Following Rules Takes Discipline

Listed below are the Limit5Bass investing rules for success. This is a list of rules that I’ve assembled over the years. These rules have put me on the winning side of the trade more than the losing side. It seems like the more that I adhere to my listed rules, the better my portfolio performs.

Breaking rules usually means losing money. I too at times try to hold onto shares for that “last” gain even though I have seen and write about the bearish signals for a stock I am holding.

Following rules takes a lot of discipline. A couple of metric tons to be exact. Discipline is something I continue to work on every single trading day. And with that said, I still break some rules here and there. I am human just like everybody else and sometimes get caught in the emotion of a trade.

Seeing a stock moving up when you are not in it leads to FOMO, or the fear of missing out of further stock gains. FOMO causes you to chase a position rather than letting the trade come to you.

When you miss an entry point for a stock, it is usually best to wait for the next trade set-up. But one strategy I have been using more lately is the scale-in strategy and scale out-strategy I describe below.

It is hard not to let “greed” take over at times when stock prices seem to still be going up. Selling a stock is one of the most difficult things you do, at least at first. Once you do it a few times, it actually feels good to lock in those gains. Let go of the FOMO, there are thousands of stocks out there with opportunities everywhere.

So remember, investing is a game of psychological warfare and your psychology is being pitted against others at all times. Your portfolio will appreciate a well laid-out plan rather than trading and investing based on emotion. The more rules you can adhere to, the better your portfolio will perform.

Limit5Bass Rules For Investing Success

Have Patience – significant moves tend to happen over a period of several months, not days or even weeks. The key is being on the right side of the overall market trend.

Don’t Chase The Last Dollar – 95% of investors will never buy at the bottom or sell at the top. If I can get within 10% of both, I am extremely pleased.

Buying Is Easy, Selling Is The Hard Part – a good closing technique means moving against popular opinion, meaning selling into strength as a stock’s share price is climbing or at the first sign of trouble, such as a reversal candlestick pattern. I have never heard of anyone going broke by consistently locking in gains by closing positions.

Don’t Use Margin – a sudden market movement can change the course of charts, if I get caught out of position at least I don’t have to worry about margin calls. I can then look to reduce risk further during any subsequent market rebounds. When you have margin, sometimes you are forced to close a position at the most inopportune time.

Preservation of Capital is Key – enough said. While you must have a high risk tolerance to participate in the stock market, I try to remain as cautious as possible and sometimes would rather lock in gains and forgo possible additional gains at critical market junctures.

See The Forest, Not Each Tree – this simply implies that I like to look at a stock’s bigger picture, this may involve using 20 year monthly candlestick charts or 5 year weekly candlestick charts – both have a longer term perspective. I then try to narrow down exactly where I am in the larger trend.

Simplify Your Portfolio – 4 core stocks usually make up approximately 75% of my portfolio holdings. Learning the ins and outs of a fewer number of stocks has helped me time my purchases and sales better, increasing my portfolio’s performance.

Scale In & Scale Out – once I start to see the first reversal sign or two, I start to scale in or out of a position, as deemed necessary. I do not usually enter or exit a position all at once in case my analysis was wrong.

Sell Some Shares – I tend to sell a portion of my holdings, usually about 25%, after a stock has advanced between 10-20%. This is based on the motto of “don’t be greedy”. This also works off of the “scale out” rule, rule #8. I may use the sales proceeds to re-buy the shares during an opportunistic pullback, or I may use the extra proceeds for another stock that may be setting up into a high confidence trading opportunity.
- The exception is the “8 week hold rule” from Investors Business Daily.

Price Objectives – once a price objective of mine is reached, I then try to see re-analyze the stock’s chart at that time based on additional chart history being available. I then use this additional chart history to see if the analysis needs to be updated or not. Charts are ever evolving based on supply and demand.

Let Go Of Losers – the quicker I can cut a losing stock from the portfolio, the better of I am. So I consider selling any stock once I am down 5-8%. I have made a few exceptions to this rule (I held FB through a 15% correction from $26 to $22.67 even though I ended up buying more at $23).