RF - My trading "laws"

1. Buy in Increments- Nothing is more important that the price you pay for a stock. The key, obviously, is to buy low and sell high. I am not good enough to find the bottom for a stock, so what I normally do is buy in pieces of 2 or 4. Let’s say I like GE, is selling at $10, and I want to buy 1000 shares. I never buy 1000 at once, instead, I buy 250@ $10, let it come in buy another 250@ $9.50, then another 250@ $9.10, and so on. Even though you will pay a little more in commissions, you will save more and get in at a better purchase price, than if you bought all 1,000 @$10.

2. Don’t Chase the Rallies- This is tough because emotions guide the market. Two things control the market: fear and greed. If you end up buying a stock after a huge day, mostly likely there is a hedge fund standing back about to short 1,000,000 shares and wipe you broke. This, then goes back to point #1. If you have to own a stock, even on a big “up” day, buy a ¼ or ½ of your position. If it takes off, you have a position on, but more importantly if it tanks, you don’t lose as much.

3. Don’t Buy a Stock from a Recommender- The idea of the blog is give investors and traders ideas. Every posted buy, I personally make, and I will try to post when I buy/sell around to the actual time, but then again, I get tied up and can’t guarantee it. Just because Cramer or someone on CNBC has a stock trade, doesn’t mean it will go up. For all I know, a market maker or broker could have paid them to recommend a stock, just so the broker could blow out of a terrible long position. Most of the stocks I buy have a lot of research behind and trade based on technical measures or what not; however, there is no guarantee in performance. When I look at stocks, I look at various measures. A few are relative strength, charts, unusual volume, call/put activity (as well as ratios), short interest, top ownership, historical and implied volatility and also purchase analyst reports. It’s more detailed than that but that’s for starters.

4. “Buy the dips and sell the rips”- This is my own view but the quote is popular. Most of the time, I buy on down days and sell my trades into up days, or “rips” or what I refer to as “into strength”. It’s contrary to conventional wisdom but it works out well as a component of behavioral finance.

5. When in doubt, buy “insurance”- If you are buying a stock for the long-term, but are unsure about the short-term, I like to buy “put insurance” or known as “put protection”. Let’s say I want to buy some Dominion because I believe the intrinsic value is $45 and its selling at $27. I will get long 100 shares of Dominion, then I will buy some “put options” with a $25 strike, to protect my losses, in cases Dominion falls below the levels of initials purchase. Some people think this is stupid because you are buying insurance on a “piece of paper” but Rule #1 is don’t lose money and Rule#2 is don’t forget Rule #1.

6. Cut your losers – This took me years to understand but this, in opinion, is the key to trading. Never let a short-term trade turn into a long-term investment. Let’s say I bought 100 shares of C @ $10 for a quick bounce to $13. The next 3 days, C, goes to $7. Most people will hold until it gets back to $10, to breakeven, and forget the $13 but most of the time, what happens is that C goes to $3 and your loss gets wider. Keep in mind the goal of the trade ($10 – 13) and when it doesn’t go as planned, cut early, because if you stay in the game, you will make it back.


Feel free to add your trading "commandments" in the comments