Why Traders Should Never Violate Their Own Rules

Mike Turner |

As this quarter's earnings season winds down and as we approach a month or two of market action without the all-too-common heavy-handed political machinations coming out of Washington, maybe we can look at an end of year trading strategy with some reasonable expectations of market consistency.

The time-cycle forecasts for the broader markets (see S&P 500 via the SPY, below) are uniformly mildly bullish for the next couple of weeks. The Bull/Bear update (see below) comes in at a +2, but that number could be a bit too bullish. Between the negative ratio on the Investor Sentiment data and the very short-term bullishness of the forecasts, I am not all that interested in putting a lot of new money to work this week.

I am adding one new position to my portfolios this week, but that's about it. If you are subscribed to Signal Investor(up +40.18%, year-to-date), you will see this trade. But, other than that one trade and my weekly Trade of the Week (up +22.68%, annualized year-to-date), I'm going to take a wait-and-see attitude.

I suspect that you and I have some of the very same objectives. We both want to make as much money (profit) in the stock market as we can without incurring undo risk of loss. I have found that the best way to achieve this objective is to have a clear set of criteria for putting money to work in the market. Mine include the following:

  1. Have a rule for every market condition.
  2. Never violate your rules.
  3. Always have an exit strategy and set that strategy at the time you first put the trade on. You can adjust your strategy over time, but not if it means violating your exit strategy rules.
  4. Trust your gut when writing your rules, but trust your rules and not your gut, once the rules are in play.
  5. Don't be afraid to not trade. It is not always a good idea to be 100% in the market.
  6. Ignore talking heads and analysts. If they knew so much, they would be rich and not giving you advice.
  7. The single worst thing that can happen to a trader is to let emotion come into play during a trade. When it comes to stocks, try to stay agnostic.




The Bull/Bear and Turner Oscillator Update...

This week, the ratio of new technical long buys to new technical short sells, is about 1.5-to-1 in favor of the bears. As such, the Bull/Bear Rating has moved down one notch to a +2, slightly more bearish than the previous week. 

All four forecasts of the major US Indexes are weakly bullish for the next couple of weeks. This is certainly a bullish forecast indication, but it is not overwhelmingly bullish. 

The black line (net of the total of new technical long buy signals for the month minus the net of the total of new technical short sell signals for the month), along with the red line (total of new technical short sell signals for the month) are both flat-lining. This is not a pattern seen over the past 3 years, so caution is advised. This type of pattern 'could' suggest the market is in a transition period and could break either up (bullish) or down (bearish). 

From these data, it seems reasonable to assume the market is looking for a reason to move and, depending on the eventual reason provided, the market could react accordingly. 

The recommended trading position is neutral with a slight bias to the upside.

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Turner Bull/Bear Forecast
For the Upcoming Week

The Turner Bull/Bear Forecast™ provides a one-week directional forecast on the market, with [-5] being the most Bearish and a [+5] being the most Bullish. This is predicated on the ratio of number of new Buy Signals to the number of new Short Sell Signals for the previous week. The assumption is investors are becoming more Bullish the more lopsided the ratio becomes in favor of new Buy Signals; and, the converse is true; the more lopsided the ratio becomes in favor of new Short Sell Signals, the more Bearish investor sentiment.


The Turner CrossOver Oscillator™ provides an indication of the over-bought or over-sold condition of the market. The red line (New Short Sell Signals) shows a technical direction and strength (or lack thereof) of investors to push stock prices lower, triggering new Short Sell Signals. The higher the Short Sell Signals line, the more Bearish the market. The black line (Composite of both Short Sell and Long Buy Signals) is the combined impact of both the new Short Sell Signals and the new Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite of Signals line is moving higher. The higher this line moves, the more Bullish the market. Market bottoms are represented by a change in direction of the Composite of Signals line from moving lower to moving higher. Market corrections become much more likely when the Composite of Signals line crosses the Short Sell Signals line from below the Short Sell Signals line to above the Short Sell Signals line. The market is represented by the green shaded area.


Closing Thoughts...

My goal is to educate first of all... but, since a lot of my subscribers also want me to pick stocks, I share the results of my rules-based trading via my Signal Investor portfolio. And I do have a lot of folk following that particular trading strategy. Being up more than 40% this year and more than doubling the return of DJIA is not a bad year for any strategy.

Many of my subscribers eventually become clients of mine in my money management company, Sabinal Capital Investments, when they make the decision that they like the methodology and the performance, but do not have the time to follow that methodology. Being a rules-based investor is hard work that requires dedication and discipline. It is, indeed, a day-job, and many folk (even those who are retired) have priorities in their lives that just do not permit the time and effort needed to be a rules-based investor. That's when many of these folk call me to talk about managing a portion of their risk capital.

My number one goal, in this weekly newsletter, is to educate you and help you become a much better and far more profitable stock market investor/trader. If I can help you develop a rules-based approach to trading, I am confident you will make more money in the market and will also keep your risk within the level of tolerance that you can manage.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


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