9 Rules You Must Know to Beat the Market

Want to become a good trader?

Then you need to become a sponge. You need to absorb a ton of information–then make sense out of it all. And today I’m going to show you how…

Ned Davis, founder of Ned Davis Research Group, is going to help. He’s been in the business 35 years. He’s seen it all – booms and busts, bulls and bears. And he’s proven he knows what it takes to make money in the market.

“The markets are fascinating,” Davis recently told Sarasota Magazine. “One year, you are an expert on oil. The next year, you are learning all about housing. The next year it’s Ukraine, the Middle East, Ebola, because that’s affecting the market. In this business, if you like to learn, you’re learning something new every day.”

Like any great investor, Ned Davis works with a set of rules. Nine to be precise. And today we’re breaking down the first four. So pay attention! These are the rules you must master if you want to succeed–no matter if the market’s going up, down, or sideways.

To help you out, I’ve added my own comments to this trusty list. That’ll help “translate” Davis’ rules into our own Rude trading strategies.

Let’s get started…

1. Don’t Fight the Tape

That’s an old Wall Street saw you might have seen before. What does it mean? It simply means you need to go with the trend when investing and trading. If you “fight the tape,” it means you make boneheaded moves like investing in stocks that are in a downtrend. Many traders think they’re being contrarian when they’re really being stupid. Don’t trying to swim against the current. You’ll drown. But you have no idea how many people try…

2. Don’t Fight the Fed

You don’t have to like everything (or anything) the Fed does. That’s fine. Think I do? But when it comes to your trades and investments, go with the flow or risk getting flattened. Period. The Fed’s a hammer. You’re a nail. Deal with it.

Davis is a bit more technical…

“Remain in harmony with interest-rate trends (rates dropping is good; rates rising is bad. Money moves markets. Stay in line with monetary trends (money [minus] economic demands equals liquidity left over for financial markets).”

3. Beware of the Crowd at Extremes

All trends eventually come to an end. And Davis says we have to look for psychological extremes and prepare to exploit them. When a trend gets really frothy, the bubble’s probably about to burst. But this also works the other way around. When no one (and I mean no one) wants anything to do with a stock or industry, chances are it’s getting to a point where you should buy.

4. Rely on Objective Indicators

You have a “gut feeling” about a stock? Then go take an antacid or something. Remember, the market makes fools of most people most of the time. And guess what– you’re “most people.”

Never, ever, ever, ever think you can outsmart the market. Instead, rely on your charts and indicators to tell you when to buy and sell. It’s the best defense you have against your emotions–which are your biggest trading enemy. Don’t ever “trade your gut”…

5. Be Disciplined

“Our mandate is to follow our models, forcing us to be disciplined,” Davis says. “Our benchmark or anchor composite model determines core invested position.”

There’s a lot of noise out there. Do you have the discipline to ignore it? Many folks don’t. They get caught up in rumors, guesses and hot tips. Don’t make that mistake. It never ends well. Filter out the noise and follow your plan to the letter.

6. Practice Risk Management

Here’s a common scenario. You make four trades. Three of them are winners, and you book $250 each for a total of $750. But you broke your rules on your fourth trade. And you ended up losing big. It cost you $1,000. Despite the fact that you profited from 3 out of your 4 trades you ended up booking total losses of $250.

And you wonder why so many traders go gray early? Bad risk management leads to bad returns. Don’t do it.

7. Remain Flexible

Markets change. The Fed changes interest rates. Disruptive technologies get introduced. A bad drought drives up the price of grain…who knows? And what worked last year might not work today. If you notice your trading system isn’t producing as many winners as it used to, maybe it’s time to check market conditions and possibly revisit your strategies…

8. Money Management Rules

“We are more interested in making money than being right,” Davis says. “Be humble and flexible.”

I’m wrong a lot. Every trader is, even the best. And those who can’t admit they’re wrong end up losing their shirts. As I’ve said many times, if we’re wrong, we move on to the next trade. Period. No matter if it looks like the greatest thing since sliced bread. No whining, no looking back. Nope, it’s adios, amigo.

9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

What else needs to be said? Study bull markets. Study bear markets. It’s no coincidence many of these longer-term trends play out in similar fashion. It’s never exactly the same but as Mark Twain said, even if history doesn’t repeat itself, it does rhyme.

OK, there you have it – nine trading rules to live by. If you want to become a winning trader, you have to own them.

If they’re good enough for a market wizard like Ned Davis, I promise they’re good enough for you.

Now get crackin’…


Greg Guenthner
for The Daily Reckoning

P.SKeep the gains flowing! If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, right here. Stop missing out. Click here now to sign up for FREE.

PSS: I’m traveling all day today—so no Rude tomorrow. Check back Thursday morning for more trading updates…

[Ed. Note: Send your feedback here: rude@agorafinancial.com – and follow me on Twitter: @GregGuenthner]

Trading Notes

The nail that sticks up gets hammered down…

This old Japanese proverb perfectly sums up how most of the country operates. Tradition, respect, and ritual reign supreme. Fall in line and do what is expected of you (or else).

To put it another way, as one presenter at the International Federation of Technical Analysts conference, don’t take risk.

Here in Tokyo, all of the analysts and experts seem to agree that the locals are, to put it delicately, resistant to change.

But many of the folks I’ve spoke with—both Japanese and foreign—seem to think that the country is flipping the switch.

Heck, a little optimism would be welcome here in the Land of the Rising Sun. Despite the Abenomics spark that has helped the Nikkei Average more than double since late 2012, Japanese stocks have a long way to go before even coming close to reclaiming the highs set over 25 years ago…

To be perfectly honest, I don’t know if it’s truly morning in Japan. But I can tell you that the younger generation appears to embracing a little more risk than their older counterparts.

As I was riding the elevator back to my room last night, a young couple was whispering behind me. I turned and caught the man’s eye.

“Tall,” he said, raising his hand high above his head

I was surprised that he would speak so candidly to me. After all, you wouldn’t catch an older Japanese person making a personal comment to a stranger, let alone openly chatting about him behind his back.

“Yeah, I have to be careful not to bump my head around here,” I said, slapping the top of my forehead.

He nodded. “Japan… small country.”

We shared a laugh and I stepped off at my floor.

Hey, the kid might have unintentionally made a good point. Maybe he’s the new generation of risk takers that Japan so desperately needs right now…

The Daily Reckoning