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Bob Farrell is a Wall Street veteran who draws on some 50 years of experience in crafting his investing rules. He is an acknowledged technical analyst. I have picked his top rules from StockCharts. Here are Top 10 rules of investing of Bob Farrell`s:-
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an opposite excess in the other direction
Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras — excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually. comes.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism,” says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks (“Nifty 50” stocks).
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
Even with these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.
9. When all the experts and forecasts agree — something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Wall Street and Main Street are much more in tune with bull markets than bear markets.
Five Mantras For Traders
This is from Trading Success, a site by Ray Barros: I am repeating the words as it is. Many thanks to the website.
Your Daily Mantra
1. The market pays you to be disciplined.
The constant truth is discipline equals increased profits. Without discipline, you will put less money in your pocket.
2. Be disciplined 100 per cent of the time.
If you trade with discipline nine out of ten trades, you cannot claim to be 100 per cent disciplined. This 10 per cent undisciplined trade will really hurt your overall performance. So discipline must be practiced on every trade.
3. Love to lose money.
Traders ask: What do you mean, love to lose money?
What the rule means is that you are going to lose throughout your trading sessions. So, get out of your bad trade as soon as you realize you have made a wrong choice. This will save you a lot of trading capital and make you a better trader.
4. If your trade is not going anywhere in a given time frame, it is time to exit.
This rule relates to the theory of capital flow. When there is price stagnation which happens often throughout a trading session, the market is telling us that they are happy with the prevailing bid and offer. You do not want to be in the market then and best to exit. It is a waste of time, capital and emotional energy. The market will heat up again and then you can re-enter the market with a new trade.
5. Never take a big loss, only a big loss can hurt you.
Never put yourself in a position of losing more money than you can afford. You are not a ‘loser’ unless you do not get out of the losing trade once you know the trade is no longer good.
Big losses wipe out too many small winners you have worked hard for. It is also psychologically devastating when you lose big as it may take a long time to build up your confidence again. Then you are a loser.
My Notes: I again acknowledge Mr Barros as the writer of these excellent mantras. I try to follow all five of these. When I say that I follow all five of these mantras, it is not to go on any ego trip. It is to share with you the fact that traders can implement these rules in their trading plan, with a little bit of discipline. If I can do it, everyone can.