Rule No.1: Determine The Trend
Always identify the primary trend first. This can be easily identify using trendlines and moving averages. As a rule of thumb, 10,20 MA are for short term trends, 50, 100 MA medium term and 200 MA for long term trend. When the price is above the 200 MA or the long term trendline, it shows that the stock is in a long term bull trend such as the diagram below.
Rule No.2: Buy at Single, Double or Triple Bottom
Buy at single, double or triple bottom. This is an important rule especially for double bottom when you see that the second bottom is higher than the first bottom, it would be a compelling buy signal.
Similarly, sell at single, double or triple top as these are obvious price patterns that most traders will see and they will act on it at the same time. Always remember to determine your stop loss point and follow your plan strictly.
In addition, do not overlook the fact that the 4th time the stock reaches the same level (either top or bottom), it is not safe to sell or buy because it nearly always go through.
Rule No.3: Buy and Sell on Percentages
Buy or sell at 50% decline from any high level; or 50% advance from any low level. This is because 50% is an important support and resistance level.
Today I'll just talk about 3 rules, next week I'll share with you with a few more rules from this book.