Thursday, January 15, 2009

Trading Rules

Roundup: Testing’s 10 Trading Rules
This is a roundup of all of my posts this week testing’s 10 Trading Rules.
As I wrote when I started this series, I’d usually be wary of taking trading advice from any site with that many flashing banner ads, but many of the rules on TM’s list are similar in spirit to concepts I’ve talked about on this blog and very much against traditional investment thinking. Enjoy.
Rule #1: Buy New Lows, Not New Highs
I would rephrase this rule as intermediate-timeframe indicators have historically been contrarian (i.e. mean reverting). I think that’s true, but playing devil’s advocate, this phenomenon is new to the last few decades. Read my whole take.
Rule #2: Buy the Market After It’s Dropped, Not After It’s Risen
This rule is similar to the first, but focuses on shorter timeframes. I agree, but again to play devil’s advocate, it’s an even newer phenomenon and must be traded with particular caution. Read my whole take.
Rules #3 and #4: Don’t Fight the Long-term Trend
I agree and I disagree. There’s money on the long side to be made in bear markets and money on the short side to be made in bull markets, but that money is a lot more difficult to capture and it’s much easier to be stunningly wrong. Read my whole take.
Rule #5: the VIX 5% Rule
The VIX 5% rule is a decent (but not great) defensive filter. Read my whole take.
Rule #6: Reduce Overnight Risk with Indices/Sectors Instead of Stocks
I only trade leveraged mutual funds and have no opinion on individual stocks, but sure…sounds good.
Rule #7: Reduce Overnight Risk (More) by Buying Established Companies
See above.
Rule #8: Learn how to use RSI(2)
Yes, yes, yes. I’ve covered this one previously in Trading with RSI(2).
Rule #9: Avoid Being Churned with the ADX Indicator
In this humble geek’s opinion, this one is utterly debunked. Read my whole take.
Rule #10: Trade News, but Not Like Everyone Else
I’m a 100% mechanical trader. When you can show me someone that’s put together great returns trading the news, I’ll do a little jig and put it on YouTube. Promise.
Happy Trading,

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