a balance sheet. Picking up these skills will enable you to invest in high-quality businesses whose shares are selling at a discount to intrinsic value.
• Profit at the expense of Mr Market. Benjamin Graham introduced Mr Market in his book The Intelligent Investor. Mr Market comes along each day and offers you prices for stocks.
He will buy or sell at the quoted price. Although his quotes are often at fair value, Mr Market is a manic depressive; on some occasions, he is so depressed that he prices assets too cheaply. Other days he’s so optimistic that his quotes are much higher than fair value.
Your job is to buy from Mr Market when he’s depressed and sell to him when he’s optimistic.
• Only buy when you get a healthy margin of safety. When Warren Buffett was a major buyer in the Washington Post in the early 1970s, he bought shares trading at one-fifth, yes that’s one-fifth, of their intrinsic value.
• Don’t aim to be the owner of dozens of different stocks. Research stocks thoroughly and prepare a target list of the very best quality businesses whose shares are available on the stock market.
Buy shares when you can get a margin of safety on the purchase price.
• Buy businesses whose operations are surrounded by a wide, and preferably widening moat.
Warren Buffett likes to buy companies with what he calls a wide moat – a strong competitive advantage that, regardless of how much money a competitor might throw at the business, will persist. Coca Cola is such a company.
A new Cola manufacturer could put billions into displacing Coca Cola with only a very small chance of succeeding.
• Don’t be the game’s Patsy. Warren Buffett is careful to remind would-be investors of the Poker saying:
“If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
You can avoid being a Patsy by acquiring skills similar to Warren Buffett’s or through investing in index funds.
The choice comes down to how good you think you are.
Do you have what it takes to join the elite? Some of you do, but which of you do?
Stock Trading Rules
• Buy rising stocks and sell falling stocks.
• Do not trade every day of every year.
• Trade only when the market is clearly bullish or bearish.
• Trade in the direction of the general market. If it’s rising you should be long, if it’s falling you should be short.
• Co-ordinate your trading activity with pivot points.
• Only enter a trade after the action of the market confirms your opinion and then enter promptly.
• Continue with trades that show you a profit, end trades that show a loss.
• End trades when it is clear that the trend you are profiting from is over.
• In any sector, trade the leading stock – the one showing the strongest trend.
• Never average losses by, for example, buying more of a stock that has fallen.
• Never meet a margin call – get out of the trade.
• Go long when stocks reach a new high. Sell short when they reach a new low.
Other Useful Trading Guidance
• Don’t become an involuntary investor by holding onto stocks whose price has fallen.
• Stock is never too high to buy and never too low to short.
• Markets are never wrong – opinions often are.
• The highest profits are made in trades that show a profit right from the start.
• No trading rules will deliver a profit of 100 per cent of the time.
Whether You Choose to Play the Trading or Investing Game
In any new endeavour, you’re sure to make mistakes.
Don’t start trading or investing with money you can’t afford to lose and make sure your mistakes are little ones.
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