Knowing when to break the rules can make you more money than you ever thought possible.
Everyone knows that when prices break under the 200-day moving average, it’s an urgent signal that you sell.
The trend is not your friend anymore, and you must sell; otherwise, grievous losses are sure to follow.
As legendary trader Paul Tudor Jones warned us not too long ago, “The whole trick to investing is: ‘How do I keep from losing everything?’ If you use the 200-day moving average rule, then you get out. You play defense, and you get out.”
It is an essential signal for all sorts of trend followers and market timers, and generally speaking I think it is probably a decent rule to follow if you are trading indexes and sectors.
If you are trading stocks purely on a technical system, then it is probably still a good rule to use as it can keep you from riding a stock to disastrous losses.
Some of the smartest people I know use the 200-day pattern as part of their hedging system, and I confess to having glanced at a few times during my career as well.
As a rule of thumb paying attention to the 200-day moving average is probably smart.
However, in order to get a comfortable seat in the 20%+ club you have to know when the rule of thumb needs to be ignored…
Every now and then, I’m asked a common yet somewhat annoying question by friends and fellow market experts alike…
If I could only own one stock for the rest of my life, which one would it be?
The reason it’s such an irritating question is because, even though the askers often have good intentions, they unwittingly expect a stupid answer.
They expect me to say Amazon.com Inc. (Nasdaq: AMZN), Alphabet Inc. (Nasdaq: GOOGL), or any other popular tech giant trading at multiples so high that owning the stock probably gives you vertigo…
Or a biotech company that could “change the world,” even though the odds of successfully betting on a biotech firm hitting that jackpot are extremely small…
Or a driverless car company, or a drone manufacturer, or some other firm making a device that everyone expects to be ubiquitous in a few years…
Which of these super sexy and exciting businesses would I buy now and hold forever?
Not a single one, because I know the way to wealth is more than just following the same mainstream spin like everyone else.