Verbal Kint once famously asked, “How do you shoot the devil in the back; what if you miss?” As we edge through the first month of 2012, investors are wondering the same thing.
Insofar as we're navigating the world's wildest reality show, I thought it might be helpful to juxtapose our 10 Trading Commandments
with the current climate.
In no particular order:
Zig When Others Zag
In December 2011—or, 10% ago in the mainstay indices—the smartest guys on Wall Street screamed to get out of the market
. Now, according to the Investor's Intelligence poll this morning, there are only 29.8% bears. Market moves typically consist of three phases: denial, migration and panic
Respect the Price Action but Never Defer to It
Define a stair-step approach to risk management; as discussed in December 2011, as long as S&P 1265
and BKX 40
hold, the current move "works" to S&P 1360
Opportunities Are Made Up Easier Than Losses
If you missed this rally thus far, don't despair—it could be worse,
it could be raining
you could have been short. Clear the mechanism; profits reside in the ride ahead.
Emotion Is the Enemy When Trading
There are many reasons to be angry as social mood continues to deteriorate, but we must remember that news is always best at the top and worst at a bottom.
Adapt Your Style to the Market
For the better part of 2011, my stylistic approach was to "hit it to quit it." Entering this year, I've modified that—in select situations, such as Research in Motion
(RIMM)—by trading around core exposure, buying dips and selling blips.
Discipline Trumps Conviction
Good traders know how to make money; great traders know how to take a loss.
Maximize Your Reward Relative to Your Risk
Market proxies have become extremely crowded (and dare I say, gamed
). Filter your process to identify individual stocks and situations in search of the incremental edge.
Perception Is Reality in the Marketplace
Never let an opinion get in the way of making money.
When Unsure, Trade "In Between"
Hit for average, not power. Singles and doubles add up, and you're less likely to strike out.
Don't Let Your Bad Trades Turn Into Investments
Post-rationalization is the fatal flaw of positive performance. There is a world full of opportunities out there; don't carry baggage as you explore them.