Three simple trading rules

New clients often ask where they should start with trading. There is one golden rule; three other rules to follow and two daily articles to read.

I should note that while I look after both long-term investment portfolios and shorter-term trading clients, this article is aimed at the shorter-term trading clients.

The trades I provide come from market leaders. One could say that there is always a market leader, however I prefer to trade with the odds in my favour, so here are some of the factors which help put the odds in our favour - the key three trading rules:

1. Sisters’ Strength

Since the turn of the last century, it has been well documented that the market leaders are not alone, but accompanied by their peers, or their ‘sisters’. We look for groups of companies within the same industry, that together, are leading the markets.

For those who want to learn more about the odds of market movements, patterns and trends, you could read academic papers from quantpedia.com or start with condensed research from thepatternsite.com. Both have been cherished resources in my own personal studies.

2. Economic Tailwinds

There is always a larger investor with more power and influence; this is often the government. Investors should always take note of the economic environment surrounding their trading. The most dominant force is the legislator, or the government. We look for favourable conditions to help propel our trades, so trade the government or legislative targets, not against them.

Want to know more than 90% of uni graduates? For Australian investors there is a great daily article written by Greg Pell at FN Arena. Working with 200+ new recruits in this industry, this has been part of my key advice to those interested in the share market. Read Greg’s article for three months straight and you’ll have a better handle on the markets than 90%+ uni graduates.

3. Liquidity

To make a profit we (normally) need to close the trade, so when it counts, we need to make sure there is someone else there to trade with. This is not an issue for the largest companies on the ASX or ‘blue-chips’. Liquidity does however, start to be an issue, outside of the 150th largest companies on the ASX, and it gets worse the further you go out. Derivatives can be worse still - if you don’t know what to look for.

For more insights on which trading tools to use read this article here.