The Trend is Your Friend.......

It has been a somewhat slow summer, so I decided a few weeks back to re-read (or read in some cases) a few "classic" trading texts. To determine which books I should read, I go by some of the reading lists at Amazon (i.e. "Top Ten Trading Books) or book recommendations of other traders. I look for the common denominators, those books that end up on the most lists. I discovered this slim text on many of the lists, so I decided to read it for the first time. It reminded me time and again of some very basic, and important trading tools.

Richard D. Wyckoff wrote this book between 1932-1933. It began as a series of articles in a leading financial magazine. The book is a series of lists, axioms, and how-to articles. Here are just a few basic principles behind Wyckoff's method:

1. Determine the overall trend of the market. Markets trend up, down and sideways. Buy into the direction of the market.
   
2. Of the following: what stock to buy, why to buy a stock, or when to buy a stock - when rules, timing trumps all!
3. Always protect yourself using stop losses one or two points away (depending on price of course.....)
4. Let your winners run and close out losses IMMEDIATELY. Why settle for 3 point profits and 30 point losses......
5. Riding a dead horse, switch to a live one. Or, long in a bear market, then get out and get short!
6. Observe which side, the bulls or bears, possess the greatest power and go with that side.
7. Abandon the idea of making money from news-driven events (i.e. earnings reports).
8. A weakening market means some market movers have sold considerably more than others are willing to buy.
9. Always keep your risk acceptable.
10. The night before the market opens, read about the 100 most active stocks of the that day, then decide which will move the soonest, the fastest, the farthest, and in which direction the move will occur.
11. Systematically control profits in excess of your losses.
    

Wyckoff's emphasis on trends is understandable. By 1932-33, many people had seen their entire savings wiped out by selling into the greatest financial panic of all time. Wyckoff, and many other savvy traders, were only too happy to buy stocks at rock-bottom prices, and hold them until the prices had recovered. Does this scenario sound familiar? We are in the middle of downward-moving market, with no bottom in sight. Wyckoff's book offers some very important lessons for these volatile times.