Crush the Market Using These 9 Trading Rules

If you break your trading rules, you will fail…

Sloppy, undisciplined trading will cost you money. Sure, you might get lucky now and again. But you’ll never achieve consistent success shooting from the hip or trusting your gut.

But there’s help. The wisdom of Ned Davis, founder of Ned Davis Research Group, can make sense out of the insanity. He’s been in the research business 35 years. He’s seen it all—booms and busts, bulls and bears. And he’s proven he knows what it takes to make money in the market.

“The markets are fascinating,” Davis recently told Sarasota Magazine. “One year, you are an expert on oil. The next year, you are learning all about housing. The next year it’s Ukraine, the Middle East, Ebola, because that’s affecting the market. In this business, if you like to learn, you’re learning something new every day.”

Like any great investor, Ned Davis works with a set of rules. Nine to be precise. And today we’re breaking ‘em down. These are the rules you must master if you want to succeed in the trading game… no matter if the market’s going up, down, or sideways.

To help you out, I’ve added my own comments to this trusty list. That’ll aid in

translating Davis’ rules into your own Rude trading strategies.

Let’s get started…

1. Don’t Fight the Tape

That’s an old Wall Street saw you might have seen before. What does it mean? You simply need to go with the trend when investing and trading. If you “fight the tape,” it means you make boneheaded moves like investing in stocks that are in a downtrend. Don’t trying to swim against the current. You’ll drown.

2. Don’t Fight the Fed

You don’t have to like everything (or anything) the Fed does. That’s fine. Think I do? But when it comes to your trades and investments, go with the flow or risk getting flattened. Period. The Fed’s a hammer. You’re a nail.

Davis is a bit more technical…

“Remain in harmony with interest-rate trends (rates dropping is good; rates rising is bad. Money moves markets. Stay in line with monetary trends (money [minus] economic demands equals liquidity left over for financial markets).”

3. Beware of the Crowd at Extremes

All trends eventually come to an end. And Davis says we must look for psychological extremes and prepare to exploit them. When a trend gets too frothy, the bubble’s probably about to burst. But this also works the other way around. When no one (and I mean no one) wants anything to do with a stock or industry, chances are it’s getting to a point where you should look to buy.

4. Rely on Objective Indicators

If you have a “gut feeling” about a stock, take an antacid or something. Remember, the market makes fools of most people most of the time. And guess what — we’re most people.

Never think you can outsmart the market. Instead, rely on your charts and indicators to tell you when to buy and sell. It’s the best defense you have against your emotions, which are your biggest trading enemy. Don’t ever trade your gut…

5. Be Disciplined

“Our mandate is to follow our models, forcing us to be disciplined,” Davis says. “Our benchmark or anchor composite model determines core invested position.”

There’s a lot of noise out there. Do you have the discipline to ignore it? Many folks don’t. They get caught up in rumors, guesses and hot tips. Don’t make that mistake. It never ends well. Filter out the noise and follow your plan to the letter.

6. Practice Risk Management 

Here’s a common scenario. You make four trades. Three of them are winners, and you book $250 each for a total of $750. But you broke your rules on your fourth trade. And you ended up losing big. It cost you $1,000. Even though you profited from 3 out of your 4 trades you ended up booking total losses of $250.

And you wonder why so many traders go gray early? A lack of risk management leads to poor returns.

7. Remain Flexible

Markets change. The Fed changes interest rates. Disruptive technologies are introduced. A bad drought drives up the price of grain. And what worked last year might not work today. If you notice your trading system isn’t producing as many winners as it used to, maybe it’s time to check market conditions and revisit your strategies.

8. Money Management Rules

“We are more interested in making money than being right,” Davis says. “Be humble and flexible.”

I’m wrong a lot. Every trader is, even the best. And those who can’t admit they’re wrong end up losing their shirts. As I’ve said many times, if we’re wrong, we move on to the next trade. Period. No matter if it looks like the greatest thing since sliced bread. No whining, no looking back.

9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

What else needs to be said? Study bull markets. Study bear markets. It’s no coincidence many of these longer-term trends play out in similar fashion. It’s never exactly the same. But as Mark Twain said, even if history doesn’t repeat itself, it does rhyme.

There you have it: nine trading rules to live by. If you want to become a winning trader, you have to own them.

If they’re good enough for a market wizard like Ned Davis, I promise they’re good enough for you.


Greg Guenthner

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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.

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