VOLTAIRE REVISITED
 
Some Common sense trading approaches.
 
Voltaire once said, "Common sense is uncommon." This can be applied very well to the markets. What one needs in the market is an overdose of common sense. But even though we are full of it most of the time, it seems to desert us just as we need it in the market.
 
We enumerate herebelow some of the common sense approach to trading and investing. Frequent reading of this is recommended so that the points get to be a part of one’s psyche. Then Voltaire may not have so much to complain about.
 
Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure methods and trade according to the major trends only.
 
None of what follows is rocket science and none of them are very original either. All traders and investors know them all except that they keep forgetting them. We put them together in one list so that it may become easier to see the errors as they are being made and halt them so as to limit the damage we cause to ourselves.
 
1. Trade long in a bullish phase. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast? Thus, despite our bullish outlook overall, we end up losing money on ill-timed shorts!! In a bull market, one can only be long or on the sidelines.
 
2. Buy strong stocks and sell weak stocks. The public continues to buy when prices have fallen. The operators buy because prices have rallied. This is the principal difference between the winners and losers of the market. It may not sound logical, but buying strength works. The rule of survival is not to "buy low, sell high", but to "buy higher and sell higher". Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
 
3. Don't enter a trade until it has been well thought-out, a campaign devised for adding to the trade, and contingency plans set for exiting the trade This way one is forced to think the entire trade thru to the end and not just about the entry point.
 
4. In bullish phases buy 38 or 50% retracements while in bearish phases sell similar retracements. Trade with the trend and initiate further positions so that one can win bigger.
 
5. Patience is a very rewarding quality in the markets. Note the following points.
 
  • If you miss a trade, wait for a correction to occur before putting the trade on.Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
  • Do not take small profits. Small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
 
6. Be Impatient about booking losses. “The first loss is the best loss goes one market adage”. Nothing truer than those words.
 
7. Never, ever add to a losing trade, or "average" into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are shorting, then each new selling price must be lower. This rule is to be adhered to without question.
 
8. Add to winners and get rid of losers. Each day, look at the various positions you are holding and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the adage, "let your profits run."
 
9. When trading is going well, enlarge your positions. But when trading is going badly, cut back or stop for some time.
 
10. Pyramiding is advisable but in smaller lots every time you pyramid.
 
11. Not all markets are tradable. When market is caught in a phase of indecision, we have no compulsion to remain in it.
 
12. The first phase of the rise is always slow. The last phase of the rise is always very dynamic. 50% of the price rise at the end will occur in 10% of the time!. Big money is made in the ending phases. Make sure you are there in the market at that time!