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By: Chris Rowe — October 6, 2020

5 Essential Trading Tips I Learned on Wall Street

Today, I'm going to give you something that (I hope) will stay with you for the rest of your days (and may there be many, many more of them)!

I have pages and pages of trading tips that I’ve jotted down over the years. Some of them stretch back to when I first earned my Wall Street stripes.

Even at this point in my investing career, I STILL make time to go through those pages of trading tips on a regular basis, just so that they stay fresh in my head.

In fact, it's something that I did this past weekend.

I want to share with you five of my favorite trading tips -- the ones that have truly helped to get me where I'm today.

I hope you’ll write them down just like I did. They'll never steer you wrong -- no matter what kind of market we're in.

MY PERSONAL TRADING CHECKLIST: 

1) Don't Talk to People About Your Trading. 

I know what you're thinking: "Chris... you never shut up about your trading! Whudaya mean: 'Don't talk to people'"?

I hear you. So allow me to clarify...

Sure. I talk a lot about the markets and about investing. That's my job! So when I say "Don't talk to people," what I mean is: Don't talk yourself into getting attached to any position.

As a trader, you have to be on your toes, completely unbiased, and ready to change your opinion at the drop of a hat.

This rule is crucial.

The problem is that when you talk to people about what you're doing, it can reconfirm how you feel about a trade. So the more you talk about a trade, the harder it can be to change your opinion.

The ability to quickly change your opinion from one moment to the next is unique and often challenging, but vital to a successful portfolio.

So try to keep the bragging (and your wishing and hoping) to a minimum, folks. Otherwise, you may end up like the captain of the Titanic.

2) Be a Bull AND a Bear … At Least Partly.

They call them "long-term trends" for a reason: they stick around for a long time.

Most of the time, you won't be in the middle of a turnaround. But when a market does turn around, it happens fast. Especially when it turns to the downside.

Whether the trend is up or down, the short-term moves will be up AND down.  It was this fundamental fact that prompted the great Jesse Livermore to say: "Don't hold your allegiance to the Bear side or the Bull side."

In other words, unlike in most areas of life...

... when it comes to trading, disloyalty is actually an excellent quality to have.

Even if the long-term trend is up, you should still look to play the short-term ups and downs. If the long-term trend is up, then you should have more bullish positions than bearish ones.

If you don't want to take the risk of shorting a stock, then consider buying deep in-the-money Put options that expire about six to 12 months out.

But... watch out for this common mistake.

Let's say that the long-term trend is up. All of a sudden, it occurs to you that everything is going swimmingly in the stock market. I mean, everything is just perfect... even "too perfect".

So, you decide to play it safe and take some bearish positions, just in case.

Smart.

All of a sudden, the market takes a normal, healthy correction for about a month. Everyone you know is kicking themselves for not selling at the recent top, and so are you. But the difference is that you have those bearish positions, so you feel GREAT.

Now, the common mistake is to hold on to those bearish positions.

Don't do it!

Maybe you can hold 20% of them, but be sure to take your profits on the rest. If the long-term trend is up, then the market will almost surely continue its trend for a "long" time. So don't let your profit turn into a loss.

The last thing I'll say about this is that you shouldn't "micro manage" your portfolio.

If you initiate some bearish positions and the market keeps trading higher, then the majority of your portfolio should be doing okay. So don't worry too much if a few bearish positions go the wrong way for the time being.

You'll lose some here and lose some there, but overall, you should be OK.

More importantly, when the day comes that the market does have a sharp selloff followed by a bear market, your bearish positions should be working exceptionally well.

This will keep you from panicking… or, worse, from losing 60% of your stock portfolio.

(If the long-term trend is down, just do the opposite of what we said above. Take a few bullish positions, but take more bearish positions.)

3) Pay Attention to Price/Volume Activity.

I want you to write the following down and Scotch Tape it above your computer... on to your fridge... and over your shaving mirror: "Volume = Validity".

When a stock makes a move, check out how meaningful that move was by looking at how much volume traded that day or that week.

If the volume is very low, the move is probably meaningless. If it's high, you should take heed of what the stock is trying to tell you.

If you're long a stock which moves to the upside, you want to see above-average volume. This is especially true when a stock breaks through a recent resistance point, or a price that the stock has had noticeable trouble breaking through in the past.

Let's say that a stock ran up to $32.00 and then sold off, as if $32.00 was sort of its ceiling. Say it then repeated that pattern three more times. Now, let's say on the fourth try the stock breaks above that $32.00 ceiling and trades up to $33.50.

This is a critical time for you to check out how much volume that stock has traded. Compare that volume to its "average daily volume".

You want to see at least two times the average volume traded on the day that the stock broke that resistance point.

The more volume traded on that day, the better. That tells you that it's likely the stock has much more upside.

On the flip side, if your stock has been trading higher and then pulls back, check out the volume. Get a clear picture by looking at the stock's chart.

If you notice that the volume is higher than usual, it's a red flag. You may consider selling AT LEAST half of your position.

It’s an even bigger red flag if, right before the high volume selloff, you notice that as the stock was trading higher, the volume was decreasing. That means that the buying has slowed down.

Seeing a buying slow-down followed by a big selloff is a sign to sell.

Now, if the stock corrects but the volume is very low relative to its recent activity, that should comfort you. As a matter of fact, when a stock trades higher and then corrects, what you would love to see is the volume getting lighter and lighter as the stock corrects. That may be a good time to add to your position.

What you should love to see after that is for the stock to trade higher on increasing volume.

4) Don't Go Back to the Well.

This is sort of a tough rule, because if you know a stock well and you understand the "rhythm" of its trading activity, it could be smart to trade what you know … as long as you're not emotional.

The problem here is that the stock market moves based on emotion. And chances are you're not the exception to most traders. So this is one of those rules designed to save you from yourself.

If you're ice cold and have zero emotion tied into your trading program, then you're pretty unique.

But unless you're a professional trader (which everyone thinks they are right after they closed out a winning trade), don't go back to the same stock just because you already made money on it.

Chances are that the first time you made money on a stock will probably be the best that you will do on that stock for a while. This is just a rule of discipline.

It may be a good rule for you to follow, simply to avoid the natural urge to go back to something that was successful in the past.

Professional traders do this all day long, and even professionals can let their emotions get the better of them. You may find yourself asking: "Am I biased?  Do I want to trade this stock again just because it worked in the past?"

If you're not 150% sure that you're unbiased, then just stay away. It's good advice that’s saved me big money.

5) Buy Stocks That Show the Strongest Performance.

In other words, buying after a rally isn't necessarily buying at the top.

When a bull market starts, it usually happens very quickly. As a matter of fact, by the time most people realize that the bull market has started, more than half of the gains have already been made!

This can be frustrating to individual investors. They all know that the institutions are the ones who make the bulk of the money in the stock market.

Did they know something that you don't? Why is it that the institutions are usually already in the bull market from the time it starts?

The answer is: They're in it because they're the cause of the bull market to begin with.

It may seem like I'm stating the obvious here, but most people lose sight of the fact that stocks can only move based on buying or selling.

Although institutions know "the scoop" before individuals do, it's not like they're able to get in before the move because they're so smart. It's because they are the move. When they start buying, that large-scale buying causes the market to move big time.

So what do you do about this frustrating problem?

The next time you find yourself fretting because you missed the bottom of a 10% move in the stock market, start looking at which stocks were the first ones to move when the market turned to the upside.

They're up for a reason: Because institutions are accumulating the stock in anticipation of an even bigger move.

Even if the stock has doubled, you may want to consider it. Don't think that you "missed the boat," because stocks can trade 1,000% higher. The first stocks that double in a bull market usually double again! 

OK. There are my "five for fighting" principles.

Actually...

Here's a Bonus Tip: When the Stock Market Rallies, Pay Close Attention to Any Stocks in Your Portfolio That Are NOT Participating in the Rally.

If you see the Dow Jones up 200 points and you own stocks that are either down or only up slightly, then that's a major red flag. If they perform badly in an up market, what will happen in a down market?

To zero in on the problem a little more, you should also pay attention to how that stock's sector is doing.

Digging even further, look at how the stock's peer group is doing. If the peers (or competitors) are trading higher, but the stock you own isn't, then that should be another red flag.

On the flip side, you can usually spot the stronger stocks when the market is tanking.

If the Dow is down 200 points and you see stocks that are up, you should pay closer attention to them because someone may be out there buying them when nobody is watching.

If they perform well in an ugly market, how do you think they'll perform in a bull market?

I hope these tips will help you for years to come.

See you soon!

Chris Rowe

Founder, True Market Insiders

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