Stock Trading Best Practices

Last modified: June 16, 2013

Below are some rules of thumb I personally consider when trading stocks.  They are rules that I like to follow, but not hard and fast rules.  This post isn’t any kind of trading advice – please consult a professional financial adviser for that.

 

The Friday Rule (new as of 6/17/2013):

1. Under most circumstances, avoid opening new positions on Friday, due to the traditionally low volume.  Positions may be closed though, as needed.

 

Opening Long Positions (buying):

1. Buy stocks that are making a short-term dip, but are in an up-trend.  Trade with the trend.

Why: You’ll be taking advantage of short-term under-pricing, and the stock will generally continue profitably in its trend.

2. Buy only when RSI(2) is < 10 (meaning the very near term RSI is oversold). From Connors strategy.

Why: If you’ve already decided to buy, then it is best to buy when the stock has sold off recently. Effectively you’ll be buying a dip.

 

(more to come…)

 

Opening Short Positions (selling short):

1. Buy stocks that are making a short-term peak, but are in a down-trend.  Trade with the trend.

 Why: You’ll be taking advantage of short-term over-pricing, and the stock will generally continue profitably in its trend.

2. Sell short in the morning, about 30 minutes after the opening bell.

Why: In an up-trend mornings are typically (but not always) accompanied by a rise in prices, while afternoons will typically sell off.  Selling short at the high of the day is the ideal time.

3. Never hold a short position over an earnings report.

Why: A surprise upside earnings report may result in a gap up, which is especially devastating to a short position.

4. Never open a new short position on Friday.

Why: Friday’s typically consist of a slight upward rally on light volume. Opening a short trade on Fridays can put you immediately in the red, requiring further retreat to get back to profitability.

5. Sell only when RSI(2) is > 90 (meaning the very near term RSI is overbought). From Connors strategy.

Why: If you’ve already decided to sell, then it is best to sell when the stock has rallied to a peak recently. Effectively you’ll be buying a peak.

 

(more to come…)

 

 

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