Nine Rules of Research According to Ned Davis

There’s always some ‘big’ news story dominating the markets (we have to talk about something) that can catch your attention and in turn shift your bias and focus and rattle your cage. The first half of 2016 seems to have contained an abundance of such stories ranging from profit margin contraction, Fed policy, country’s leaving unions, police shoots, and whether certain political candidates are either racists or criminals, and of course the Brexit.

As traders our job is to focus on what the market is telling us – for many of us that involves a form of analysis based on price movement and for others it incorporates corporate reporting and macro economics. No matter your market paradigm, staying focused on what matters is crucial.

Today I want to share the nine rules of another of my favorite research commentators Ned Davis, founder of the well-respected market research firm, Ned Davis Research…

1. Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)

2. Don’t Fight the Fed – Fed policy influences interest rates and liquidity – money moves markets.

3. Beware of the Crowd at Extremes – psychology and liquidity are linked, relative relationships revert, valuation = long-term extremes in psychology, general crowd psychology impacts the markets

4. Rely on Objective Indicators – indicators are not perfect but objectively give you consistency, use observable evidence not theoretical

5. Be Disciplined – anchor exposure to facts not gut reaction

6. Practice Risk Management – being right is very difficult…thus, making money needs risk management

7. Remain Flexible – adapt to changes in data, the environment, and the markets

8. Money Management Rules – be humble and flexible – be able to turn emotions upside down, let profits run and cut losses short, think in terms of risk including opportunity risk of missing a bull market, buy the rumor and sell the news

9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

There’s nothing exceptionally profound here apart from hard nosed awareness of what’s important. When times are ‘noisy’ it’s nice to have a reminder of what’s important as these are the messages that will see you through both the good times and the bad.

Identifying chart setups is simply a system for gaining access to high probability stock market trends! Hundreds of years of price charts have shown that prices tend to move in trends. A trend is merely an indicator of an imbalance in the supply and demand of a stock. These changes can usually be seen by market action through changes in price. These price changes often form meaningful chart patterns that can act as signals in trying to determine the beginning, or continuation, of trend developments.

In my experience there are two key trade types:
1. The ‘buy on weakness’ trend reversal trade, and
2. The momentum trade.

The first develops from a reversal from low levels where long term support is showing and or accumulation price action has developed. The ’breakout’ from these zones is often a precursor to a strong market imbalance and trend move.

The second is a signal that forces the extension of an existing trend. These can be very frenetic, powerful, and highly lucrative but must be systematically risk managed to achieve a consistent optimum result.