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Please scroll all the way down for what he is doing. He is up almost
60% using a Technofundamental Investment Strategy which he esplains.
John
Trend Trader's Strategy -- Strategy Lab - MSN Money
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Trend Trader Richard Rhodes
Journal
Strategy
Portfolio
Transactions
Biography
Richard develops a macroeconomic view of market trends
and trades the stocks he believes will fundamentally benefit from
major rallies and declines.
Post a message for Richard
Trend Trader Lab Performance
Round 7 $158,461.86
Lab Summary Page
Web Site
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The Rhodes Report
Portfolio
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Track Richard's investments on Trend Trader's portfolio
page.
Journal Entries
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Follow every buy and sell Trend Trader's Transactions
page.
Strategy
If there is anything I have learned in 18 years of
trading, it is that simple works best. Those who need to rely upon
complex stochastics, linear-weighted moving averages, smoothing
techniques, Fibonacci numbers, etc., usually find that they have so
many things rolling around in their heads that they cannot make a
rational decision. One technique says buy; another says sell. Another
says sit tight, while another says add to the trade. It sounds like a
cliché, but simple methods work best.
Discuss the latest trades
on the Strategy Lab
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Therefore, my trading strategy is to analyze fundamental
and technical factors to determine whether a long, short or a
sideline position is warranted in the market. Fundamentally, I
develop a macroeconomic view of the world using Federal Reserve
interest-rate policy, world economic trends and currency movements.
This allows me to use my fundamental beliefs as a backdrop against
which to apply technical analysis. If I perceive that fundamentals
are bullish, then I am poised to go long the markets if my simple
technical indicators tell me to do so. Conversely, if the
fundamentals are bearish, I trade from the short side when my
indicators tell me to do so.
Those simple technical resources are simply log charts,
common trend lines and other well-known chart patterns. To supplement
this, I use various term moving averages dependent upon the equity
under analysis, for I believe that all equities beat to their own
drum, thus a one-moving-average-fits-all does not necessary apply.
Also, my favorite oscillator is the 20-day stochastic, for it is
longer term in nature and captures the intermediate trends rather
well.
In addition, and more importantly, I use trading rules to
effectively manage my positions and to protect myself from making
judgment errors. I must admit, I am not smart enough to have devised
these simple trading rules. A great trader gave them to me some 15
years ago. However, I will tell you they work. If you follow these
rules, breaking them as infrequently as possible, you will make money
year in and year out, some years better than others, some years
worse -- but you will make money. The rules are simple, but adhering
to them is difficult.
a.. The first and most important rule is that in bull
markets, a trader should be long. This may sound obvious, but how
many of us have sold the first rally in every bull market, saying
that the market has moved too far, too fast? I have, and I suspect
I'll do it again at some point. Thus, we've not enjoyed the profits
that should have accrued for our initial bullish outlook, but have
actually lost money while being short. In a bull market, one can only
be long or on the sidelines. Remember, not having a position is a
position.
b.. Buy that which is showing strength; sell that which
is showing weakness. The public continues to buy when prices have
fallen. The professional buys because prices have rallied. This
difference may not sound logical, but buying strength works. The rule
of survival is not to "buy low, sell high", but to "buy higher and
sell higher". Furthermore, when comparing various stocks within a
group, buy only the strongest and sell the weakest.
c.. When putting on a trade, enter it as if it had the
potential to be the biggest trade of the year. Don't enter a trade
until it has been well thought-out, a campaign devised for adding to
the trade, and contingency plans set for exiting the trade.
d.. On minor corrections against the major trend, add
to trades. In bull markets, add to the trade on minor corrections
back into support levels. In bear markets, add on corrections into
resistance. Use the 33% to 50% corrections level of the previous
movement or the proper moving average as a first point in which to
add.
e.. Be patient. If you miss a trade, wait for a
correction to occur before putting the trade on.
f.. Be patient. Once a trade is put on, allow it time
to develop and give it time to create the profits you expected.
g.. Be patient. The adage that "you never go broke
taking a profit" is maybe the most worthless piece of advice ever
given. Taking small profits is the surest way to ultimate loss I can
think of, for small profits are never allowed to develop into
enormous profits. The real money in trading is made from the one, two
or three large trades that develop each year. You must develop the
ability to patiently stay with winning trades to allow them to
develop into that sort of trade.
h.. Be patient. Once a trade is put on, give it time to
work; give it time to insulate itself from random noise; give it time
for others to see the merit of what you saw earlier than they.
i.. Be impatient. As always, small losses and quick
losses are the best losses. It is not the loss of money that is
important. Rather, it is the mental capital that is used up when you
sit with a losing trade that is important.
j.. Never, ever add to a losing trade, or "average"
into a position. If you are buying, then each new buy price must be
higher than the previous buy price. If you are shorting, then each
new selling price must be lower. This rule is to be adhered to
without question.
k.. Do more of what is working for you, and less of
what's not. Each day, look at the various positions you are holding
and try to add to the trade that has the most profit while
subtracting from that trade that is either unprofitable or is showing
the smallest profit. This is the basis of the adage, "let your
profits run."
l.. Don't trade until the technicals and the
fundamentals agree. This rule makes pure technicians cringe. I don't
care! I will not trade until I am sure that the simple technical
rules I follow, and my fundamental analyses, are running in tandem.
Then I can act with authority, and with certainty, and patiently sit
tight.
m.. When sharp losses in equity are experienced, take
time off. Close all trades and stop trading for several days. The
mind can play games with itself following sharp, quick losses. The
urge "to get the money back" is extreme, and should not be given
into.
n.. When trading well, trade somewhat larger. We all
experience those incredible periods of time when all of our trades
are profitable. When that happens, trade aggressively and trade
larger. We must make our proverbial hay when the sun shines.
o.. When adding to a trade, add only one-fourth to one-
half as much as currently held. That is, if you are holding 400
shares of a stock, at the next point at which to add, add no more
than 100 or 200 shares. That moves the average price of your holdings
less than half of the distance moved, thus allowing you to sit
through 50% corrections without touching your average price.
p.. Think like a guerrilla warrior. We wish to fight on
the side of the market that is winning, not wasting our time and
capital on futile efforts to gain fame by buying the lows or selling
the highs of some market movement. Our duty is to earn profits by
fighting alongside the winning forces. If neither side is winning,
then we don't need to fight at all.
q.. Markets form their tops in violence; markets form
their lows in quiet conditions.
r.. The final 10% of the time of a bull run will
usually encompass 50% or more of the price movement. Thus, the first
50% of the price movement will take 90% of the time and will require
the most backing and filling and will be far more difficult to trade
than the last 50%.
There is no genius in these rules. They are common sense
and nothing else. But as Voltaire said, "Common sense is uncommon."
Trading is a common-sense business. When we trade contrary to common
sense, we will lose. Perhaps not always, but enormously and
eventually. Trade simply. Avoid complex methodologies concerning
obscure technical systems and trade according to the major trends
only.
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