- price is the true north star. Everything is reflected in the price. all opinion, hundreds of money managers, their actions and inactions, pension funds, all research all knowledge is finally shown in the overall market price which is S&P index or NADAQ composite. SPY or QQQ. Why is this important? then you don’t have to frantically look for news and CNBC or hot tips and can spend more time with family and friends and meditate and swim or hike a mountain.
- Profit is made by avoiding loss. Loss is defined as ATR – average trading range. any simple chart on yahoo finance you can plot ATR 20 days. First decide how much can you afford to lose. 1 ATR or 2 ATR and so on so forth. If you are wrong just exit. why is this important? Look at the chart below: say you are only willing to lose 8-9 percent of your equity.
why is this important : Consider the math. Say you buy a stock at 50. For whatever reason, it drops 8% to 46 during the next few days. You promptly unload it and move on. To reclaim that loss, you need to make an 8.7% gain on your next purchase with your remaining capital, which shouldn’t be hard to do.
this is our #1 Priority : preserve our capital at all costs. Sell first after a small loss of 8% and then ask questions later.
why ATR : ATR is a measure of volatility. Let the market move up or down which is its nature. that’s what it does. If volatility spikes then be in sidelines till things settle down.
3) If market is in correction stay in sidelines – 3 out of 4 stocks lose money in correction. If a market is in rally then buy top rated stocks breaking out.
When is a market in correction? when 8-9 days of high volume selling in the overall market within a month.
when is the market in rally? Top rated stocks are breaking out in high volume. the great paradox of investing is that the ripest buying opportunities occur right after bear markets when markets have declined 20% or more.