2. 1 Basic Strategies
In summarizing the strategies and tactics you need to avoid the big wipe-out and to stand proudly in the 'winners' circle,' the following constitutes the essence of a basic strategy:
1. Participate only in those markets which are trending strongly or which are in the process of developing into a major trending formation. Identify the major ongoing trend of each market and take positions only in the direction of this dominant trend or stand aside (see Figures
2.1 and 2.2).
2. Assuming that you are trading in the direction of the trend, initiate your position either on a signiﬁcant breakout (such as a gap opening on high volume) from the previous or sideways trend, or on a measured reaction from the ongoing major trend.
(a) In a major downtrend: sell on minor trend rallies into overhead resistance or against a strong down trendline, or on a 45% to 55% rally (or the third to ﬁfth day of the rally) from the recent reaction bottom.
(b) In a major uptrend,: buy on minor trend reactions into support or against a strong up trendline, or On a 45% to 55% reaction (or the third to ﬁfth day of the reaction) from the recent rally high. In this regard, it is imperative to note that, if you misread or choose to ignore the trend of the market, and are buying against an entrenched bear market or selling against an entrenched bull market, you are likely to spill lots of red ink, and feel pretty silly, as well.
3. Your with-the-trend position could result in a big favourable move, so you should try to remain aboard for the ride. By premising that every with-the-trend position could result in the big move, you will be encouraged to resist the many temptations to trade for the minor swings, or to scalp against-the-trend trades.
4. Once the position is going your way and the favourable trend has been conﬁrmed by your technical analysis, you can add to the position (pyramid) under speciﬁc conditions, as noted in Chapters 11I and 15.
5. Maintain your position until you are stopped out, and your trend analysis indicates that the trend has reversed. At that point, if you have been attentive to the market, you should be positioned for the newly formed trend.
In Chapters 11 and 15, the speciﬁc and detailed tactics of exiting a position will be discussed. However, if you have liquidated a position and subsequent market action indicates that the major ongoing trend is still intact and that you have liquidated prematurely, get back on board. But, do it carefully and objectively, again initiating with-the-trend positions as discussed elsewhere in this book, notably in Chapters 11 and 15.'
6. But, what if the market moves adversely, not with you as it's 'supposed' to? First of all, how will you know if it's a position gone sour? If you can't work it out, the daily equity run will 'tell' you in no uncertain terms. As a rule of thumb, you should probably not risk more than 40% of margin on a stock trade, or 70% on a futures trade. Dickson Watts, a famous turn-of-the-century commodity speculator once said, 'run quickly or not at all.' He may have had a deep bankroll or been enough of a masochist to include the, 'or not at all' part. My advice is to heed his words, minus the 'or not at all.'
And ﬁnally, while a consistent, viable strategy is clearly the main-stay of successful speculation, three additional traits are required:
discipline, discipline and discipline.