Over the past dozen years there has been one simple piece of market advice that has worked better than anything else. That advice is "don't fight the Fed."
Marty Zweig, who was a well-known trader and investment advisor, is generally given credit for that succinct advice. Zweig is also well-known for predicting the Black Monday crash in 1987 when he appeared on the TV program Wall Street Week.
Zweig had a number of investing rules in addition to "don't fight the Fed" that can be very helpful to review on a regular basis. These rules are mostly common sense, but it is easy to lose sight of common sense in difficult markets. These rules were published almost exactly 30 years ago but they are more valid today than ever.
- The trend is your friend, don't fight the tape. Price action should always be the paramount consideration. It will tell you more about the market than anything else
- Let profits run, take losses quickly. The way you make big money is to stay with trades that are working and to quickly cut those that aren't.
- The cheap get cheaper, the dear get dearer. Valuation of stocks is driven by emotions. Investors are driven to sell cheap stocks and buy expensive ones.
- Every indicator eventually bites the dust. What works is always changing. As traders understand and internalize indicators they will front run and cause them to no longer work
- Adapt to change. The market is always evolving and we must recognize that and adapt to produce exceptional results.
- Don't let your opinion of what should happen bias your trading strategy. The market does not think in the same way that we do. Just because we believe that a certain course of action is logical doesn't mean that it will occur.
- Don't blame your mistakes on the market. If the market doesn't do what we want it to, then either our strategy was wrong or we had bad luck. The market didn't cause our losses.
- Don't play all the time. There is not always a supply of great trade opportunities. We have to be patient and wait for the right setups to develop
- You'll never know all the answers. We will never have perfect information. If we don't act when we have partial knowledge then we will never act.
- Don't put too much faith in the experts. Anyone who is active in the market will be wrong quite often. It doesn't matter how experienced, wealthy or knowledgeable they might be. They are fallible.
- Beware "New Era" thinking, i.e. "It is different this time." While the news and facts may change, human nature never changes.
- The market is not efficient but is still tough to beat. Even when we do have good information that is not widely known it doesn't guarantee positive results.
All good traders understand these rules to some extent. The common thread is that we are at the mercy of the market and we have to understand that in order to navigate it effectively. Human nature is always at play to some extent and will impact the market more than anything else.
Traders are often caught up in watching small movements on a daily basis, but it is concepts such as "don't fight the Fed" and "the trend is your friend" that determine our success more than anything else.