Every trader should have a set of guidelines that directs how they interact with capital markets. I have mine.
The Bill Cara Rules:
- Only trade the stocks of successful companies, which is like saying ‘choose your friends wisely’
- Base all decisions on actual company and market data while ignoring market stories or beliefs of others
- Be mindful of Price Drivers and Peer Group action and seek to discover the reason why prices rise and fall
- Buy/Sell only on breakouts/breakdowns of Prices and Indicators, based on the weight of the evidence
- Always hold positions that are on the right side of the Price Trend
- Do not set Price Targets or anticipate gains, which is an exercise in greed and the path to the dark side
- Be mindful of areas of Price Support and Resistance for all your holdings as that is the market speaking
- Be mindful of Company Reporting Dates because that is the time investors and traders make decisions
- Have more winners than losers. You will have losers, but you must never succumb to fear, the dark side
- Have smaller average % losses than average % gains, which is your number one risk management rule
This is a short Lesson, but perhaps the most important one of the 120 in this series.
Every trader has different rules. Other rules you may have read about are complete opposites to my thinking. Here are a few examples:
- I do not believe ETFs are risk management tools per se for the majority of people who use them. I believe most ETFs are traps, as they contain bad companies and bad stocks that are passively managed. The best traders research companies to find the best ones in the best industries for economic and business cycles, and they buy the stocks when the price is out of favor, pushed there largely by interventionists, and skilled manipulators and their surrogate media and communications specialists.
- I do not believe there is ever a need to buy bonds in a portfolio unless that portfolio is for income and bonds happen to be more attractive at the time than stock dividends.
- I do believe that averaging down is an essential part of entry strategy. We call it ‘painting the bottom’ as nobody can pin-point a precise cycle bottom in price. Having studied the industry drivers and company fundamentals, and the market prices of the stock and its benchmark prices, we are able to make a decision to accumulate stock. We buy into weakness. During distribution, we sell into strength.
- I do not believe in giving a broker a stop-sell order because that information is disseminated to others and crucial to their decisions, which is one of the reasons why sophisticated financial services industry insiders make money and the clients don’t. As a knowledgeable trader, you have your own accumulation or distribution zone alerts and trade execution signals to guide your trading. The only reason for selling out a position earlier than anticipated is due to a relevant and material change in market drivers or corporate fundamentals that had served as the basis for your decision to accumulate a position in a particular stock.
- Every trader that announces their favorite stocks via mainstream media is the enemy. They are ‘talking their book’ in hopes you buy at higher prices than they paid for those stocks, which you would do at your risk.
In summary, I believe that not more than 10% of investors know how to trade, and maybe 15% follow them if they are able to monitor the trading by insider trading reports and other public disclosures or if they are working in the financial services industry with access to client trades.