Buy low, sell high. And?
July 24, 2008 7:11 PM   Subscribe

What are your trading rules?

I'm collecting mob wisdom on trading stocks, on short, intermediate and long term bases. This list of rules is the kind of thing I'm looking to add to. What are your own trading rules? Which rules would you have tattoed to your forehead in mirror writing so you saw it in the mirror every morning before the market opened?
posted by unSane to Work & Money (24 answers total) 31 users marked this as a favorite
Right now? I have one rule: stay in cash. This market is well and truly out of its mind right now. Have fun getting whipsawed either way.
posted by mark242 at 7:45 PM on July 24, 2008

Response by poster: Oh, I dunno. SKF has made me a fair bit of money on the pivot days. But overall I agree. I'm not holding anything overnight at the moment.
posted by unSane at 7:50 PM on July 24, 2008

From the wisdom of Warren Buffett: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees." Chairman's Letter - 1996
posted by belau at 7:51 PM on July 24, 2008

I watch the business news rather than the market and once I see news I like, I look into buying the stock following the news. The market strikes me as being pretty random/weird on some stocks.

I generally like a p/e ratio of around 15 or below. I also factor the cost of the trade into the purchase price of the stock which I feel gives me a more realistic look at what my portfolio looks like. Dividends are always nice, I have to be able to understand the balance sheet with no problem, and I generally prefer businesses with real properties as opposed to intellectual property. I also watch for companies with low levels of debt.

I never day trade, and I generally dislike gambling (this is probably a personal thing) and won't buy stocks that involve it. My portfolio is pretty badly out of balance, due to my participation in my employers share purchase plan so I avoid the same sector as my employer.

All pretty elementary stuff, but I am new/small investor.
posted by Deep Dish at 7:58 PM on July 24, 2008 [1 favorite]

A Consumerist link to a great CNN Money article, in which some heavyweights (mostly) offer up advice they've taken from other heavyweights:
posted by prodevel at 8:05 PM on July 24, 2008

As "mob wisdom" interspersed with trader gibberish your list is unimprovable.

It might be worth reading Charles Ellis' "Investment Policy"--the source of Buffet's index fund advice.
posted by Phred182 at 8:08 PM on July 24, 2008

Here's a rule I learned last week.

I bought BAC at 20, where it rattled around for an hour. Tired of watching it (half of my portfolio was long BAC at that moment so I was a bit nervous), I sold it at market for 19.99. It then proceeded to shoot up to 25 that day, and now it is still over 30 last I checked.

Lesson: when exiting a position don't simply sell at market, fire off a trailing stop sell order instead.

That way you'll pick up any unexpected gains with minimal risk of further loss.
posted by yort at 8:46 PM on July 24, 2008 [2 favorites]

Get out when you are not right, not when you are wrong.

If I am in a position, I ask myself, "Self, if you had no position would you get onto this one?" If the answer is no, I get out.

Always have a preplanned exit door. Know what you are going to do in every situation and have the discipline to do what you planned.

There are two types of discipline, the discipline to do what you know is correct and the discipline to not do what you know is wrong. Without both, you will lose your money.

Don't let your ego interfere with your trade.

Scale out. You won't go broke taking profits.

posted by JohnnyGunn at 8:46 PM on July 24, 2008 [5 favorites]

I haven't been very active in the past few years, but here are a few rules that I follow

- Never risk more than 2% of trading capital on a single trade.
- Know your exit criteria before you enter.
- Never second-guess your trading system. Either follow all the signals or get a new system.
- Keep records.
posted by jclovebrew at 8:48 PM on July 24, 2008

will find that the best way to own common stocks is through an index fund

The Chairman recently repudiated that wisdom with the observation that 8% pa compounding gains over the rest of the century will send the indices up to the stratosphere.

I made 33% gains over the past 30 days on my portfolio, swing trading on my theses of what the market was thinking and doing.

I've decided to stop this behavior since the daytrading is interfering with my near term professional goals and it's all probably beginner's luck, but the buy-and-hold investment approach is chum for the sharks on WS.
posted by yort at 8:53 PM on July 24, 2008

Read the book Reminiscences of a Stock Operator, from 1923. It's the true tale of a famous 1890's-1920's stock trader named Jesse Livermore, who is called Larry Livingston in the book, as told to the book's author. It's amazing how little has changed from his era. His truisms about the market, as illustrated through anecdotes he relates about his (and his friends' and competitors') trading exploits, are really interesting.
posted by Asparagirl at 8:57 PM on July 24, 2008 [1 favorite]

never buy at 9:30! (If you are a day trader)

learn how to read the charts.

If you are just a long term investor, an index fund works well, but that is if you have a 10 year horizon and can keep feeding the fund every month.

I like day trading. Scale in, always. think of eah day as like 40 ten minute windows where anything goes. I only trade stocks that move around a lot. a $100. net gain is great, take the money off the table. Do not try to hit a home run on a given trade. Just a single or a double will do.

If you are savvy, scale in even if the share price is falling. Avoid sectors that are risky, like financials.

Research, and then more and more.

Have several computers/monitors, a FAST connection, and decent trading software. You need to look at the charts all day long.

If you have a job, forget it, just feed an index fund, OR, just toss it in a money market!
posted by cvoixjames at 9:38 PM on July 24, 2008

Which rules would you have tattoed to your forehead in mirror writing so you saw it in the mirror every morning before the market opened?

Only one. "Don't trade."

This one rule will make you wealthier than all the others combined.
posted by JackFlash at 10:54 PM on July 24, 2008 [1 favorite]

Like your own list says, buy low sell high is poor advice. Buy high and sell low, instead.

Recognize the importance of the improbable, i.e. 'fat tails' distribution.

You can go broke taking profits if occasional outsized returns are needed to make up for the many small losses. Let your winners run, cut your losses.

After system development is done, don't worry about what would have happened if you had done otherwise. Take what the market, your system, gives you.

Volatility tends to accompany profits. If they didn't, it would be easy.

Jesse Livermore's best advice: "The big money is made by sitting." (or words to that effect)


And in this economy, I like getting out of cash (greenbacks) as fast as possible.

Those who favor the buy and hold approach, may find this website interesting. A nice fat +1.64%. And let's not forget the government's economic statistics are getting a fair bit of criticism. This doesn't exactly change everything, it probably doesn't change anything. It's not like everyone can go out and do better individually. Bogle's argument that the majority can't beat the average is irrefutable. But the "Buy an index fund!" gang doesn't present as strong of a case as they claim.
posted by BigSky at 11:00 PM on July 24, 2008

half of my portfolio was long BAC at that moment so I was a bit nervous

You learned the wrong lesson, yort.

Don't buy low and sell high. Buy at support, sell at resistance. Sell when support is lost; buy when resistance is broken. If following one of these rules makes you get out of trade just a few minutes after getting into a trade by following the other rule, so be it. Where is the support and resistance? Now you get to do some work and earn your pay.
posted by fatllama at 12:50 AM on July 25, 2008 [1 favorite]

Personal money? I'm very, very risk averse but make money pretty consistently.

I've posted many times that I'm a cash flow investor, and have talked through these rules with many folks via email so here goes:
  1. Never purchase any share unless it pays you a dividend
  2. Never purchase a dividend paying share unless it yields at least 10% (my personal hurdle rate)
  3. Never purchase a dividend paying share yielding more than 10% unless it trades at a discount to book value
  4. Never purchase a dividend paying share yielding more than 10% trading at a discount to book value unless it pays monthly distributions
This type of trading is of note because it renders one share price indifferent. Picking stocks is a chumps game. I can't do it at any single point in time, and neither can the greater majority of people. And all the time?. Nobody can do it all the time, so I don't even try.

Those are the rules that I apply to securities that have passed my screens. As for selecting securities, I have to leave that up to you but unless you're willing to read prospectus' you really have no business purchasing individual shares.

Folks that can't / won't / don't acquire or read a prospectus? Can't be bothered? Yeh, welcome to the market, I take money from those kinds of traders. I make money pretty consistently, and for years my biggest problem was reinvesting the cash flow at the end of the month.

I'm not going to post my rules that decide when and how I sell but that side of my trades in indeed done programatically (relative dividend yield).

Another rule that I follow - I take large positions. I like thinly traded securities that have the attention of few traders and I keep buying until my position approaches five to ten percent of daily trading volume. Then I find another security to purchase, or move funds into another hold I've already got. This strategy can cause problems if volume dries up - I'm currently holding two NYSE listed securities where I've got positions in each of over ten percent of daily trading volume (11% and 16% and please note that this is volume not float we're talking about ... ). The takeaway here is you can make significant money in thinly traded stocks. Stuff that is doing hundreds of thousands of shares a day? Too many eyeballs on the shares, you ain't gonna see nothing that everyone else hasn't already picked over. This is especially true of retail money.

But I'm well aware of concentration risk and it's corollary so I'm very comfortable with this type of exposure and you can't beat the monthly cash flow. This approach isn't for everyone, but I'm currently earning about 13.02% annual current yield (paid monthly) cash flow, and can easily support myself and Mrs Mutant off that revenue stream (in fact I'm doing so at the moment while I finish my MBA).

That is one part of my portfolio. I also engage in relative value strategies, and I'm finding lots of opps in this market. I won't explain it here but will note that the cash flow from the portfolio has enabled me to experiment and learn those trading techniques, without risking my own money (I use the money from other traders noted above).

I'm also long (since 2004) gold & siliver (and one junior miner) but those are buy and hold.

Regardless of the system you have it's critical that you've got one. We know that emotion is the root cause of all mistakes retail traders make.
posted by Mutant at 3:06 AM on July 25, 2008 [16 favorites]

I previously inventoried mistakes retail money makes in the market, as cataglogued by academics studying the behaviour of smaller investors. Might help as you try to develop a system that works for you.

While some of them (selling too early) are almost obvious, its interesting that far too many folks don't have a quantitative system in place (trade on "feeling") and when presented with a share that is losing money actually will plow more cash into the position.
posted by Mutant at 3:18 AM on July 25, 2008 [1 favorite]

Bone up on Jim Cramer's thoughts. (Not necessarily his picks, just his methods.) I learned a lot from his short-lived radio show.

It boils down to doing a lot of homework on the companies you are buying. Buy when the stock is a bargain, sell when it's in demand.

Better to buy a (good) stock on its way down, just before it bottoms, and sell just before it tops, than trying to time the market. Its less stressful and easier. You wouldn't know when a stock is going to start rising, and once it does you are paying a premium. I think his book even details how this approach makes more money.

But the best advice is, don't trade stocks unless you have the time to devote to doing enough research.
posted by gjc at 8:40 AM on July 25, 2008 [1 favorite]

I buy index funds with the majority of my money.

I also keep a small account for active trading to remind myself why I keep the rest in index funds.
posted by bitterpants at 10:34 AM on July 25, 2008 [1 favorite]

The single most important thing when you're trading (or investing, but since you trade far less often it won't kill you as much) is not to let your emotions make the decisions for you. Don't sell in a panic, don't buy in a frenzy.

Emotion loses you money.
posted by Justinian at 1:33 PM on July 25, 2008

"single most important thing when you're trading (or investing, "

Justinian, trading is NOT investing.

investing is long term, where you contribute into an IRA, Mutual fund, or just an index, or, heck, just a money market account. you contribute the amount you can each week or month.

"Pay yourself first!" is the motto for savings/investing. It's money in for the long haul.

TRADING is totally different. It's flipping equities to turn a quick profit. If you are good, and that is subjective, any profits are short term capital gains, which you pay tax on according to your tax bracket.

everyone knows that you don't trade unless you have 25k to put on the table. You can buy on margin, and, if you're good, can make like 100 bucks a day, on average.

Takes money to make money, so if you have only 5k or 10k, forget it. trading that is. Pay off your debts first before even considering stocks.
posted by cvoixjames at 5:25 PM on July 25, 2008

I like this guy's advice on day trading. Don't risk more than 1-2% of your trading capital on any given trade - put a stop loss if you don't have the discipline. Set modest goals - again, 1-2% if you're putting a lot of money into a single trade, maybe more if you're playing with less - put a limit order if you don't have the discipline to stop at a modest gain. For day trading, you want volatility and liquidity so you can gain or lose and get out before the market closes. Don't hold anything but a small percentage of your capital in a stock (or whatever) overnight unless you're going to watch the after-hours market like a hawk, because what goes on after-hours can be nuts. Most important and hardest to follow - don't get greedy. Excessive greed will kill you because it keeps you from accepting the modest gains that will profit you in the long term. If you don't have discipline and an iron will, don't day trade.
posted by walla at 7:17 AM on July 26, 2008

I disagree about not trading with small amounts like 5k or 10k, unless that's a significant chunk of your savings. You can still have some fun and make (or lose) a little money with amounts like that. Hell, you can even have some fun with $100 or $200.
posted by walla at 7:20 AM on July 26, 2008

SEC rule is 25k in the account to day trade, if you are flagged a "pattern day trader" which will happen once you exceed 3 day trades within a 5 (business) day period.

means you can have some fun, but you are limited (with 5k or 10k), because 3 day trades burn up fast, and then you are stuck with holding positions overnight. Surprise! Next morning your stock fell 5 points overnight! Then you are stuck. Do I wait it out? Or bail?

As a day trader, I can flip stocks all day long, then close my positions before 4pm.

The thing is it takes a lot of time and energy, so it better be a worthy (profitable) endeavor. If you want to have "fun" with 5K, go to Vegas, go on a long vacation...don't just get stuck in small time trading, the commissions alone will eat you alive! Just my opinion.
posted by cvoixjames at 10:10 AM on July 26, 2008

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