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Alan Farley’s rules for a swing trader

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Alan Farley had famously declared that the 200-day moving average divides the investing world in two. Bulls and greed live above the 200-day, while bears and fear live below. Sellers eat up rallies below this line and buyers come to the rescue above it. Known as master Swing trader Alan has widely written about his swing-trading techniques and has given some rules. Out of that 15 rules are presented here –

Rule 1: If you have to look, it isn’t there.
Forget your college degree and trust your instincts. The best trades jump out of nowhere and create a sense of urgency. Take a deep breath, then act quickly before the opportunity disappears.

Rule 2: Trends depend on their time frame.
Make sure your trade fits the clock. Price movement aligns to specific time cycles. Success depends on trading the right ones.

Rule 3: Price has memory.
What happened the last time a stock hit a certain level? Chances are it will happen again. Watch trades closely when price returns to a battleground. The prior action can predict the future.

Rule 4: Profit and discomfort stand side by side.
Find the setup that scares you the most. That’s the one you need to trade. Don’t expect it to feel good until you take your profit. If it did, everyone else would be trading it. Wisdom from the East: What at first brings pleasure in the end gives only pain, but what at first causes pain ends up in great pleasure.

Rule 5: Stand apart from the crowd at all times.
Trade ahead, behind or contrary to the crowd. Be the first in and out of the profit door. Your job is to take their money before they take yours. Be ready to pounce on ill-advised decisions, poor judgment and bad timing. Your success depends on the misfortune of others.

Rule 6: Short rallies, not selloffs.
Shorts profit when markets drop, so they start to cover. This makes it a terrible time to enter new short sales. Wait until they get squeezed and shaken out, then jump in while no one is watching.

Rule 7: Manage time as efficiently as price.
Time is money in the markets. Profit relates to the amount of time set aside for analysis. Know your holding period for every trade. And watch the clock to become a market survivor.

Rule 8: Trades that work in hot markets destroy accounts in cool ones.
Stocks trend only 15% to 20% of the time. Price ranges cause grief to momentum traders the rest of the time.

Rule 9: Control risk before seeking reward.
Wear your market chastity belt at all times. Attention to profit is a sign of immaturity, while attention to loss is a sign of experience. The markets have no intention of offering money to those who do not earn it.

Rule 10: Big losses rarely come without warning.
You have no one to blame but yourself. The chart told you to leave, the news told you to leave. Learn to visualize trouble and head for safety with only a few bars of information.

Rule 11: Bulls live above the 200-day moving average, bears live below.
Are you flying with the birds or swimming with the fishes? The 200-day moving average divides the investing world in two. Bulls and greed live above the 200-day, while bears and fear live below. Sellers eat up rallies below this line and buyers come to the rescue above it.

Rule 12: Enter in mild times, exit in wild times.
The big move hides beyond the extremes of price congestion. Don’t count on the agitated crowd for your trading signals. It’s usually way too late by the time they act.

Rule 13: Perfect patterns carry the greatest risk of failure.
Demand warts and bruises on your trade setups. Market mechanics work to defeat the majority when everyone sees the same thing at the same time. When perfection appears, look for the failure signal.

Rule 14: Trends rarely turn on a dime.
Reversals build slowly. Investors are as stubborn as mules and take a lot of pain before they admit defeat.

Rule 15: See the exit door before the trade.
Assume the market will reverse the minute you get filled. You’re in very big trouble when it’s a long way to the door. Never toss a coin in the fountain and hope your dreams will come true.

About the author: IE&M Team

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