TRADING RULES

I was preparing some documents which required me to articulate my trading philosophy in just a few paragraphs which is not easy. Without posting every rule I follow, here (in short) is what I attempt to practice in trend following:


Buy the leading stocks of the current uptrend as they move up through a proper pivot point or new high. Using the CANSLIM formula we identify strong fundamental companies that also possess the correct technical "look". Stocks are only purchased as they break out of a proper sound base. The only time to be invested is in an uptrend. Cash is also a position and many times throughout the year 100% cash is a desirable position. Protecting capital is the #1 priority.

When/if fully invested the portfolio may consist of 4-6 positions. There may be cases where 3-4 is desired to maximize our return with the true leaders. Starting position is 60% of the desired total position and we only add as the first purchase shows us a profit. Typically, we'd look to add another 20-30% as we have a 3% gain and pyramid from there. We don't want to add past a 5% gain as this raises our original basis and increases the chances of being shaken out of our position. Keeping in mind nearly 3 of 4 stocks will reset the pivot.

Profits will start to be taken in the 20% area and taken incrementally. It is normal to take profits as the stocks is still advancing. The exception being if a stock advances 20+% in less than 3 weeks, in which we hold for a minimum of 8 weeks. However, we never let a 20% gainer turn into a losing position.

Selling rules are the most important. If a position is taken and the stock begins to move against us we sell 40% when down 3%, another 40% down 5% and remaining when down 7%. Most important factor is cutting loses quickly and letting winners run. With this formula, we can have 4 or 5 losers with only 1 winner and remain profitable.

This trading method uses rules and not opinions or emotions. We are rigid with our rules but flexible with our expectations. In most cases, the less you do the better. Sitting tight when right and quickly cutting losers is the key.