Regular readers know that I've got a simple set of three rules that I follow in my trading. I like three because it's a small enough list that I can pledge to myself to remember it and stick with it. I don't like lists of trading rules that some people have that go on for pages, particularly since I know they can't possibly stick to them all.
But last night's post got me thinking about changing one of my rules. To explain……….I pointed out that energy, on which I am generally bearish, looked primed for a bullish bounce. A number of folks jumped on me about this, pointing out that yes, perhaps I'd get a day or two of strength, but why would I want to be holding a security that was generally weak in a bearish market? (For the record, I haven't opened a single bullish position today, and these comments made it likely I won't at all).
So I considered the topic more broadly, and it cut to the nub of the problem I have in markets less friendly than this, which is that I trade against them. In other words, over the long haul, the market generally is owned by the bulls, and it's financial suicide for me to trade against them. As Gary has so long tried to tell me, why not simply trade with the broad trend?
So I'm thinking of kicking out the weakest of my three rules – – not to trade in the first 30 minutes – – and replace it with "Trade only in the direction of the primary trend." In other words, if the recognized, multi-month (multi-year, even better) trend is up, then trade bullish. If it's down, trade bearish.
Now that probably strikes you as about as useful as the Warren Buffett rule I offered yesterday morning, but I am serious. I believe the primary trend right now for both energy and equities is down. I have profited nicely from that this year. In last night's post, I was contemplating a pretty wide variety of bullish trades in energy for the very short-term. This rule would stop such trades in their tracks.
The prerequisite to such a rule being useful, of course, is to have properly identified the trend. If from 2003 to 2006 I ran around saying it was a bear market, my rule would have been not only useless, but harmful. But we need to assume that a consensus has been reached amongst thinking folk like Slopers and we're trading along with the primary trend.
The other drawback to this rule is that it tends to ruin opportunistic trades, such as playing big bounces in a bear market. For instance, back on July 16, I bought a bunch of CSK simply for a bounce, and on July 18, I sold it for a 40% profit. That's all well and good, but now, a couple of weeks later, it's down 50%. To save you the trouble of getting out a calculator, a 50% drop would have meant a serious loss. So I would have denied myself that nice trade, but I would have also avoided needing the dumb luck required to have hit it at just the right moment.
I'd be interested in your thoughts. I try to be very economical with my words when constructing these rules; I treat them like proverbs. Any refinement or other ideas would be appreciated, since in my experience the collective body that meets here on Slope does a very good job learning from one another.
