Markets running you ragged? A rules-based approach to trading can help by removing the emotional element and allowing you to focus on the numbers.
Editor’s note: This is the final part of a three-part series on Richard Dennis and his “turtle traders,” and what traders can learn from the 1980s experiment. Part 1 tells the turtle traders’ story and offers a few tips on how to trade like a turtle. Part 2 explains how turtle traders follow the trend.
Richard Dennis's now-famous experiment with teaching a group of traders known as the “turtles” back in the early 1980s demonstrated a number of things. First, that trading can indeed be taught and that trend-following can be a profitable approach. Another critical element that investors today can learn from the turtles is that developing a rules-based trading approach could help you achieve better results.
It’s important for investors to follow a plan, or a set of rules, says David Settle, curriculum development manager for Investools from TD Ameritrade Holding Corp. Of course, there is no one system out there that will make money for everyone. Yet, some investors find that that success may depend on probabilities—managing risk on losing trades and letting winning trades run as long as possible.
"Some of the most successful investors or traders are those who develop their own set of rules that they are emotionally capable of executing consistently, whether those rules are dictated by fundamental inputs such as value investing, dividend growth investing, or technical price patterns like momentum trading," Settle says.
A rules-based trading approach can remove some of the emotional impact that can affect trading decisions, often in a negative fashion. "Most traders can look back to their 'worst trades' and see that most of the time they were breaking their rules because they saw opportunity for bigger profits—greed—or worried about taking losses—fear," Settle says.
Investors looking to take their market approach to the next level may want to consider crafting some rules around entries, exits, and risk management. There can also be rules that dictate how and when to move and exit order, such as a stop-loss order, from where you may have originally placed it.
One example of a rules-based trading approach is taught in the Investools® Stock Investing Course. This is based on trading in bullish markets, focusing on outperforming industries that are receiving institutional support. The approach identifies companies whose stocks are in uptrends and bouncing off new levels of technical support. "Once in a position, the exit rules allow for the stock to continue its upward trend for as long as possible until support is broken," Settle says.
The course outlines a system of position sizing based on stop-order placement and overall portfolio risk for each individual position. "When you have multiple stock positions, it's important to take steps to avoid having all of your trades stopped out at once," Settle says.
Within the Investools course, the instructors also provide sample investing plans that include examples of entry, exit, and risk management rules. For example, "In the sample investing plan for our Stock Investing course, the entry and exit signals are based on specific signals from three different indicators: 30-day simple moving average, MACD, and stochastic indicators. We also have a rule that suggests an investor's position size so they don’t lose more than 2% of their active trading portfolio on any single trade," Settle says.
Such rules help to take the emotions out of any individual's trading. Plus, rules help traders protect themselves from major unexpected market moves that can impact their entire portfolio negatively, Settle says.
Just as the group of original turtle traders found, following a specific and detailed set of rules can help improve your trading odds. "Traders can’t eliminate the risk of loss completely, but they can try to keep their accounts alive in the worst-case scenarios, so to speak," Settle says.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
A stop ("stop loss") order will not guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.
*Investools® 7-day free trial is valid for new Investools clients only. Offer is available through December 31, 2017. New Investools clients are able to select a free 7-day trial for either the Stock Investing course or the Income Investing course. Investools reserves the right to restrict or revoke this offer at any time. This is not an offer or solicitation in any jurisdiction where Investools is not authorized to do business. A valid email address is required to participate.
Please allow 1 week from requesting the free trial to receive an email from Investools® with information on how to access your 7-day free trial. The 7-day trial includes access to either the Stock Investing or Income Investing online course, online and in-person workshops, one-to-one coaching, online coaching, Investor Toolbox®, and Trading Rooms®. After the 7-day trial ends, you must subscribe to maintain access. Cost for the Stock Investing course for non-TD Ameritrade clients will be $699. Cost for the Stock Investing course for TD Ameritrade clients will be $499. Cost for the Income Investing course for non-TD Ameritrade clients will be $2,199. Cost for the Income Investing course for TD Ameritrade clients will be $1,549.
Investools, Inc. and TD Ameritrade, Inc., are separate but affiliated companies that are not responsible for each other’s services or policies. Investools® does not provide financial advice and is not in the business of transacting trades.
All investments involve risk, including loss of principal.
Neither Investools Inc. nor any of its officers, employees, representatives, agents or independent contractors are, in such capacities, licensed financial advisors, registered investment advisers or registered broker-dealers. Investools Inc. does not provide investment or financial advice or make investment recommendations, nor is it in the business of transacting trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools Inc. of any particular security, transaction or investment.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.