1) React rather than predict 

  • Rich traders know they don't know; new traders don't know that they don't know
  • Forecasts, market calls, projections etc... are not what I do

2) Price itself is the best indicator

  • The current price of a stock contains the collective wisdom of thousands. If a stock is making new highs, it is probably because people who know more than you are buying
  • I only buy stocks that are making new 52 week highs

3) Identify the general market trend first 

  • I only buy stocks when the general market is rising, hold cash in sideways markets, and sell short when the market is falling
  • I use a 100 and 150 day moving average to define the long term trend
  • I use a 20 and 50 day moving average to define the short term trend

A:  Summer: The S&P 500 is in a bull market.  I buy strong stocks making new highs in this environment.  

B:  Fall: I go into cash or bonds in this environment.   

C: Winter: The S&P 500 is in a bear market.  This is the season for shorting weak stocks.

D: Spring: I cover my shorts and go into cash. 

4) Buy strong stocks in bull markets

  • I scan for stocks making new highs after breaking out of consolidations. 

5) Short sell weak stocks in bear markets

  • Trend followers, embracing volatility, make money in up and down markets.

6) Do not lose more than 1% of your account equity on any given trade. 

  • If you risk much more than 1% you will go bankrupt eventually.  As Larry Hite says,  "If you don't bet, you can't win.  If you lose all your chips, you can't bet".  
  • I continue to add stocks, one per week, until a maximum of seven stocks are added.

7) Stops are placed according to stock's volatility 

  • Each stock I buy is a unit of risk.  Volatile stocks have wider stops and smaller positions;  less volatile stocks have tighter stops and larger positions: