There are many ways to trade successfully in the markets. For those of us who choose to follow a rules based strategy, I’ve compiled a list trading rules for buying and selling that have helped me be successful over the years. Some of these are my own rules, many of them are derived from the book How to Make Money in Stocks by William O’Neil, while others are from other great books and traders I’ve met along the way. The source for each rule is sited below.
Buy Rules |
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| # | Do/Don’t | Rule | Reference |
| 1 | Do | Never establish a new long position when the market is “in correction” (i.e. a downtrending market). Conversely, never establish a new short position in an up trending market. Always trade in the direction of long term trend of the market. | Michael Lamothe |
| 2 | Do | Only start new long positions from stocks that are on our Advanced Reports or have passed our ChartYourTrade MRI Scans. No Exceptions! This will help narrow down the field and focus on only the best opportunities. | Michael Lamothe |
| 3 | Do | Always consider position sizing before entering the position. Appropriate position sizing will determine success in the market over the long term more so than our entries and exits. Refer to the “How to Use the ChartYourTrade Position Size Calculator.” | Michael Lamothe |
| 4 | Do | Focus on stocks breaking out of 1st or 2nd stage bases with heavy volume (40% or better). Late stage bases may be bought, but should be kept on a tighter leash (3% max). | Michael Lamothe |
| 5 | Don’t | Never average down. Each add-on to an existing position must be made at a higher price than the previous purchase. | Michael Lamothe |
| 6 | Don’t | If buying a thinly traded stock, only buy a small position as thin names can easily be manipulated and tend to be more volatile. Look for stocks that trade a minimum of 200k daily, ideally over 400k daily. | Michael Lamothe |
| 7 | Do | If a stock that I am holding offers an additional entry point, purchase fewer shares than I did originally to not increase my average cost too dramatically. | Michael Lamothe |
| 8 | Do | Always check which funds own the stock. Make sure they are quality funds (look for many “A” rated funds). | Scott O’Neil |
| 9 | Do | When conditions warrant, when attempting an early entry, draw a trend line connecting the recent highs. If that line is surpassed on high volume, you may enter the trade. | Richard McKay |
| 10 | Do | Check what % of management is holding stock and write it down. Do not buy a stock that has 0% management ownership (the smaller the company the greater % of management should own it). | Scott O’Neil |
| 11 | Do | The stocks you select should show a major percentage increase (minimum 18-20%, avg 25-30% or better) in current quarterly EPS (the most recently reported quarter) when compared to the prior year’s same quarter. Comparing in this way avoids distortion from seasonality. | Ch. 3 (HTMMIS) |
| 12 | Do | Look for EPS growth in most recent 2 quarters. In bull markets, look for stocks that show 40-500% growth or more. | Ch. 3 (HTMMIS) |
| 13 | Do | Check consensus earnings estimates for the next several quarters and for the next year or two. Do this to make sure the company is projected to be on a positive track. | Ch. 3 (HTMMIS) |
| 14 | Do | Take particular note if the growth of both sales and earnings have accelerated for the last 3 quarters. You don’t want to get impatient and sell your stock if it shows this type of acceleration. Stick to your position unless if a sell rule is triggered. | Ch. 3 (HTMMIS) |
| 15 | Do | Most recent quarter after tax profit margins should be either at or near a new high and among the very best in the company’s own history. | Ch. 3 (HTMMIS) |
| 16 | Do | Check the earnings of other companies in your stock’s industry group. If you can’t find at least one other impressive stock displaying strong earnings in the group, you may have selected the wrong investment. | Ch. 3 (HTMMIS) |
| 17 | Do | Current quarterly EPS should be up at least 25-50% over the same quarter the previous year. The best companies might show earnings up to 100-500% or more! | Ch. 3 (HTMMIS) |
| 18 | Do | Look for annual EPS that have increased in each of the last 3 years. You normally don’t want the 2nd year’s earnings to be down, even if the results in the following year rebound to their highest levels yet. | Ch. 4 (HTMMIS) |
| 19 | Do | Select stocks with 25-50% and higher annual earnings growth rates. | Ch. 4 (HTMMIS) |
| 20 | Do | Beware of stocks with slipping earnings that recover. The recovery may have a good looking percentage increase over the prior year, but could still be well off it’s peak. (eg EPS of 3,4 5,$6 then back to 3 and next year is 4, this is still off the peak of 6 and the prior high of 5.) | Ch. 4 (HTMMIS) |
| 21 | Don’t | Avoid older companies with entrenched management (in a strong market). These are the companies that strain to get current earnings up 8-10%. | Ch. 4 (HTMMIS) |
| 22 | Do | Look for ROE of at least 17% (the really superior stocks will sport 25% to 50% ROE) | Ch. 4 (HTMMIS) |
| 23 | Do | Look for CPS (cash flow per share) that is at least 20% greater than actual EPS. | Ch. 4 (HTMMIS) |
| 24 | Do | Look for earnings stability rating of 25 or lower. Stocks with ratings of 30 or higher are more cyclical in terms of their growth. All else held equal, you want greater sustainability and consistency. | Ch. 4 (HTMMIS) |
| 25 | Do | Turn-around story: should you decide to buy a turnaround story, look for annual earnings growth of at least 5-10% and two straight quarters of sharp earnings recovery that lift results for the latest 12 months into or very near new high ground. | Ch. 4 (HTMMIS) |
| 26 | Do | If the stock is newly issued and the company doesn’t have a 3 year earnings record, look for big earnings increases and even bigger sales growth over the last 5-6 quarters. | Ch. 4 (HTMMIS) |
| 27 | Do | Primary consideration should not be given to the PE Ratio, but rather to whether the rate of change in earnings is substantially increasing or decreasing. PE should generally not be a factor in the decision making process. | Ch. 4 (HTMMIS) |
| 28 | Do | Look for the “N” in CAN SLIM. New products, new management, new environmental conditions. These are all catalysts that can drive a stock higher. | Ch. 5 (HTMMIS) |
| 29 | Do | For large companies, you want top management to own at least 1-3% of the stock and more for smaller companies since managers have a vested interest in the stock. | Ch. 6 (HTMMIS) |
| 30 | Do | Note: It’s difficult for larger, older companies to innovate in a meaningful ways. New product lines can often end up being just a drop in the bucket of their bottom lines. | Ch. 6 (HTMMIS) |
| 31 | Don’t | Do not buy stocks with excessive stock splits. Either greater than 2 for 1 or 3 for 2, OR numerous stock splits within a 2 year period. | Ch. 6 (HTMMIS) |
| 32 | Do | It’s usually a good sign when a company, especially a small to medium sized growth company that meets CAN SLIM buys its own stock in the open market consistently over a period of time (a 10% buyback would be considered big). | Ch. 6 (HTMMIS) |
| 33 | Do | A low corporate debt-to-equity ratio is generally better | Ch. 6 (HTMMIS) |
| 34 | Do | Buy only the best 1, 2, or 3 companies within it’s industry group. The one with the best quarterly and annual earnings growth, the highest ROE, the widest profit margins, the strongest sales growth, and the most dynamic stock price action. | Ch. 7 (HTMMIS) |
| 35 | Do | Buy stocks with RS ratings of 80 or higher. The higher, the better. | Ch. 7 (HTMMIS) |
| 36 | Do | In a correction during a bull market, the stocks that decline the least are usually your best selections. If the market is really correcting (10% or more) the better growth stocks may correct 15-25%. More than that could be flashing a sell signal. | Ch. 7 (HTMMIS) |
| 37 | Do | Look for abnormal strength on a down day. | Ch. 7 (HTMMIS) |
| 38 | Do | For a small company, at least 20 funds should own it. | Ch. 8 (HTMMIS) |
| 39 | Do | Look for both an increase in the quality of fund ownership as well as the number of funds owning over the past several quarters, with the most recent quarter showing a material increase in ownership. It’s more important, however, for top rated funds to own a stock than a large number of funds to own a stock. | Ch. 8 (HTMMIS) |
| 40 | Do | In bear markets, either stay out, or go short. Bear markets typically last 5-6 months. | Ch. 9 (HTMMIS) |
| 41 | Do | Watch average cost like a hawk! Do not let average cost grow 2-3% above proper buy point. | Scott O’Neil |
| 42 | Don’t | Never buy 3% past a proper buy point. | Scott O’Neil |
| 43 | Do | Focus on top 40 industry groups. | Scott O’Neil |
| 44 | Do | Accept no less than a 85 RS rating. Prefer to buy 90 and above. | Scott O’Neil |
| 45 | Do | Track the short interest ratio: is the amount of short selling on the NYSE expressed as a percentage of total NYSE volume. This ratio can reflect the degree of bearishness shown by speculators in the market. Along bear market bottoms, you will usually see two or three major peaks showing sharply increased short selling. There’s no rule dictating how high the index will go, its just about finding the peaks. | Ch. 9 (HTMMIS) |
| 46 | Do | Try to buy stocks that are atleast 15% of their 52 week high. An acception is when coming out of a fresh bear market. | Ch. 11 (HTMMIS) |
| 47 | Do | Only buy stocks off of valid bases or valid secondary buy points. Skip general “areas of consolidation” where you may be shaken out. | Ch. 11 (HTMMIS) |
| 48 | Do | Any CORE position must have the following: 1. The highest RS rating, 2. The best fundamentals, 3. The “It” factor, 4. Compelling fund ownership | Scott O’Neil |
| 49 | Don’t | Never buy a stock on the way down that is trending down (or that has fallen 15% below it’s high). You always want to buy on the way up. | Ch. 13 (HTMMIS) |
| 50 | Don’t | Do not buy low priced stocks. Stick to stocks that are at LEAST $10/share or greater (emphasis on greater) | Ch. 13 (HTMMIS) |
| 51 | Don’t | Do not buy a stock without doing the homework on it first. Develop a watch list, learn about the stocks, and then buy them as they are breaking out. Not the reverse. | Ch. 13 (HTMMIS) |
| 52 | Don’t | Never use excessive margin. Always consider the market climate, stage of the cycle, and the stocks you are selecting before using margin. | Ch. 13 (HTMMIS) |
| 53 | Do | Studies show that approx 37% of a stock’s move is tied to it’s industry group and 12% is tied to it’s sector. Therefore, in most cases, limit buys to the top stocks within the top industry groups and sectors. (100 rank should be extreme industry group cut off for consideration). | Ch. 15 (HTMMIS) |
| 54 | Do | No major defects should be allowed in any purchase. No more than 1-2 minor defects should be allowed. Ideally, you should only focus on the highest quality stocks with no defects. | Ch. 16 (HTMMIS) |
| 55 | Do | Only buy stocks with a SMR rating of A or B. Stocks with ratings of D or E should in most cases be avoided. These ratings can be found for free when you search for a stock on investors.com | Ch. 16 (HTMMIS) |
| 56 | Do | Only buy stocks with a A/D rating of A, B, or C. Stocks rated D or E should be avoided until their rating improves at least to a C. These ratings can be found for free when you search for a stock on investors.com | Ch. 16 (HTMMIS) |
| 57 | Do | Most stocks should be in the top six or so broad industry sectors in IBD’s daily “new price highs” list or in the top 10% of IBD’s 197 industry sub-group rankings” | Ch. 20 (HTMMIS) |
| 58 | Do | Look mainly for “new America” entrepreneurial companies (those with a new issue within the last 8-10 years) rather than too many laggard, “old America” companies. | Ch. 20 (HTMMIS) |
| 59 | Do | I will recognize that year one of a new Bull market is the most productive and I should be the most aggressive. Year two is usually strong but less so than year one. Year three is usually a difficult year and frequently results in a major market downturn. Therefore, I will be very cautious and conservative after year two. | Michael Hicks |
| 60 | Do | Always follow the major long term trend of the market. If it is a bull market, buy stocks. If it is a bear market, sell stocks. This theme also accounts for moderate corrections within bull and bear markets. It is the being able to sit with your positions and not over thinking them that the big money is made. Always have an exit strategy for all positions and always keep in mind the type of market (bull or bear) when developing those strategies. | Reminiscences of a Stock Operator |
| 61 | Don’t | Never accept tips from anyone and never let anyone else’s biases influence your own. Livermore lost big in cotton because he was following someone else’s tips instead of following his own instincts and belief system. | Reminiscences of a Stock Operator |
| 62 | Do | Consider which stage of the market cycle you are in when making your selections. The later the stage, the more you should concentrate on stocks with lower volatility. | Scott O’Neil |
| 63 | Do | Always move incrementally in the market. Add exposure when you see: 1. a Follow Through Day; 2. Additional accumulation in the indices; 3. Successful breakouts; 4. Indices pushing through resistance; 5. Your initial positions show you a profit. | Scott O’Neil |
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Sell Rules |
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| # | Do/Don’t | Gain/Loss | Rule | Reference |
| 1 | Do | Loss | Cut every loss at a maximum of 8% from the price you paid for the position. No exceptions. | (HTMMIS) |
| 2 | Do | Both | Always set stop losses as soon as a new position is established. As the trade progresses raise my stops below significant levels of support. NEVER lower my stops. | Michael Lamothe |
| 3 | Do | Both | If a stock is reflecting the market conditions and the market is acting badly, lighten up. | Michael Lamothe |
| 4 | Do | Both | Sell if a stock falls below the 50DMA in the heaviest daily volume in months. | (HTMMIS) |
| 5 | Do | Both | Consider liquidating a position prior to earnings if I have less than a 5% cushion | Michael Lamothe |
| 6 | Do | Both | Sell on signs of a poor rally (heavy selling near the top, followed by a low volume recovery). This may be your last chance to get out at decent levels. | (HTMMIS) |
| 7 | Do | Both | Sell if the RS rating drops below 70. | (HTMMIS) |
| 8 | Do | Both | Sell if earnings slow materially (by 2/3 from the prior rate of increase) for 2 consecutive quarters. | Ch. 3 (HTMMIS) |
| 9 | Do | Both | If no other sells rules are violated after holding for 13 weeks and the stock hasn’t moved from it’s buypoint, consider selling. | (HTMMIS) |
| 10 | Do | Both | If holding a 3rd stage or later stock, consider swapping into a 1st stage breakout if a strong stock from well formed base emerges. | Michael Lamothe |
| 11 | Do | Both | Sell in stages unless if sell rule #1 is tripped. | Michael Lamothe |
| 12 | Do | Gain | Sell on the way up if a stock makes a logarithmic move and hits the top of the range 3 times. | (HTMMIS) |
| 13 | Do | Gain | Sell part of position if stock climbs 20% above avg cost. | (HTMMIS) |
| 14 | Do | Gain | Sell if held through some consolidations and stock is now entering a 3rd or 4th stage base. | (HTMMIS) |
| 15 | Do | Gain | Know when savvy investors are due to have a long term capital gain. | (HTMMIS) |
| 16 | Do | Gain | Sell on a move through the upper channel line after a big run up. | (HTMMIS) |
| 17 | Do | Gain | Sell if a long-term uptrend line over a series of months is broken at the end of the week on overwhelming volume. | (HTMMIS) |
| 18 | Do | Both | If the market is showing signs of a potential change in character (i.e. moving from trading tightly to trading wide and loose) begin lightening up positions. | Michael Lamothe |
| 19 | Do | Both | When any market index accumulates 5-6 distribution days over any 4-5 week period, begin reducing positions aggressively and raise cash. | Ch. 9 (HTMMIS) |
| 20 | Do | Both | When market indexes peak and begin major downside reversals, act immediately by moving 25% or more of your portfolio to cash. | Ch. 9 (HTMMIS) |
| 21 | Do | Both | Never try to ride out a bear market on margin | Ch. 9 (HTMMIS) |
| 22 | Do | Both | If entering a bear market (not simply a pullback or a correction) try as gracefully as possible to move 100% to cash. If market leaders appear to be holding up, they will eventually be caught also. | Ch. 9 (HTMMIS) |
| 23 | Do | Both | When planning for an appropriate place to sell, always look at both the daily and the weekly chart before making a decision. | Michael Lamothe |
| 24 | Do | Both | Monitor peaks and troughs over time. When selling, consider moving averages, price based support/resistance levels. | Michael Lamothe |
| 25 | Do | Both | Rebound levels: monitor a potential rebound level as what the historical trend has been for the stock. If 21dma has acted as support, what % was it breached before it recovered. Also consider the volume by which previous support levels were breached. Think of it as a trampoline. If a basketball is dropped onto a trampoline, the surface of the trampoline will dip slightly and then return to the surface launching the basketball higher. If a stock dips slightly below a support level on light volume, it may be worth waiting to see if it can recover that level by the end of the day. Now consider what would happen if you dropped a boulder onto a trampoline. The trampoline would just collapse. If a stock breaches a support level on tremendous volume, I won’t wait around to see if it rebounds. If it does, I can always buy it back. | Michael Lamothe |
| 26 | Do | Loss | Always cut your loss the moment you know that you are wrong without hesitation. Do not wait for 7-8% to begin cutting losses. That is the absolute maximum to allow a loss to grow to. I’m noticing more and more that the earlier I cut my loss the moment I know I’m wrong, the more it has benefited me. | Michael Lamothe |
| 27 | Do | Both | Always know where my line in the sand is whether it be sell all or a portion of my position. When that line is reached, sell without hesitation. | Michael Lamothe |
| 28 | Do | Both | Trim your exposure when you see: 1. Distribution days in the indices; 2. Numerous breakout failures; 3. Stalling or resistance on the indices; 4. Your initial positions are at even or down | Scott O’Neil |
