The secret to successful trading: have a system and stick to it

Whatever your style of trading, you need to stick to a proven system to avoid losing your shirt, says John C Burford. Here, he looks at the Dow Jones's seemingly unstoppable rally, and identifies strategies for both conservative and adventurous traders.

This relentless rally in stock markets has, to me, all the hallmarks of a buying exhaustion.

It is so reminiscent of the heady days of 2007 with massive bullishness of institutional operators in stark contrast to deteriorating economies.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Back then, the US housing bubble had burst and the financial stocks (banks, etc) had already cracked. But the good old Dow kept marching up until it hit the wall at 14,200.

Today, we have a similar picture with the US economy in a very weak dead cat bounce', the eurozone in crisis, while here in the UK, we are running on fumes.

Advertisement - Article continues below

But remember, the stock market is not the economy. And my beat is technical trading, so what do I find with the above as backdrop?

Recall in Wednesday's post, the rally had carried past my solid target at 12,400.

Now targets are just that targets. They are minimum goals they can, and sometimes are, exceeded, as here.

Here is the latest chart:


I have retained the long-term tramlines from my previous email, but have found a new pair of short-term tramlines!

These are the up-sloping lines drawn off the rally from late June.

Advertisement - Article continues below

The upper tramline beautifully provides support until the 5 July break, while the lower tramline has been the support since then.

Note the multiple contact points all along these tramlines with no overthrows.

This is textbook stuff.

The charts are signalling a reversal

But take a look at the form of this latest push since late June:


(Click on the chart for a larger version)

Advertisement - Article continues below

There is a potential five-wave Elliott wave pattern right there.

Waves 1 and 2 are good with wave 2 stopping just above wave 1.

Wave 3 is a long and strong impulse rally on high momentum, wave 4 is a complex correction, and the potential wave 5 is in new high ground while momentum lags the values attained at wave 3.

This is a potential negative momentum divergence, and is a powerful reversal signal.

So, are we setting up for a top? The omens look pretty good, I must say.

Confirmation of a top would come if the market can break back below my long-term central tramline at the 12,600 area.

Advertisement - Article continues below

If I were a conservative trader, I would be looking at this area to enter short trades using a wide stop, but within my 3% rule.

However, if I were more adventurous, I might wish to enter short trades on a break of my lower tramline in the 12,710 area, using the recent high as protective stop.

The risk here would be around 60 pips. This presents quite an unusually low-risk trade.

Using a proven system and sticking to it

Each trader must decide for themselves if they wish to adopt an adventurous (but not reckless!) trading stance, and are willing to be stopped out on their close stops several times before finding a solid entry.

For this strategy to work, you must be able to hold your winning positions through the inevitable gut-wrenching reversals, where you see your profits rapidly dwindle.

For most, this is very difficult to handle. Most traders want to grab a nice profit when they see it regardless of the potential for much larger gains.

Advertisement - Article continues below

But success depends crucially on being able to override your basic impulses.

(I may have more to say on how to train your mental and emotional urges in future posts.)

Or, wishing a more stress-free life, you may adopt a much more conservative approach and decide to wait for the market to prove it has changed course before acting (moving averages are good for this). You would then use much wider stops.

You could walk away and only look at the market once a day (at the end of the session?) and not even glance at your daily equity.

If stopped out, you will calmly reassess.

I know a trader/investor who has great success waiting for the market to confirm a trend and then place very wide stops (he uses 300-500 pips in the Dow, for instance).

Advertisement - Article continues below

Only you can decide the style to adopt that suits your personality. But the key, of course, is to follow a proven system.

And don't worry of you miss a trade there will always be plenty more coming down the lane.

Patience really is a virtue in trading.

Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .



Spread betting

Build profits with this industrial equipment rentals company

United Rentals is poised to benefit from higher spending on infrastructure. Matthew Partridge explains the best way to play it.
26 Feb 2020
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019

Most Popular


Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Small business

Furlough: what does it mean and how does it affect me?

Many companies have “furloughed” employees after they have shut down because of the coronavirus. But what does furlough mean and how does the scheme w…
30 Mar 2020

Buy stocks for the long term, but buy very carefully

After the wild ride of the last couple of weeks, equities are no longer expensive. But if you do decide to buy, be very, very careful indeed, says Mer…
30 Mar 2020