Market Wizard Linda Raschke’s Technical Trading Rules
1. Buy the first pullback after a new high. Sell the first rally after a new low.
2. Afternoon strength or weakness should have follow through the next day.
3. The best trading reversals occur in the morning, not the afternoon.
4. The larger the market gaps, the greater the odds of continuation and a trend.
5. The way the market trade around the previous day’s high or low is a good
indicator of the market’s technical strength or weakness.
6. The previous day’s high and low are two very important “pivot” points, for this
was the definitive point where buyers or sellers came in the day before. Look for
the market to either test and reverse off these points, or push through and show
signs of continuation.
7. The last hour often tells the truth about how strong a trend truly is. “Smart”
money shows their hand in the last hour, continuing to mark positions in their
favor. As long as a market is having consecutive strong closes, look for up-trend
to continue. The uptrend is most likely to end when there is a morning rally first,
followed by a weak close.
8. High volume on the close implies continuation the next morning in the direction
of the last half-hour. In a strongly trending market, look for resumption of the
trend in the last hour.
9. The first hour’s range establishes the framework for the rest of the trading day.
10. A greater percentage of the day’s range occurs in the first hour then was the
case in the past, and thus it has become increasingly important to trade
aggressively if there are early signs of a strong trend for the day.
11. There are four basic principles of price behavior which have held up over time.
Confidence that a type of price action is a true principle is what allows a trader to
develop a systematic approach. The following four principles can be modeled and
quantified and hold true for all time frames, all markets. The majority of patterns
or systems that have a demonstrable edge are based on one of these four
enduring principles of price behavior. Charles Dow was one of the first to touch
on them in his writings. Principle One: A Trend Has a Higher Probability of
Continuation than Reversal
Principle Two: Momentum Precedes Price
Principle Three: Trends End in a Climax
Principle Four: The Market Alternates between Range Expansion and Range
Contraction!
12. In the world of money, which is a world shaped by human behavior, nobody has
the foggiest notion of what will happen in the future. Mark that word – Nobody!
Thus the successful trader does not base moves on what supposedly will happen
but reacts instead to what does happen.
The 10 Trading Rules of Jesse Livermore
1. Buy rising stocks and sell falling stocks.
2. Do not trade every day of every year. Trade only when the market is clearly
bullish or bearish. Trade in the direction of the general market. If it’s rising you
should be long, if it’s falling you should be short.
3. Co-ordinate your trading activity with pivot points.
4. Only enter a trade after the action of the market confirms your opinion and then
enter promptly.
5. Continue with trades that show you a profit, end trades that show a loss.
6. End trades when it is clear that the trend you are profiting from is over.
7. In any sector, trade the leading stock – the one showing the strongest trend.
8. Never average losses by, for example, buying more of a stock that has fallen.
9. Never meet a margin call – get out of the trade.
10. Go long when stocks reach a new high. Sell short when they reach a new low.
Ten Golden Trading Rules That Can Help New Traders
1. Never add too a losing trade. In adding to a losing trade you are already wrong
but now become more wrong with a bigger trading size. Adding to losers makes
you a counter trend trader that will eventually end badly when you find yourself
on the wrong side of a strong trend.
2. Never lose more than 1% to 2% of your trading capital on any one trade. This
means use position sizing aligned with stop loss placement so when you are
wrong the loss is not big enough to damage you financially, mentally, or
emotionally.
3. Never trade anything you do not understand 100%. Do not trade futures, forex,
or options until you understand the risk and how they work.
4. Trade in the direction of the trend in your trading time frame.
5. Only look for low risk/high reward trades or high probability setups , when you
don’t have any signals, don’t trade.
6. Trade your plan, your system, your signals, the chart, and price action, not your
own opinions, bias, or predictions.
7. You have to trade the right winning methodology that you are comfortable
with that fits your own personality.
8. If you do not have a full trading plan with rules on entries, exits and risk
management stop trading until you create one.
9. The size of your wins and losses ultimately determine your trading success
regardless of your winning percentage. No system is profitable with huge losses.
10. Your risk management rules will ultimately determine the success of your
technical trading system.
10 Qualities That Successful Traders Have And You Need
1. Remove Emotion from the Equation
As I mentioned above, successful traders are those who have removed emotion from
the equation. A stock does not increase in value because people think it will go higher;
rather, it does so because traders and investors have made the conscious decision to
allocate capital toward it. We all know this, but often forget it in the heat of the
moment. Before you submit your order, reflect on why you’ve decided to enter the
trade. Is it because you “just have a feeling that it will go higher” or that you conducted
thorough technical or fundamental analysis?
2. Don’t Chase Anything, Ever
Seems simple, right? Buy low and sell high, they say. But this is much easier said than
done due to the interference of emotions. Everyone wants to make money, but more
experienced traders know that more often than not, chasing a stock will result in losses.
In theory, this makes sense. Take the scenario of people sitting at their monitors, just
like you, and watching the same stock spike right before their eyes. Before they can
even enter the trade, thousands of share have traded hands and the stock spikes even
more. By the time your trade goes through, it is likely that much of the air has deflated
and the stock begins to rapidly descend from its high, as money managers are ripping
the carpet out from under you before you can even realize it. Learning not to chase a
stock higher (or lower, if you’re on the other side of the trade) comes with experience.
If you’ve fallen victim to the scenario I just played out, use it as a learning experience.
3. Be Patient, Young Grasshopper
The previous two points go hand-in-hand with patience. It is advantageous to wait for a
stock to show signs of a bottom before attempting to catch a falling knife. Likewise, it is
smart to deal with the short-lived pain of seeing a stock spike before your eyes for the
rewarding feeling of purchasing shares after its descent. Moreover, make sure you wait
until your prospective trade has fully setup to your specifications, and don’t assume
that any indicator will produce a buy/sell signal. Always confirm before you earn.
4. Bulls Make Money, Bears Make Money, And Pigs Get Slaughtered
So don’t get greedy. If you’ve used technical analysis to project a price target and the
stock is currently trading at that level, place the sell order and do not change it. This
applies to both long and short positions. He who believes that they can squeeze more
return out of their trade — the inexperienced trader — is often compelled to sell at a
smaller gain. Remember that any profit is a good profit.
5. A Penny Saved Is A Penny Earned
Losing money sucks. No trader is in the industry of losing money. If you’re looking at a
lackluster trade setup for the hope of making up for yesterday’s bad day, you’re
breaking rule number 3 and not realizing that money saved is money earned. It hurts
more to lose money than it feels good to make money. Remember to be diligent and be
content with earning and losing no money.
6. Know Your Risk Tolerance
Every trader is different, and only you know your risk tolerance. Are you the type of
trader who can risk 20% to make 20%, or do you feel the need to have a much higher
risk/reward payout in order to enter a trade? Be sure to define your risk before placing
any trade orders. Doing so helps ensure that you have an exit strategy, which is
arguably just as important as your entrance strategy. A little extra work in the
beginning can make all the difference in the end.
7. You Won’t Be Right All The Time
Even the best traders aren’t right 100% of the time. But to be a good trader, you just
have to be right more often than you’re wrong. Think of it like baseball: the Hall of
Fame hitters are those who got out 7 out of 10 times. While this would correlate to a lot
of red in a stock portfolio, the idea remains the same. You won’t, and don’t have to be
perfect. If you follow in the footsteps of the successful Wall Street traders, then being
right more than you’re wrong will come easily.
8. Learn From And Cut Your Losses
Because you won’t always be right, you’ll undoubtedly experience some losses. The
stock market is incredibly humbling, and a long stretch of winning trades can instantly
be cut short by devastating losses. But losing trades are healthy in the long run of your
trading career, so long as you learn from them. Ask yourself why the trade went awry,
and learn how to minimize similar mistakes in the future. Also, make sure that you exit
a position as soon as your risk is fulfilled or a technical barrier — such as support,
resistance, volume, etc — has been broken.
9. Don’t Turn A Trade Into An Investment
If you’ve entered a trade, it’s most likely due to a technical or fundamental catalyst that
caught your eye. For example, you may have boughten a stock because you thought its
earnings would beat estimates. Even more, let’s say the technical setup is incredibly
bullish and signals that the stock will exhibit upward moment. Unfortunately for you,
though, the company’s earnings are lackluster and the stock falls sharply. What do you
do now? Do you hope that the stock rebounds in the near future, giving you a better
exit point? Hopefully not, because once a trade goes the opposite direction and you
decide to hold onto it, you’ve turned that position into an investment. If you created a
position with one intention, make sure you exit it with the same and don’t change your
thesis to justify the price movement.
10. Take Technical Analysis with A Grain Of Salt
The thing about technical analysis is that it works until it doesn’t. As illustrated by the
example above, a stock may have a bullish technical setup that isn’t supported by its
fundamentals. Even though traders can cross out the name of a stock, conduct
technical analysis, and make a decision regarding its future price movement, the best
traders recognize that a fundamental hiccup can trump even the best technical story.
Make sure you take the time to research the sector and industry of prospective stock,
and make note of any sector-, industry-, or stock-specific catalysts before outlaying any
capital.
