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When to Stick to Your Investment Rules

By: Jack Landry

When you first begin investing in the stock market, it can be difficult to keep track of everything that you should keep track of if you have not formally created a trading strategy that you will follow. Part of creating a trading strategy means that you must first gain an understanding of how the stock market works and the different phases that it goes through.

When you fully understand the different phases that it goes through, you will be able to create a trading strategy based on those phases and the current phase that the market is in. There is a lot of risk involved with trading stock for the better and for worse.

The general rule that you should follow is that you should trade aggressively when you are sure that you have made a correct assessment of the current conditions, but to trade in a manner that protects your money and your investment when you are unsure that you have made the correct decision.

In the beginning, you will probably feel uncertain often. However, as you gain experience, you will feel more confident more and more of the time.

There are several things you should keep in mind if you begin investing during a bullish transition phase. During this phase it is generally best to trade with extreme caution.

You should also implement your strategies to protect your investment. During this phase, you are usually doing well if you successfully protect your money.

When you have taken care of this, you will want to make sure that you are prepared to act when the bull market phase emerges, if it does. During the transition you will want to take new positions in order to take advantage of as many things as possible, but you do not want to act before you should.

It is easy to think that the market is going to make the switch and to want to get ahead of the game. When you get too excited about beating the market, you will try to position yourself before the market actually switches and you may lose your investment.

You do not need to rush in anticipation of a bullish transition. Instead, bide your time and invest when you know it is a wise decision. In addition, you should make sure that you are very picky when it comes to selecting new stocks.

Choose to purchase small, partial positions instead of full ones so that you can test out the waters as you learn before you invest your entire investment. You can do this by identifying the strongest stocks that are positioned in the strongest sectors.

You can also look for trading-range breakouts or other reversal signals for stocks that may be turning around. You will also want to keep your stops tight and switch when your rules say to switch and not any other time.

It is also a good idea to consider investing in an exchange traded fund. An exchange traded fund is very similar to an index mutual fund, but it is implemented with the stock exchanges.

However, do this only if you cannot find individual stock that fit the rules you have developed for yourself. When individual stocks appear again that fit your criteria, consider switching back.

When the transition does occur and you enter the bull market, you will want to invest as much as you can. You will still want to take measures to protect your capital, but it will not be as important during this phase.

This is the part when you will want to firmly establish yourself for a long term investment. Short positions are a waste of time during a bull market.

Unlike the bullish market, it is a good idea to purchase breakouts and to take full positions because your goal should be 100 percent. In addition, you should use your marginal account for leverage, if you have set one up.

During this time, you may be a little more flexible with your rules because you will not be as concerned about protecting your capital and because it is generally more effective to do so. The best indicators that you are in a bull market will happen at the beginning of this phase, this will be when you want to adjust your technique appropriate for the bull market.

As this phase progresses, you will want to become less and less aggressive. This means that you will want to slowly return to your original rules more and more strictly.

Article Source: http://articles.tiptopweb.info

Jack R. Landry has worked in portfolio management for the last 20 years. He recommends (www.tacticalportfolio.com) for management advice to strengthen your portfolio.

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When to Stick to Your Investment Rules