Last night, I updated my list of trading rules, and I'd like to explain why.
The changes I made were very minor, with the exception of replacing the rule related to having no more than 80% of positions dedicated to the bull or bear side, depending upon the current relationship of the 13- and 52-week exponential moving averages.
Truth be told, I never liked that rule very much, but I wanted something to try to eliminate the bullish/bear bias (OK,
bearish bias) in my trading. The problem is that it really wouldn't have solved any problems. To this day, it is still in a bearish stance, which means that the heartache of missing the countertrend rally of the past half-year would be firmly intact. One could suggest I make the moving averages much shorter, but that would whipsaw my portfolio all over the place.
I came up with a new way to beat this directional bias, and I am going to be putting it through extensive testing. To be honest, I'm not sure if I'll want to go into the details of this "bias-killer", even if it does pan out, for a variety fo reasons. As a "make-do", I've entered this new rule. It is the weakest of the rules with respect to actual day-to-day utility. It is more of a guideline than a specific nuts-and-bolts rule, but it's going to have to suffice:
Balance – this one is the hardest of all to define, but because it is impossible to know with certainty the future direction of the market, a balance between bullish and bearish positions is the most prudent. In addition, if you are heavily weighted either bullish or bearish, and if the market moves strongly in your favor intraday, you should consider taking on a large opposite day-trade position for "insurance" profits in case that intraday move reverses.
I'll also mention I've updated my Big Picture page by appending this to it:
8/29/2009 amendment: I will add that a major concern I have is that our government, which has become quite accustomed to extreme interference with the markets, will step in to "rescue" everyone during the resumption of the tumble. As a person who hopes to profit handsomely from the downturn, my concern is that the government is going to specifically target the bears in a show of populist activism.
I put nothing past them. Some ideas that spring to mind are outlawing options (or at least outlawing put options), assessing a 95% tax on profits from short sales, and making short-selling on any securities illegal. So I plan to take most of my profits before I believe the final low is in place if I get the impression that the lawmakers are about to step in and save everyone from the bears who "caused" this calamity.
