I think Jesse is saying here that if you have a Stock in an Uptrend which has just made a New High and then pulls back in a sort of typical (normal, usual) fashion, then when it starts moving up again and takes out the previous High, then he buys it. This reminds me hugely of the methods that @Stealthsurf (www.tradingbases.co.uk) uses when buying All Time High (ATH) Breakouts. I tend to perhaps take on a bit more Risk and if I am faced with a Stock in a clear Uptrend Channel, which crucially also stacks up on Fundamentals and Valuation, then I am happy to buy it as it comes up off the Bottom Line of the Uptrend - provided I have decent Candlesticks and RSI, MACD etc., to support the move. I am not averse to buying just after a Breakout from a high - but I probably do the ‘off the bottom line’ method more often.
12. Never average losses.
I do this all the time. Partly because I tend to ‘Scale in’ to a Position and also because I am more driven by the Fundamentals and the Appeal of the Company than by the Technicals - the latter are there to assist my timing but I don’t obsess about it. I am happy to hold Stocks for very Long Time Periods (years) even if they are going against me - provided the Company is still fundamentally solid. In practice I find that these kind of Stocks can be huge Winners - they are out of Favour for a long period often but once they wake up and start to Recover, then the gains can be huge - and if I Average Down early on I can make big gains. With the kind of Stocks I buy, I usually pick up a decent Dividend while I am waiting for them to recover. Have a look at my previous Blog on Averaging Down here:
13. The human side of every person is the greatest enemy of the average investor or speculator.
Obviously this is about our own Psychology - although it is also worth considering how other Investors/Traders are feeling at Key Turning Points in Markets - where Euphoria (at Highs) and Terror (at Lows) can drive people’s actions. A key element here is Discipline - it is vital whatever your Approach/Timeframe to have a set of Rules - and even more vital to actually follow them in a disciplined manner. I suspect Jesse is really talking about Discipline here.
For anyone who has read ‘Way of the Turtle’ by Curtis M. Faith (guess which Bookshop has a copy of this?), or similar books about the Turtle Traders, you will recognise that the Single Factor which made the difference between all the aspiring Traders was their ability to stick rigidly to the Rules of the Turtle System - Discipline.
I am very interested in Market Psychology and I know this is something Robbie (Naked Trader) Burns is very strong on - I am currently reading Daniel Kahneman’s ‘Thinking, Fast and Slow’ - which is to a large extent a general Psychology Book but has considerable application to how I think with regards to my Investing and to the tricks that my mind plays on me all the time (you can get a copy of this in ‘Wheelie’s Bookshop’ - it really is an excellent read, although it is quite challenging and you have to think).
Often the Psychology of the market and the Sentiment is hard to gauge - I find that the use of simple TA techniques like Candlesticks, RSI, Bollinger Bands, Overbought/Oversold Indicator, etc., can give a visual representation of this Sentiment. For instance, on Black China Monday 24th August 2015 we had a Hammer Candle formed by the Close of Play on the day - this showed that Traders were terrified early on in the day and then later the mood changed and Traders were willing to come in and Buy the Market - the Hammer showed this a treat. Often the Volume of the extent of a move Up or Down can give an insight into Market Mood - lately I have seen several ‘Blow-off Tops’ where there is a Buying Frenzy at the end of a move up for several days and the Buyers become exhausted in a final burst of excited and greedy euphoria.
I am of the view that a reasonable understanding of basis Market Psychology, and our own Psychological shortcomings, can give Investors another ‘Edge’ in the Markets - it is worth picking up a book or 2 and getting a feel for this aspect of our ‘Job’.
14. Wishful thinking must be banished.
I couldn’t agree more - I see a lot of this on Twitter - ‘Hope’ is not an Investment Strategy. However, the unfortunate reality is that none of us are immune from this and I know that I am afflicted with this disease as much as anyone. I have recently been reading Daniel Kahneman’s ‘Thinking, Fast and Slow’ (did I tell you? LOL?) and this book has really made me think about the many biases our Brains trick us with all the time. In theory we need to be objective and rational, but in practice this just does not happen.
Having said that, I perhaps strangely think that Optimism (I think this is related to Hope !!) is a useful predisposition for Investing - the simple fact is that over more than 120 years or so, Stockmarkets have generally risen - apart from many severe Bear Market drops - which of course we need to navigate by adopting Capital Preservation techniques so we have plenty of Funds left to catch the next Up Wave (like Selling early on in the drop and/or Hedging, Diversification, etc.)
The only way we will ever get close to “banishing” Wishful Thinking is by having a clear and simple Set of Rules and we need strict and unbending discipline in applying them - the Rules are relatively easy, the Discipline is relatively hard (or even impossible !!). Maybe the only way around this is having a Computer driven Trading Model that executes all Trades as per a given set of Rules - sorry, that sounds great but so makes me yawn……
15. Big movements take time to develop.
Another great Rule - I think this is hugely under-rated by many Stockmarket Players. I am not interested in the little wiggly ‘Scalping’ type moves that the Market offers up every day - I want to catch the Big Waves and ride them as far as I can. This takes huge patience and means there are periods of time when the Markets are just not suitable for me to bother buying (er, just like the current Markets which are quite simply trending downwards - so Shorts are the way to go).
A small number of very skilled practitioners are superb at this Short Term Trading stuff - people like @blue2_u and @Devon_Trader on Twitter - but they are the exception - most people think they can do it and end up losing a fortune. It is not easy. For me, apart from the fact I am useless at it, it takes far too much Screen Watching for my tastes and temperament. If this is your bag though, these guys are worth following and learning from.
It is also related to our old buddy, ‘Bottom Fishing’ - it is so tempting to leap in and buy the ‘Cheap’ Price that the Market is throwing up at us but invariably these are just one of many descending Lows in a Downtrend Channel full of Lows which just keeps grinding down. So that superb bit of ‘Cheap’ Bum Fishing you did was actually not so clever really. Far better to let other people do the Fishing and you wait for enough Fishing to have been done that the Share Price forms a good Base of Support and changes from a Downtrend Channel at least to doing a bit of Sideways - your Risk is hugely reduced by following this approach and reducing Risk is the way to make Money.
For the ultra-cautious, there are simple techniques like waiting for the Price to rise over the 200 Day Moving Average before Buying and some people use a similar method with the 10 Month Moving Average. As a bare minimum, if the 200 Day Moving Average Line is still falling you are looking at a Downtrend - at least wait until it levels out but ideally you want it to turn up - that’s an Uptrend.
16. It is not good to be too curious about all the reasons behind price movements.
This is an interesting Rule and I am not overly sure what it means. I guess it might be related to ‘Noise’ - there is a colossal amount of Information out there on any one day and so often we are merely guessing for the real reason why a Stock or Market has moved a certain way. It is very easy to confuse ‘Noise’ with ‘Signal’ - with experience I have found that I have got much more relaxed about such Noise and I put a lot more faith in what the Market is telling me these days in terms of Candlesticks and Price Waves etc. So often we want a ‘Reason’ for a move but in truth it could just be that there were more willing Sellers or Buyers on a certain day - or the Holders in a particular Stock might just be a fickle bunch of Retail Punters.
This is one of the big problems with Financial TV News like CNBC and Bloomberg etc. - they have to have a ‘Reason’ for every slight move that happens on the Markets and this is a big contributory factor as to why they wheel out so many Talking Heads which they bring on for any particular narrative. So often I can see that the Markets are going to fall just from the Technical Setup of the Night before - but when it falls they will have a ‘Reason’ for the drop - which probably has nothing whatsoever to do with it. It is quite possible that Buyers are just not prepared to pay up anymore and want lower prices.
I guess if you obsess about reasons for Price Moves, then you will actually drive yourself quite nuts and totally lose focus on what you should be worried about which is the Price Action and the things you can control like your Risk levels and your Entry and Exit Prices etc.
On the subject of Noise, it is worth noting that something Robbie Burns stresses in his Seminars (I heard this from @treesieT on Twitter) is the importance of cutting out Noise - it is something worth pondering - how much of that spiel on that Bulletin Board is really useful Information and how much is just useless tosh?
Have a read of this Blog to see how and why Prices really move:
17. It is much easier to watch a few than many.
For Jesse as a Short Term Trader this makes a lot of sense - I can see the logic in focusing on just a few Stocks, Indexes or Commodities or whatever, and learning how they move over time. I think this kind of specialisation brings huge subliminal benefits that you cannot necessarily put your finger on but you just become a much better Trader through experience - almost by osmosis. I definitely see this in myself with Stocks even though I have a Longer Term outlook - I get to know how my Stocks behave (or not as in many cases !!).
I have no doubt that over the years I have got to know many Stocks and I have my favourites - if you go to ‘The WheelieWatchlist’ this shows exactly what I mean. I suspect most Long Term Investors have a similar bunch of Stocks they tend to like and return to again and again over the years.
A small focused ‘Portfolio’ of maybe just 6 Trades or something may suit a Short Term Trader with strict Rules on Stoplosses and Position Sizes etc., but for a Long Term Investor there is huge danger in having a small Number of Stocks and I would recommend a bare minimum of maybe 12 or so (I probably contradict this in my Blog link below !!).
Many times I have written and discussed the Number of Stocks there should be in a Portfolio - check out this blog where I dig into it:
18. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.
I’m thinking this Rule is another Short Term Trader specific one. In fact, I more and more am of the view that if you buy the popular Stocks, then you will probably not make money. I have felt for a while that I do better on FTSE250 type stuff and on Small Caps and AIM than I do on FTSE100 - and it is probably because everyone is Trading the Big Stocks and it is perhaps ridiculous to think that I can really have an ‘Edge’ over the whole World - the competition is just fierce. With Smaller Stocks, you can find stuff that is ‘Off the Radar’ and unloved and where Fund Managers are not allowed to Buy because of their Mandates - this is where I like playing, not in the well known and “leading active issues”.
I would surmise that using these kind of Stocks will work for Short Term Trends or Waves of Price movement - it probably does not really apply to Long Term Investment.
Looking at it another way, it could mean Stocks that are Breaking-out to New 52 Week Highs or something - in this case then maybe it is a case where Investors can get in and make money but of course much of the gains may already have been had and often you are taking on Valuation Risk by buying stuff that is up at Highs. Of course with such Stocks you are buying ‘Strength’ which can be a very useful thing and you certainly have Momentum going your way. On the whole, I tend not to Invest in this manner - although I will if the Fundamentals and Valuation of the Company stack up. Quite often I will buy more of a Stock I already hold if it breaks out to New Highs (again, the Valuation etc. must still make sense).
19. The leaders of today may not be the leaders of two years from now.
There’s not a lot to say here - it’s pretty obvious really. The Market is an ever-evolving and changing beastie and Leaders and Laggards are changing constantly - there is no point in having a fixed view either Bullish or Bearish - you must adapt to the prevailing Conditions and be flexible to change your mind and alter a Trade if you need to. For example, I was Bullish right up until the end of 2015 despite many signals that were contradicting this - however, early in January 2016 I smelt a Rat and quickly changed my Stance to Bearish - until things change, I am staying in a very Defensive Capital Preservation mode - but I hope (that word again !!) to be able to go back on the Bull Attack later in 2016 after the Brexit Vote has gone away - but I might have to wait for longer. I will let the Market tell me what to do.
This Jesse Rule also raises thoughts around ‘Buy & Hold’ Investing - it really is saying that this approach probably will not work for the majority of Stocks - I think there is a huge amount of truth in this. Rolls Royce RR., Standard Chartered STAN, Marconi MONI, anyone?
20. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
This ‘Rule’ is a bit silly - of course you can’t extrapolate from one individual Stock out to the whole Market - and why would you need to anyway? The Indexes are so quick and easy to Chart these days that you can just judge them on their own merits. I think Jesse should have forgotten this one and just had 20 Rules !!
21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.
Now that is more like it - a proper ‘Rule’. There is a huge amount of truth in this - very few Tipsters are any good and even the best ones get loads of Recommendations wrong. It is the nature of the game unfortunately. Don’t get me wrong though, I like Tips - the reason is that such things are usually very well written and detailed and can give you good insights into a Stock that you won’t buy now (because you know Tips are always rubbish) but you will keep an eye on how the Price moves and how the Business develops - it could be an excellent future opportunity.
If you have a hard and fast Rule never to buy any Tips, then you will never buy anything - every Stock on the Market probably gets Tipped by someone or other several times a year !!
For me, a Tip is just a route to opportunity and opens up further research and proper evaluation - blindly buying Tips will make you very poor. Especially if the Tip is of High Risk Speculative ‘WheelieBin’ type Junk.
Right, that’s the end of this one, hopefully you found it intriguing. Personally, I am quite pleased with how this Blog turned out - it was an idea that struck me and I thought it would make and unusual and interesting piece both for you lot to read and for me to write. Unlike that Hedging Blog which still makes me shudder when I think about it….
Something that stands out from doing this ‘exercise’ of looking at Jesse’s Rules, is that my hunch that many apply to Long Term Investors is probably just about right - even if they do not apply 100%, there are certainly large elements of relevance. It is noticeable how few Rules there were where I could pretty much say “does not apply to Long Term Investing”. For those of you with a Short Term focus, I expect you have seen these Rules before, but even so I hope it has made you think about how you do stuff.
‘til we meet again,