1 – Never enter a trade without a
plan. Understanding where your entry and exit points are before you
initiate a trade are vital to success in the stock market.
2 – Determine the direction of the
general market and never trade against the trend. When the market has
no established direction, often the best place to be is 100% cash.
3 – Buy the strongest stocks in the strongest groups. A stock’s overall move is highly correlated to the group that it’s in.
4 – Only buy high relative strength stocks—they generally outperform the rest of the market.
5 – Limit your universe of stocks
to companies that are profitable. Look for at least 25% quarter over
quarter growth in earnings and sales for a minimum of 3 quarters. Annual
earnings should be positive and increasing year over year for at least 3
6 – Buy stocks that have
institutional sponsorship. Institutional investors account for over 70%
of the volume in the market—a demand that ultimately determines the
direction of a stock’s price.
7 – Do not buy such a large
position that you can’t sell it in a hurry, without moving the price of
the stock significantly. Liquidity constraints are important and will
differ depending on your goals and your account size.
8 – Use charts to enter and exit a
stock at its “optimal point.” This is the point where risk/reward is
highly skewed in your favor. Limit your buying activity to stocks that
have formed constructive bases. Don’t buy a stock as it goes through a
pivot point or trend line, unless it is trading well above its average
volume for the day. Don’t purchase a stock more than 5% past its pivot
point. Some stocks may warrant a tighter limit of 1-2%, depending on
their personality and the market environment.
9 – Use a maximum sell stop of
7-8%, *when purchasing a stock from a proper base at the correct pivot
point. Do not set hard stops unless you absolutely must. Set price or trend line alerts instead, so
you can observe the circumstances before you’re forced out of a
*Exception: If a stock immediately falls below a pivot point or trend
line, it should be sold regardless [of the percentage from your purchase
10 – Market exposure depends on three variables:
• Overall health of the general market indices
• Breadth and technical health of the leading stocks.
• Amount of progress you have made in your account.
11 – When you pyramid, or add
shares to a position, never add more than half of your initial position,
so as not to hurt your average price. Use a separate sell stop for the
stock you added—don’t set a new sell stop for the entire position
[relative to the new average price].