Trading Lessons from Todd Harrison

Going through the batch of Minyanville articles before the weekend, I came across some of Todd Harrison’s trading rules. Yes, we are not traders, but I did decide to apply those rules to the successful investor’s sentiment in current times.

Here they are:

1. Respect the price action but never defer to it.

The action (or “eyes”) is a valuable tool when trading but if you defer to the flickering ticks, stocks would be “better” up and “worse” down—and that’s a losing proposition. This is a particularly pertinent point as headlines of new highs serve as sexy sirens for those on the sidelines.

This means that when buying stocks you want to generate a profit. That won’t happen if you’re buying record highs. Buy Cheap, Sell Dear.

2. Discipline trumps conviction.

No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you’re smarter than the market.

Key Words: Risk and Define. Know all the upsides and all the downsides. Know every possibility as well as probability. Markets must make sense eventually, hope in them does not.

3. Opportunities are made up easier than losses.

It’s not necessary to play every move, it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.

Know when to hold ’em and know when to fold ’em. Only when that perfect hand comes along “Bet Big” and Let your winners run.

4. Emotion is the enemy when trading.

Emotional decisions always have a way of coming back to haunt you. If you’re personally attached to a position, your decision making process will be flawed. It’s that simple.

Always remain logical and don’t second guess your first assessments because it doesn’t feel right. Give it time. Too often analysts are correct initially but don’t sticks around long enough to realize.

5. Zig when others Zag.

Sell hope, buy despair and take the other side of emotional disconnects in the context of controlled risk. If you can’t find the sheep in the herd, chances are that you’re it.

When the whole world is all gaga over stocks maybe that may not be where you should be looking right now. Be a Contrarian.

6. Adapt your style to the market.

At various junctures, different investment approaches are warranted and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you.

Don’t be afraid to have your own ideas and theories. If they find a basis in economic teachings, go ahead and use it. Think for yourself.

7. Maximize your reward relative to your risk.

If you’re patient and pick your spots, edges will emerge that provide an advantageous risk/reward. Proactive patience is a virtue.

In other words: The approach of the Value Investor. Search, assess all possibility and execute. Always Use Margin of Safety.

8. Perception is reality in the marketplace.

Identifying the prevalent psychology is a necessary process when trading. It’s not “what is,” it’s what’s perceived to be that dictates supply and demand.

Although this is generally true (especially for traders), in investing however understanding reality does play an enormous role in success. If everyone says one thing, but the laws that govern nature, science or economics say otherwise better stick to the laws. Understand the fundamentals.

9. When unsure, trade “in between.”

Your risk profile should always be an extension of your thought process. If you’re unsure, trade smaller–or paper trade–until your identify your comfort zone. Trading “feel” is cyclical and any professional worth his or her salt must endure slumps.

For investors this means playing safe (buying bonds or gold) when in doubt until your perception is clear again. Don’t speculate.

10. Don’t let your bad trades turn into investments.

Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off—win or lose.

Understand when you’re wrong and get out. Don’t gamble with your way down. Use stop losses.



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