Trading “Rules of Thumb”

V2 ML – 12-23-20


Things not to do:

  1. Don’t lose money.
    1. O’Neal said that he would close any trade that moved against by 8%. I am generally not willing to wait that long. I will often close trades if I am only down a few hundred bucks. There will always be additional trades to engage with in the future. You do not have to be right on this one trade. Rapidly closing losing trades (losing as little as possible) allows you to fight (trade) another day.


  1. Rule number 2 is also, “Don’t lose money”.
    1. Analysis paralysis. New traders have a tendency to become stuck in a state of paralysis when a trade moves against them. They tell themselves that “it will come back” or other such justifications. This is how major losses are created. When a trade moves again you, sell early and look for another entry point or another trade.


  1. Don’t buy foreign companies (unless you really know what you are doing).
    1. Even if the firm is traded on a domestic exchange (NYSE, Nasdaq, etc.), your brokerage firm will withhold anticipated foreign taxes on any dividends received. In order to get credit for this tax having been paid to the foreign government, one must fill out a Form 1116 when filing your taxes. This could create an additional tax preparation expense when you must pay your tax preparer. This additional hurdle is enough to make me wish to avoid the inconvenience altogether.
    2. Watch out for unstable jurisdictions. Taiwan comes to mind (ex. China could invade at any time).


  1. Don’t buy Chinese companies. Even Chinese companies listed on domestic exchanges have been notorious about cheating on their revenue figures. Luckin Coffee recently got caught lying about their numbers and the stock gapped down 80% overnight (4/2/2020).


  1. Traders must learn to “invert their psychology”.
    1. Outside of the occasional large correction or bear market, it generally makes sense to do the opposite of what your emotions are telling you. This takes time to learn; often many months or years.
    2. If you are euphoric, you should contemplate lightening (selling) your position(s).
    3. When terrified (and it seems things could not be worse), consider buying.
    4. If dealing with FOMO (fear of missing out), one had best stand aside as the move could be close to “over”.


Things to do:

  1. Ring the register. Even if you feel it is too early. Most anytime you are given a “gift” in a short amount of time, take it and look for the next trade.
  2. Patience is key.
    1. Elder says that the only advantage we have relative to the big boys is that we get to pick and choose the opportunities we wish to try to trade. While the big boys must always be in the markets, we can wait for only the best opportunities. Wait for the best high probability setups.


  1. Don’t trade when you aren’t feeling good.
    1. It is very difficult to make proper trading decisions when one is not feeling well. It is better to stand aside and wait until you are feeling better.
    2. One tends to exit positions too early (when not feeling well), and vice versa.
  2. Once you begin trading with “real money”, start with as little money as possible. Even after practicing on the paper trading system for a few years, I only utilized $10,000 for the first 6 months Once I demonstrated to myself that I wasn’t likely to lose money, I began depositing more.


Market Wisdom:

  1. “It’s not the news, its how markets react to the news.”
    1. When the markets react badly to positive news, watch out as more downside action is likely on the horizon
    2. When the markets react positively to bad news, more upside is likely in the near term.
    3. While in a bull market, the market can often respond positively to bad news.
    4. While in a bear market, the market can still often respond negatively to good news.


  1. “Buy the rumor, sell the news.”
    1. By the time news of an event is hitting the market, the big boys are going to use that news to unload positions they put on while the rumor was being fomented.
    2. Retail (inexperienced) traders tend to think it a good idea to buy stocks based upon news events. What the retail traders don’t know is that the big boys were buying the stock 6 months or 6 weeks ago in anticipation of the news and are now selling their positions into the positive volume being created by the less sophisticated traders.
    3. The big boys like to sell without moving a stock downward when possible, so if the retail traders provide them with this opportunity (i.e. retail traders are buying), expect the big boys to be selling into it.