Rules are Imperative to Success - Especially in the Stock Market

Published on June 21, 2019 @ 9:03am

Experience has taught us certain rules are well worth considering if you're looking to be successful in the stock market. Of course those rules can be very different depending on whether or not you're a short-term swing trader or a long-term investor, but the fact remains if you adhere to a solid set of rules and disciplines, you're likely to become far more consistently successful - now and well into the future.

First, I just wanted to mention the importance of something we've relied on for years to be accurate and effective when it comes to helping traders and investors consistently become more successful.

Although charting and technical analysis has been a big mystery for many years, the concept is really starting to become mainstream, which is good for us and good for you.

Why? Although many like to make claims of being expert technicians, the truth is most continue to focus on certain technical tools and theories that recent history has proven to be ineffective, or at the very best modestly reliable. Meaning, there's an awful lot of old and unreliable tools out there many think work well, but simply don't.

However, if you're willing to take the time to learn what actually works, the proper analysis and methodologies can give you the type of edge that will allow you to spot trend reversals before the rest of the heard, an opportunity to sell when maybe others are piling in at the wrong time, and more importantly give you a great indication of what to consider and what to ignore - no matter how fundamentally solid the idea in question is.

Charting and technical analysis can also be a fantastic way to identify and assess where big money is flowing before the actual fundamental reasons ever start to surface. Remember, stocks and the markets in general often trade well in advance of what's to come, so it's usually the smart money that's going to start to reveal what's on the horizon long before the fundamental landscape actually starts to develop.

It's been very well documented for years here we're huge fans of charting and technicals. So much so it's become more and more of our focus here, and for good reason. While fundamentals often tell us which stocks to buy, it's the charts and technicals that tell us when to buy them, when to sell them, and when to ignore them.

I find it fascinating now that everyone from Jim Cramer to other Wall Street pundits on CNBC are starting to share their thoughts and analysis on charting technicals in an effort to better identify when's a good time to buy a stock and when's best to ignore a stock. I've made my living in and around the stock market now going on 20 years, and never have I ever seen so much commentary and analysis on charting technicals in the media like I have over the last few months.

I've said for a long time the advent of the Internet and all of the technology associated with real-time data and charting these days has provided professional traders and investors a significant edge using this fascinating and often reliable form of analysis. And now that these markets have entered a time period of extreme volatility and uncertainty, everyone out there is looking for that extra edge, so of course the media is starting to finally exploit it.

The bottom line is although fundamentals are clearly important when it comes to multi-year long-term investing in any stock; literally nothing is more important to the near and mid-term landscape more than charting and technical analysis.

Of course nothing in the markets is 100% reliable 100% percent of the time, but if you're willing to pay close attention to the charts, and assess things without any emotion whatsoever, you're likely going to put yourself in that top 20% of the investing population that makes 80% of the money.

This is precisely why we work diligently to not only bring you timely and reliable technical and fundamental analysis day in and day out with respect to the broader markets, the sectors associated and the plethora of individual stocks that make up the markets, we also make a big effort to try and educate you all along the way.

At the end of the day for us, it's all about helping you become more profitable, and ultimately help you become a more knowledgeable investor or trader - whatever your strategy might be. Like the old saying goes, give a man a fish feed him for a day, teach a man to fish feed him for a lifetime.

Rest assure, we spend countless hours assessing the markets and thousands of individual quality fundamental names in an effort to pinpoint when's the best time to participate in those names, and ultimately give you the kind of edge it takes to be consistently successful. We're clearly not always right, but it just goes to show just how much time it takes to spot potentially profitable opportunities, while reducing the potential risk as much as possible.

After years of helping professional investors and traders make better decisions, and ultimately more profitable, here are 10 of our most important rules we’ve found to help even the savviest individual.

  1. Before you ever decide to participate in any idea you must determine in advance whether it's going to be a short-term trade or a long-term investment. If it's a short-term trade, make sure to pre-set your parameters. Plan the trade and trade the plan based on your own risk tolerance and desired strategy. Meaning, a protective stop loss and a reasonably acceptable target. If it's a long-term idea in a VERY HIGH QUALITY name, be prepared to exercise patience and don't be afraid to average down in the idea if it ends up moving lower than 20%, but not before.
  2. Fundamentals tell you what to buy. Charts often tell you when the best time to buy them is. Remember, nothing drives the short and mid-term landscape for anything more than momentum, sentiment, fear and greed. However, in the long run fundamentals always win. This is why it's so vitally important you pre-determine your strategy in any idea - no matter what we or anyone else says about the stock in question. It's your money. The worst thing that could ever happen is having a short-term trade gone wrong that ends up becoming a long-term investment. Don't be afraid to cut losers and don't be afraid to ride winners, but never ever let winning trades turn into losing ones.
  3. If you're a long-term buy and hold investor and you hold in excess of 15 individual names, you're probably better off consolidating those holdings into a few multi-year outperforming ETFs like QQQ and SPY, because the chances of a portfolio with too many names outperforming the NASDAQ 100 and/or the S&P 500 is probably pretty slim.
  4. Predetermine how much of your portfolio is allocated to long-term investing and/or short-term trading. Also, predetermine your personality's risk tolerance and patience. This will go a long way toward helping you be successful. Most investors and traders have no real idea of what they’re strategies, timelines and goals are. It’s imperative every individual assesses their own personal risk tolerance, timeframes, goals and strategies. Rather than thinking about how much you might make on an idea, think first about how much you might be willing to lose in the event the idea in question goes wrong. Then, determine if it’s something you’re willing to hold for years, or simply hold for a short to mid-term trade. Keep your expectations realistic, because there’s no bigger place on earth than the stock market where rhetoric (both positive and negative) runs more rampant. Don’t buy the hype. Rather, make sure you have solid context technically and fundamentally for the stock in question. The more reasons you have to make up your bullish or bearish context for an idea, the higher the probability for success will be for the idea in question.
  5. Avoid companies that haven't proven much of anything on the revenue and/or earnings front - no matter how sexy the story might be or what anyone else says. If the Company in question isn't profitable, it better have enough cash on the books to see its way to profitability. Also, avoid companies with astronomical debt levels compared to cash on the books. You can easily look up a company's balance sheet and valuation metrics at sites like Yahoo! Finance by clicking on the ticker symbols statistics or financials. Unless it’s a development stage biotech with a LOT of cash on the books, the Company must be generating millions per quarter in revenue! If it’s not, that’s a major concern.
  6. Unless you love to gamble and lose, it's probably a very good idea to avoid penny stocks like the plague. Most of them our probably going to end up out of business, and that's no way to build a solid portfolio for the future. Again, rather than thinking about what you might make when considering an idea, first determine what you're willing to completely lose and go from there. Many novice investors gravitate to penny stocks because they think a small stock can get big faster than a big stock can get bigger. That couldn’t be farther from the truth. There’s a reason penny stocks are penny stocks, and it’s usually because they have no revenue and/or earnings to speak of, and they have poor cash balances on their books.
  7. Keep your emotions completely out of your trading or investing. Be realistic and see things for what they really are. Nothing can destroy a portfolio faster than pipe dreams or unrealistic expectations. Put in the necessary time depending on your strategy and keep things real.
  8. Take the three to five minutes every single day to read our daily report - not only will this keep you well on top of what's going on in and around these markets every day, it will ensure you don't miss something important regarding a new idea or any previously suggested ideas.
  9. You don't have to participate in every single idea you read or hear about. It's almost impossible unless you have an unlimited amount of funds. Even then, you should only ever participate in an idea your intuition and intelligence is telling you to participate in, and you understand a realistic context for the idea in question. In other words, if we put an idea out there and you really like the context of why we like the idea then participate in it. If something is telling you not to or the context isn't strong enough for you simply ignore it. Sometimes less is more. However, it is VERY important to read why we like something in its entirety before ever participating in the idea in question. We are not a portfolio management service. We cater to those willing to make their own decisions and willing to take the time to stay on top of the markets and further their education by staying well on top of our daily reports via email.
  10. As for our open ideas, when we suggest them we tag the idea in our open picks section with either a mild, medium or aggressive allocation. This is a representation of where we believe the major indices are in their long-term cycle. Mild is late stage bull market. Medium is mid-stage bull market and aggressive is bottoming bear market.

John Monroe - Senior Editor and Analyst