Market Thoughts Update, Gridlock, and Trading Guideposts from a Highly Respected Trader. Classic and Must Read Again!
The markets have just increased to new two plus year highs on the DOW, S&P 500, and NASDAQ since we made the decision and ‘call’ to go long after the June and July lows in 2010. As the markets are up on average of 15+ or so percent since then, in line with our expectations, its always good to ” remember the basics” and make sure to not fall into the trap of ” Borrowing Money for a while and not actually making it”.
While we expect higher trading days in the months ahead, and the rally to continue into 2011, there can easily be pullbacks and corrections during the period. Therefore I think its prudent to repost the Trading Guidelines from Fred Lange, a very highly respected trader . I am very, very fortunate to be able to call him a friend and his knowledge and wisdom are impossible to duplicate. Thanks to him too I learned this year, many months ago to be more accurate, about Gridlock and the markets, which is now the prevalent theme we are hearing about on the financial networks and even, as you see from recent posts, Rush Limbaugh and others.
With regards to Gridlock, Fred mentioned further today that “practically all of the positives being ascribed to the market strength are derivatives of the expectations of GRIDOCK. QE 1 did not work due to no associated expansionary forces and concurrent lack of confidence and uncertainty. QE 2 may help the economy reflecting the powerful impact of GRIDLOCK and its derivative forces. I remain of the view that QE2 is not needed due to huge cash availability in the monetary system. A surge of confidence has been needed to replace uncertainty. The transition from uncertainty to confidence is now well underway with the belief in recent months that the Republicans wound make huge political gains”.
Below you will find a classic list of Trading Guideposts written by Fred W.Lange. Fred was the Director of Research at the time for Blair and Company, based at 20 Broad Street, NYC, N.Y. He wrote these rules in November 1968!. These trading guideposts are as valuable and relevant now as they were in the 60â€²s and 70â€²s and should be mandatory and required reading for all.
â€œPresented below are some TRADING GUIDEPOSTS which we believe can be useful by investors who persist in the pursuit of shorter term profits. Remember that short-term market activity to be successful requires an extremely high degree of self-discipline, flexibility and sophistication. While the rationale behind each of the GUIDEPOSTS listed can be expanded upon, the point made in each case should be readily understandable. However, despite the apparent benefits that can be achieved by short term trading, we remain of the opinion that capital enhancement is best accomplished by making commitments in a cross-section of growth-oriented companies taking an intermediate to longer term viewpoint.
1. Buy only stocks that either the investor or the RESEARCH DEPARTMENT know thoroughly and where up-to-date information and opinions are readily accessible.
2. Do not take extreme positions.
3. Buy stocks only when the technical pattern confirms fundamental judgment.
4. Sell quickly if the stock does not act as anticipated.
5. Do not be afraid to buy back quickly if the stock continues to act exceptionally strong even if it is higher.
6. Do not ever become overly enthusiastic despite what current trends appear to be (lose objectivity).
7. Do not ever become overly pessimistic despite what current trends appear to be (lose objectivity)
8. Do not over-trade.
9. Act according to your convictions â€“ learn to trust your doubts as well as your expectations.
10. Seek to buy strong stocks on weakness.
11. Seek to sell strong stocks on strength.
12. Anticipate at least 10% to 15% after commissions.
13. Trade evenly â€“ doubling up on a new position to offset a prior loss may create additional problems.
14. Be patient.
15. Try to trade with the market trend and not against it.
16. Do not attempt to squeeze out the last point(s) on either the buy or the sell side.
17. Tentatively know where the market can run into supply or possibly meet support.
18. Tentatively know where the stock can run into supply or attract support.
19. Let profits run â€“ limit losses to a predetermined price and/or percentage.
20. Determine what industries and issues are the current market leaders â€“ often invaluable since a basic understanding of general market conditions can be quite beneficial in anticipating market trends and reversals.
21. Remember the market may do the unexpected.
22. In an up market, the trend probably will at least continue into early the following day before any reversal.
23. In a down market, the trend probably will at least continue into early the following day before any reversal.
24. Commissions are a small price to pay for preservation of capital.
25. Do not overstay trading positions â€“ greed is a traderâ€™s constant and greatest enemy.
26. Do not trade on tips.
27. Do not short stocks that are heavily shorted unless perhaps the downtrend is well defined and preferably in a down market.
28. Hedge strong stocks by selling a portion on strength and buying back on weakness particularly in an up market.
29. Do not fight the tape.
30. Do not let interpretations of market movements by the writers of leading financial publications distort your thinking.
31. For the minority to make money on the shorter term, the majority has to be wrong.
32. Do not become excessively keyed to the fluctuations in the popular averages; concentrate on the trends of individual issues.
33. Lighten commitments in a down market or in a market that appears â€œtoppyâ€ after an extended or rapid advance; it is important to preserve capital during uncertain periods.
34. Learn by mistakes.
35. Do not look back (in a wishful manner) â€“ can easily distort current and future judgments.
36. Study your own weaknesses. â€