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The Market’s Screwy Enough… Your Trading Rules Shouldn’t Be

The market’s given us plenty of action to sink our teeth into lately.

It’s all too easy to get caught up in the mania. With stocks ripping to new highs, trading can feel downright easy. But it’s important to take a step back and hone your trading rules— even in a favorable trading environment like we’re seeing this year.

Today, we’re going to analyze five trading rules one of the most successful traders who has ever lived: Jesse Livermore. These were some of the rules Livermore used throughout his career to help him book millions in profits.

If you follow them closely, they will lead you to consistent profits. Of course, you don’t have to take my word for it. Ask any successful trader and they’ll tell you they’ve concocted a set of rules that have helped them succeed.

Don’t wait another minute. if you haven’t started developing your own trading rules, here are five strong candidates you can add to your list:

1. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.

This rule sounds a lot more complicated than it is. An easier way to think of this rule is that you should only bet your trading dollars on market action—not what you think is going to happen.

Everyone has opinions. We have biases. We see actions taken by central bankers, politicians, and CEOs and can’t help but guess how it will affect the markets. But these thoughts and feelings are worthless until we get confirmation from market movement that our guesses are correct.

2. As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.

Well before most speculators discussed the market in terms of trends, Livermore possessed a deep understanding of the madness of stock market participants. He knew the trend was his friend—and he was more than content to ride it until it stalled out.

These days, it feels like traders’ timeframes are getting shorter and shorter. Instead of letting a trade run its course, speculators are taking profits in a matter of hours—or even minutes. Sure, they might make some spare change here and there. But the real money is made by grabbing onto a big trend and not letting go until the market shakes you off…

3. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.

The financial media is guilty of breaking this rule at least three times a week. You’ll see some story about how the major averages are due for a fall because a household name stock is tanking on poor earnings.

In fact, since we’re finally wrapping up earnings season right now, I suspect we’ll see a few of these headlines spring up over the next couple of weeks…

Earlier this year, we were told the rally might be in trouble because Amazon was slaughtering brick and mortar retail stocks left and right.

But in reality, these stocks went their own way. Amazon and the rest of the FANGs pressed higher, while a handful of traditional retailers pressed to new lows. None of this action interrupted the movement of the major averages.

4. Wishful thinking must be banished.

I know this trading rule sounds pessimistic. I promise this sentence isn’t scrawled on the entrance to trading hell. But it is important for you to heed its message…

Wishful thinking is poison when it comes to your open trades. If a trade hits your stop loss, but you are hoping for a strong earnings report next week, you cut your losses. You can’t wish the market higher. If you try, you’ll drive yourself crazy (and to the poor house).

Approach your trades unemotionally. If it’s time to sell, cut the cord and move onto your next play.

5. The leaders of today may not be the leaders two years from now.

Quick! Name all the stocks that were listed on the Dow back in 1960!

You can’t do it. Neither can I.

Investors tend to lose sight of the fact that major averages are actively managed. Every few years, new and better companies are selected to replace the laggards so the averages better represent the best stocks on the market.

As a trader, you shouldn’t get too nostalgic about the stocks that posted unbelievable runs higher over the past decade. Instead, be on the lookout for the next potential market-leader you can add to your portfolio…


Greg Guenthner
for Seven Figure Publishing

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Greg Guenthner

Greg Guenthner, CMT, is the editor of Opening Bell Fortunes and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing since 2005. In 2019, the average position in Greg’s Sunrise Fortunes portfolio outperformed the S&P 500 by 1.65x.

View More By Greg Guenthner