Here's Why the Stock Market is Driving You Crazy Right Now

The market’s ripping higher…

But the strongest stocks aren’t the names most investors were watching just a few short weeks ago.

Financials are higher. So are industrial metals. Energy stocks found some momentum last week. The Dow is also pushing to new highs.

On the other hand, tech stocks and biotechs are weak. Popular mega-caps like Facebook are well off their highs. Amazon shares finished lower every single day last week. And it’s holiday shopping season, for cryin’ out loud!

Stock market rotations like these can be downright frustrating for most investors. That’s why it’s important to maintain a list of trading rules. Your list of rules should serve two important purposes: Your rules need to help you book profitable trades. And they need to keep you out of trouble.

Today, I’m going to break down five trading rules written by one of the most successful traders who has ever lived: Jesse Livermore. These were some of the rules Livermore used throughout his career to help him book millions in profits.

If you follow them closely, they will lead you to consistent profits. Of course, you don’t have to take my word for it. Ask any successful trader and they’ll tell you they’ve concocted a set of rules that have helped them succeed.

Let’s dive right in…

1. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.

This rule sounds a lot more complicated than it actually is. An easier way to think of this rule is that you should only bet your trading dollars on market action—not what you think is going to happen.

Everyone has opinions. We have biases. We see actions taken by central bankers, politicians, and CEOs and can’t help but guess how it will affect the markets. But all of these thoughts and feelings are worthless—until we get confirmation from market movement that our guesses are correct.

2. As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.

Well before most speculators discussed the market in terms of trends, Livermore possessed a deep understanding of the madness of stock market participants. He knew the trend was his friend—and he was more than content to ride it until it stalled out.

These days, it feels like traders’ timeframes are getting shorter and shorter. Instead of letting a trade run its course, speculators are taking profits in a matter of hours—or even minutes. Sure, they might make some spare change here and there. But the real money is made by grabbing onto a big trend and not letting go until the market shakes you off…

3. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.

The financial media is guilty of breaking this rule at least three times a week. You’ll see some story about how the major averages are due for a fall because a household name stock is tanking on poor earnings. I suspect we’ll continue to see a few of these headlines spring up over the next couple of weeks…

Earlier this year, we were told the market couldn’t press higher unless FANG recovered and pushed higher (FANG was a popular market meme consisting of 2015’s strongest mega-caps – Facebook, Amazon, Netflix, and Google).

But in reality, these stocks went their own way. Facebook and Amazon pressed higher, while Netflix and Google fell. And none of this action dictated the movement of the major averages. And as you can see from the post-election rally, market memes like FANG aren’t the only stocks that can move the markets.

4. Wishful thinking must be banished.

I know this trading rule sounds pessimistic. I promise this sentence isn’t scrawled on the entrance to trading hell. But it is important for you to heed its message.

Wishful thinking is poison when it comes to your open trades. If a trade hits your stop loss, but you are hoping for a strong earnings report next week, you should obey your rules and sell. You can’t wish the market higher. If you try, you’ll drive yourself crazy (and to the poor house).

Approach your trades unemotionally. If it’s time to sell, cut the cord and move onto your next play. It’s that simple…

5. The leaders of today may not be the leaders two years from now.

Quick! Name all of the stocks that were in the Dow back in 1960!

You can’t do it. Neither can I.

Investors tend to lose sight of the fact that major averages are actively managed. Every few years, new and better companies are selected to replace the laggards so the averages better represent the best stocks on the market.

As a trader, you shouldn’t get too nostalgic about the stocks that posted unbelievable runs higher over the past decade. Instead, be on the lookout for the next potential market-leader you can add to your portfolio…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning