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Applying the 10 Trading Commandments

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Solid mechanics are the key to persistent performance.

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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.

R.P.

Twitter: @todd_harrison

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Position in RIMM

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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