A Guru's Guide to Winning Trades
It takes patience, savvy, and a certain level of market smarts. And the cold, hard truth is that if you don't have them, the big boys will drain your portfolio dry.
Unfortunately, those are the three areas that most retail investors need to work on the most. Otherwise, they will simply end up in a cat-and-mouse game where they are the mice.
Don't fool yourself for one second into believing that your "due diligence" can be done by watching a show or two on CNBC. It just doesn't work that way.
But if there is one voice from the markets that should grab your attention every time you hear it, it belongs to Dennis Gartman, founder and author of The Gartman Letter.
He's sort of a guru's guru.
In fact, The Gartman Letter is the first thing I read in the morning, and I'm hardly alone in that habit. The letter is widely read by investors of every stripe looking for a market edge.
That includes those same big boys who are always on the prowl to grab a piece of your portfolio. Institutional investors and hedge funds are among Gartman's biggest readers.
So every morning, Gartman gets up at around 2 a.m., reads a ton of newspapers and economic reports, and writes a four-page newsletter with his opinion of what's happening in the market.
And sort of like an insomniac E.F. Hutton, when Gartman has something to say it tends to draw a lot of ears.
So when Gartman publishes his yearly "Rules of Trading," it gives everyone — subscribers and non-subscribers alike — a glimpse into how he views and trades the markets.
That makes them worth mentioning in these pages — especially since Dennis learned some of them the hard way.
Dennis Gartman's Simple Rules Of Trading
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position... not ever, not never! Adding to losing positions is trading's carcinogen; it is trading's driving while intoxicated. It will lead to ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in Bear Markets, One Can Only Be Short or Neutral—This may seem self-evident; few understand it, however, and fewer still embrace it.
6. "Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent." -These are Keynes' words, and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish, we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish, we need to sail the strongest winds, for they carry the farthest.
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In "good times," even errors turn to profits; in "bad times," the most well-researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we've known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, an Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, "When they are cryin', you should be buyin'! And when they are yellin', you should be sellin'!"
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow... usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year... and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a "secret" to trading (and of life), this is it.
16. All Rules Are Meant to Be Broken.... but Only Very, Very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
Great stuff, Dennis... Simple, yet profound.
A must read before any trade.
Your bargain-hunting analyst,
Steve Christ, Investment Director
The Wealth Advisory
P.S. The financial crisis isn't just putting a dent in our portfolios and retirement plans. For the parents of today's 13 million-plus American college-bound students, sending their kids to college is getting harder and harder. Given the recession, poorly performing college savings plans, lower home values, tougher credit standards, and steep tuition costs, more parents are finding themselves with less money for college than they'd ever imagined.
For those of you who have one or more college-bound students, we'll be publishing a controversial new report furnished by one of the country's leading college funding advisors. Stay tuned for this special report on how to substantially cut the rising cost of college and still send your child to the college of their choice.
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