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Technical Market Indicators
to Ensure Survival over the Long Run
1. Always play by the rules. No exceptions.
2. To manage is to plan, organize, and control--with consistent discipline.
3. Preserve Capital. Capital takes time to accumulate, but capital can disappear fast without good management.
4. Calculate Reward/Risk Ratios. Enter a position only when your analysis indicates at least 2 points of potential reward for 1 point of potential risk.
5. Calculate Bet Size and Diversification. Commit no more than 5% of total capital to any one position. That way, you can bounce back from a few bad trades.
6. Short-term traders should limit a loss to 1% or less for any one position.
7. Traders should limit total portfolio losses to 5%, calling a time out from trading when total equity drops that much. This allows traders an opportunity to clear the head, settle the nerves, break bad momentum, limit negative spirals into deep holes, and calmly reassess their trading strategy and tactics away from the heat of battle. A time out puts the breaks on revenge trading, which is the destructive attempt to quickly make back a loss, which too often can lead to larger losses. A time out makes it easier to recover from a loss.
8. Longer-term investors should limit a loss to 5% to 9% for any one position.
9. Investors should limit total portfolio losses to less than 15%, calling a time out from investing when total equity drops that much. Portfolio losses greater than 15% make it much harder to recover and too often lead to larger losses. For example, a 50% loss, such as those in years 2000 and 2008, requires a 100% gain just to get back to even.
10. Analyze multiple time frames--the time frame you are trading as well as higher time frames. Trade only in the direction of the larger trends.
11. Long-term investors can put the odds in their favor by investing with the Primary Tide that typically lasts many months or years. In a Bull Market, look only for opportunities to enter long and close long. Stay out of Primary Bear Markets, or look only for opportunities to enter short and close short.
12. Enter Actual Stop Orders. Mental Stops too easily can be rationalized away.
13. Use time stops. Short-term traders, whose time horizon is measured in minutes to days, should exit losing positions before the close of the day. Longer-term investors, whose time horizon can extend to weeks and months, also should set a time stop appropriate to the cycle they are trying to capture, such as the end of the month. Time stops avoid tying up capital in positions that are not productive.
14. For systems trading, Net Profit should be more than double the Maximum Draw Down, based on blind simulation on unseen data.
15. Beginning traders should risk only a small fraction of their capital using the minimum size orders until they acquire their real-time market education as inexpensively as possible. Avoid overconfidence after a few winning trades.
16. The market can do anything. No one knows what the market might do next. Constantly assess the probabilities, and be sure to have an exit strategy in case of the unexpected.
17. Trading systems and methods must be adaptive. The character of a market can change suddenly, and any trading system could stop working. The transition from a bull market to a bear market, or from a bear to a bull market, requires a change in trading style. In addition, market behavior evolves over time.
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Robert W. Colby, CMT (Chartered Market Technician), is a consultant to institutional and private investors and traders. Colby provides custom research services tailored to your objectives, whether they be short-term trading, long-term investing, or something in between. Colby also teaches and speaks at educational seminars, conferences, and workshops. Over his 50 years of professional experience, Colby has become known the world over for his expertise, objectivity, independence, and integrity. Please click here to contact Colby directly.
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