My Top 13 Rules for Profitable Trading in Any Market - James Altucher (2024)

[Editor’s note: The below article was written by my colleague, Bob Byrne. Some of you may already be familiar with his work. For more information, see his bio at the bottom of the article.]

During my first week trading, all I could do was stare at my desk.

Phone numbers covered every inch of my workspace. Traders buzzed past me.

I quickly realized I didn’t have a clue where to begin.

That’s when Big Lou, one of the senior members of the firm, recognized the mix of panic and confusion on my face. He made me an offer: I buy him lunch and he’ll tell me what I need to succeed as a market newbie.

I met him at a deli near the office. The waitress pointed us toward an undersized table for two in the back corner where Big Lou ordered an oversized corn beef sandwich.

I got a salad. I don’t know why I ordered a salad. I didn’t want one. Maybe, subconsciously, I was playing sheep to his wolf.

With notepad in front of me and pen in hand, I readied myself for all his wisdom.

“Clichés,” he sputtered through a mouthful of rye bread and beef.

I waited with baited breath. But he said nothing else.

I gathered up my big boy voice and said, “Come on, man. You gotta give me something more.”

He stopped chewing and set his sandwich down. “You really wanna do this, kid?”

I took a deep breath and nodded.

“You gotta learn the clichés, Bobby,” he said. “Not just learn ‘em, but live ‘em. In this business, you’re going to hear a lot of sayings. Some call them clichés. Others call them urban legends. I like to think of them as seven little nuggets of success.”

I thought he was kidding at the time. But after 20-plus years in this business, I can say that he was right!

There are seven investing clichés that — when combined together — provide a killer blueprint for profitable trading.

Now I’d like to share these investing rules with you.

Quick note: The first 7 rules — the ones I learned from Big Lou — will mostly be useful in a bull market. For investing in a bear market, I’ve added some rules I learned through decades of successful trading.

Bull Market Rule #1: The Trend is Your Friend

Would you rather trudge up a steep hill or stroll down a gentle decline?

The majority of people will follow the path of least resistance. All we want to do is what we are programmed to do. Keep things simple.

By the same token, don’t make trading harder than it needs to be.

You don’t have to be an experienced trader or technician to glance at a chart and see if a stock has been moving higher, lower or sideways. It’s like crossing the street. Look before you make a move.

I like to focus on something simple like the moving average of a stock.

The moving average is a technical indicator that you can easily check on Yahoo Finance.

Checking the 200-day moving average or the 50-day moving average can help you decide if the stock is trending up. Essentially, if a stock is trading above these lines, it’s a good sign.

Bull Market Rule #2: Let Winners Run

It’s human nature to fear losing. And as a trader, there’s few things worse than watching a profitable position turn into a losing one.

This creates an itchy trigger finger for many traders. They become so worried about a winner becoming a loser that they sell too soon.

Trading stocks is as much about managing emotion as it is clicking the buy or sell button.

The big money is made by controlling emotions, and often doing the opposite of what you’d like to do.

Logic should drive decisions. Every time I enter a trade, I have a plan in place.

This prevents me from selling my winners too soon and missing out on potentially huge profits.

Bull Market Rule #3: Don’t Fall in Love with a Stock

Speaking of emotions…

While we want to let winners run, there comes a time to sell.

Something will inevitably change in the narrative. And for this reason, it’s best not to get attached to any one position.

When that time comes, hit the sell button and don’t look back.

Bull Market Rule #4: Pigs Get Fat, Hogs Get Slaughtered

Setting targets — and sticking to them — is a crucial element to trading.

When a holding hits a target, we want to lock down profits.

This is different from selling an entire position. We can sell some amount of a stock, extract profits, and continue riding the wave.

This also frees up capital for other investment opportunities and can diversify our holdings.

If we don’t take profits from time to time, we run the risk of letting our positions run stale.

Bull Market Rule # 5: Don’t Let Trades Become Investments

A key difference between a trade and an investment is time.

In trading, we use triggers to buy and sell a stock. It’s crucial that we adhere to sell triggers, even if it amounts to a loss on occasion.

Often, traders will hold a losing position simply because they are worried the stock will skyrocket right after they exit.

If that happens, losers, not winners, become the mainstay in portfolios. We must resist the idea of giving a non-performing stock another day or another week.

Before you know it, one week becomes two. Then two become a month.

Then a month becomes, well, you get the point.

Bull Market Rule #6: Don’t Catch a Falling Knife

It can be tempting to buy a stock that falls 10% or 20% in a single day.

How about one that falls 50% in a week? Or 70% in a month?

It’s gotta bounce, right?

The answer is a big resounding no.

We aren’t in the business of playing hero and calling bottoms in a stock.

Let someone else be the first buyer.

We don’t need to make every penny when a stock bounces. We only need to make the easy ones.

It’s important to remain disciplined and wait for signs that a stock has bottomed. You’d be amazed how quickly a 20% drop can become 40%.

Bull Market Rule #7: Markets Can Stay Irrational Longer Than You Can Stay Solvent

This point actually isn’t a cliché. It’s fact.

No one — not even the largest financial institutions in the world — can stand up to the market.

Whenever you think something has gone up too much… or down too much… or it’s “due” to move… you’ve fallen into the same trap that has destroyed traders for decades.

Our goal is to take what we’re given, stay disciplined, and use Big Lou’s words of wisdom to achieve success and financial independence.

Now, as I mentioned before, the first 7 rules are (mainly) useful in a bull market. But when you’re in a bear market, those rules might not apply.

You have to be nimble and adapt to what the current market climate is. That’s why I’ve put together a handful of rules that I’ve used for over twenty years to consistently profit during bear phases!

Of course, not everyone likes to invest during a bear market actively. But the reality is that some of the fastest and strongest rallies occur during the context of a bear market.

Unfortunately, the rules we utilize for investing in bull markets don’t apply correctly to bear markets.

You see, in bull markets, when volatility is low, and price movement is more predictable, we want to trade in the direction of the bull trend and adopt a long-term investment time horizon.

But because bear markets are often more volatile and unpredictable, investors need to reduce their investment time frame and focus on taking faster profits.

To help you navigate and trade profitably when stocks in a downtrend, here are my 6 rules for

Bear Market Rule #1: The Trend is (Still) Your Friend

Yes, I stole this one from Big Lou.

It’s just as important to follow the trend in a bear market as it is during a bull market. So this rule is useful in ANY market.

Now, I’ve always felt that bad things tend to happen under the 200-day moving average. And in bear markets, this is especially true.

You see, once a stock or an index breaks beneath its 200-day moving average, the stock market is giving you a valuable piece of information.

The market is telling you that something under the surface is very wrong.

And if you’re an investor that likes to buy stocks, a break under the 200-day moving average is your warning sign that it’s time to hunker down and prepare to play by a new set of rules.

Remember, just as stocks trend above a 200-day moving average in a bull market, they can also trend beneath a 200-day moving average in a bear market.

Bear Market Rule #2: Avoid Stocks Closing Beneath a 5-day Exponential Moving Average

Bear markets are associated with massive stock market losses. But here’s something you might not know — bear markets are also responsible for generating exciting, short-term rallies.

The trick, however, is knowing when it’s safe to begin buying stocks.

Now, when stocks come under attack and sellers overwhelm buyers, the most important technical indicator in my quiver is also the most basic — an exponential moving average (EMA).

The only difference between an exponential moving average and a simple moving average (SMA) is that the former places more weight to the most recent price — which serves to reflect new market data better.

Here’s how to avoid losing vast amounts of money during a bear market…

When volatility is exploding higher, and stocks are crashing lower, algorithmic traders and aggressive momentum traders take their cues from a 5-day EMA.

So, as long as a stock is closing beneath a 5-day EMA, you want to avoid buying it.

Once the stock closes above the 5-day EMA, you can look for a short-term buying opportunity.

But remember, while the 5-day EMA represents the make-or-break line for strong, short-term momentum, do not be fooled into believing a break above a 5-day EMA constitutes a long-term trend reversal.

A break above a 5-day EMA is merely an indication that the environment is ripe for a short-term relief rally.

Bear Market Rule #3: Take Quick Profits

When we’re in a bear market, the goal is to buy stocks on a bounce — like in Rule #2.

But the most important thing to remember is that the overall trend is still bearish.

Simply put, as soon as you buy a stock, you need to know when and where to sell.

You already know that you need to wait for a stock to close above its 5-day EMA before you look for an opportunity to get long.

The second step in this process, assuming you’ve bought shares in a stock that’s closed above its 5-day EMA, is to identify the 10-day EMA and 20-day EMA.

These will be your upside target areas to sell your stock.

The temptation to hold on to a trade as it clears the 20-day EMA will be challenging to resist.

But during bear markets, the 20-day EMA often acts as a significant stumbling block for stocks trying to regain their footing.

A typical set-up in a bear market bounce is for a stock to trade above its 20-day EMA during the trading day, only to selloff into the close of trading, ultimately closing back beneath that pivotal moving average.

Bear Market Rule #4: Never Ignore Your Stops

In bull markets, stop losses prevent you from giving back hard-earned gains.

But in bear markets, stop losses earn their stripes by keeping you from losing vast amounts of money.

Here’s how to utilize stop losses when buying stocks within the context of a nasty bear trend.

After your initial investment, a close back beneath the 5-day EMA would serve as your stop.

If your stock closes above a 10-day EMA, your revised stop would be a close beneath that EMA. The same applies to a 20-day EMA.

The bottom line is we want to stick to our stops to keep profits from vanishing and to avoid turning a small loss into an account-crippling event.

Bear Market Rule #5: The Worst Four-Letter Word in Bear Market Trading

When it comes to investing in a bear market, hope is a four-letter word — and not a good one.

Investors, having watched their stocks sink for several weeks, have a habit of believing every bounce is the beginning of a new bull market.

You must avoid thinking like this!

Emotions like hope, fear, and greed will cost you a fortune in bear markets. That’s why we utilize moving averages and stop losses to guide our investments.

Remember, neither moving averages nor stop losses are affected by our often irrational emotions.

Bear Market Rule #6: The Light at the End of the Tunnel

Do you know what every bear market in American history has in common?

They all eventually ended!

An essential part of bear market investing is recognizing when it’s time to shift our strategy back to the bull market playbook.

Here’s what you need to know…

As stocks stabilize above their 200-day moving average, the bear market playbook needs to be placed back on the shelf, and the bull market dossier needs to be dusted off.

However, as long as stocks remain beneath the 200-day simple moving average, we want to stick to short-term investments, utilizing the 5-day EMA, 10-day EMA, and 20-day EMA to guide our actions and manage our risk.

Bottom Line:

Know what market you’re trading in, and adjust your playbook accordingly. Stick to my 13 rules for trading in any market, and you should see some steady profits flowing in no matter what direction stocks are moving in.

Analyst Bob Byrne keeps a low profile. Although he’s traded billions, he doesn’t make appearances on CNBC or Fox News… he lives in Utah with his family, more than 2,100 miles from Wall Street. After more than two decades day trading for a living, Bob entered the financial publishing industry as a daily columnist for TheStreet.com. Now he’s bringing his technical trading experience and immense knowledge of the markets to Altucher’s Investment Network.