One of the great things about publishing a trading newsletter is that I’m able to assume the role of trading teacher.  Not only do I teach other traders how to use the Darvas System, but I also field numerous questions every week from traders all over the world.

I believe that I benefit from answering these questions just as much (if not more) than those I’m providing the answers for.  When I answer the “how’s” and “why’s” behind every trading technique I use, it helps me to take a step back and remind myself of the principles that work.  It clarifies and reiterates the process for me, which is a great benefit to any trader.

I’m also able to see, again and again, the most common problems that plague traders.

With my newsletter now in its fourth year of publication, I can tell you with certainty that there are seven brutal trading mistakes that are repeated again and again by traders from many different backgrounds.

Review the list below and make sure you’re not committing any of these seven deadly trading sins…

1. Trading Too Much

Without a doubt, over-trading is the mistake I see most often.

For some reason, new traders often believe that the more one trades, the more money they will make.  In actuality, the opposite is much more likely to be true.  As trading legends like Jesse Livermore and Nicolas Darvas often advised, it’s the sitting that makes the big money.

Avoid trading too much.  Focusing on fewer stocks and fewer trades will almost certainly improve your results as a trader.

2. Changing Strategies Often

This is a natural extension of mistake No. 1 and almost every trader I know has fallen into this trap at some point in their career – usually when they’re just starting out.

Here, a trader dives into a new strategy he or she is excited about.  After a month or two, they decide to try out a different strategy – usually a shorter-term strategy.  This process usually repeats itself for about a year and causes the new trader to suffer substantial losses by trying multiple strategies.

Research proven systems, decide on the one that fits your personality best, and then STICK WITH IT.  (Remember, every strategy will have periods of underperformance from time to time; don’t make matters worse by constantly jumping over the fence because you think the grass is greener on the other side.)

3. Letting Fear Dictate Your Trading Decisions

It’s often said that the emotions of fear and greed drive the market.  I think it’s mainly fear.  Fear of missing out on a winning trade and fear of being too greedy.

Emotional trading has one solution: strictly following clear and precise rules.

4. Letting Pride Dictate Your Trading Decisions

The problem of trader pride has been made much worse due to the Internet and social media.  In the past, bragging about a trade to your brother-in-law was enough to keep you holding onto a winner that turned into a loser, but now I see legions of amateur traders trying to “save face” due to the predictions they made public on the Internet.  They’re so scared about hurting their self-proclaimed reputation as a stock market expert they forget that true market experts suck up their pride and cut their losses fast.

Drop the ego.  All traders have losing trades.  Winning traders cut those losers quickly.

5. Trying to Control the Market

You can’t control the market.  What you can control is how you react to the market.

It’s amazing how many people think that stocks should go up in a straight line and should be sold at the top of a run.  That’s just not how the market works.

A winning trend will typically move higher in a “two-steps-up, one-step-back” process.  The key is to not get rattled out of a trade when it takes a “step back” in a constructive manner.  Again, having precise rules will help a lot in determining what a “constructive” pullback is.

6. Risking Too Much on a Trade

I have to field this one a lot.  Many of my newsletter members think I’m too conservative.  And yes, I have to explain, I believe Nicolas Darvas himself risked way too much on his trades.  But the truth is that most new traders risk way too much on individual trades and this forces them out of the game quickly.

I know it sounds clichéd, but trading is a marathon and not a sprint.  To survive this game long enough to make the really big money, you simply can’t risk more than 1-2% of your portfolio on a single trade.  Many successful traders risk even less than that.

Simply stated, you should never risk more on a trade than you can comfortably afford to lose.  When you risk too much on a trade, it causes you to make dumb decisions.

7. Quitting

It’s been my experience that the desire to quit trading (or change strategies) is at its highest level right when a losing streak is about to end.

Losing streaks are a part of trading.  Yes, they can be painful, but this isn’t a game for the weak.

To beat the market, there is no substitute for perseverance.  As Mike Ditka puts it, “You’re never a loser until you quit trying.”

* The most powerful trading system I know of is the Darvas System.  You can learn this legendary system with a subscription to Darvas Trader PRO.  Each issue of Darvas Trader PRO includes our updated portfolio and watchlist of current Darvas Stocks – with EXACT buy points and sell points.  Start your 30-DAY TRIAL to Darvas Trader PRO right now and instantly receive my FREE trading course by clicking here.

I’ve always believed there is a direct parallel between success in sports and success in the stock market.

For example, to succeed in the stock market, one must first find the investment strategy that is right for them.  This is very similar to the way a football coach chooses the right offense for the team he is coaching.

In football, there’s no ONE right strategy that guarantees success.  Especially at the college and high school levels, coaches win championships using a variety of offensive systems.  Some prefer to grind it out with a conservative running game while others like to spread it out with a wide open passing attack.  Both strategies work.  Both styles win lots of games when utilized correctly.

The key for coaches is to find the proven system that best fits their player personnel and their own personality.

I think it’s interesting to note some parallels between the most successful offenses in football and the most successful investment strategies implemented in the stock market.

Below, I’ve showcased the investment world’s equivalent to the football world’s most well-known offenses.  You just might find that the style that would best fit you as a football coach fits you best as an investor.

PRO STYLE – TREND TRADING

As the name indicates, the “pro style” offense is the system most popular with the pros.  Most NFL coaches implement this offense with slight variations based on their player personnel.

The pro style offense relies on balance.  If a defense shuts down the running game, the offense will emphasize the passing game – and vice versa.

The pro style offense is also heavily-dependent on a smart and disciplined quarterback who stays calm and cool under pressure.  It requires a QB who doesn’t get easily rattled or rely on emotional responses.

Trend trading (or trend following) is the trading approach that is most popular among professional traders these days.  The Darvas System, for example, is a trend trading strategy.  Regardless of the specific strategy, the philosophy behind trend trading is simply to catch the market’s (or an individual stock’s) overall trend and ride the trend to profits until the trend ends.

Like the pro style offense, trend trading is a balanced approach.  Traders are not biased to being long or short.  If the market’s going up, they go long.  If the market’s going down, they go short.  They can profit regardless of which direction Mr. Market decides to go.

Also like the pro style offense, trend trading is heavily dependent on a DISCIPLINED trader who can set aside his emotions and make decisions in a calm and systematic manner.

THE SPREAD OFFENSE – SWING TRADING

The spread offense has taken the college football world by storm over the past decade.  It’s exciting and action-packed.  It relies on spreading the field out and getting the ball to your offense’s fastest and most-athletic players in one-on-one situations.

Despite its “flashy” nature and pass-heavy style that fans love to watch, the spread offense is successful because of its short, high-percentage passes.  While fans remember the few big plays that come out of this offense each game, the spread succeeds by methodically passing its way down the field with five yards here, four yards there, etc.  Every once in a while, it busts a huge 50-yard touchdown, but the majority of the offense relies on fast and short pick-ups.

The same is true for swing trading.  Instead of riding trends that last weeks or months, swing traders make fast trades that usually last just a few days.  Every so often, a swing trade scores a big 20% profit, but for the most part, a swing trader succeeds with fast gains of 1-3% at a time.  They pile up their smaller profits month after month.

Also like the spread offense, which relies on high-percentage pass plays, swing traders rely on high-percentage trades.  To be successful, swing traders usually need to have a winning percentage above 50% on their trades.  (This may sound obvious, but trend traders, on the other hand, can be successful with a winning percentage in the 30-40% range because their losing trades are much smaller than their winning trades.)

RUN & SHOOT – DAY TRADING

In the 1990s, the Run & Shoot offense was all the rage.  Colleges and high schools across the nation started implementing this pass-heavy offense in hopes of racking up 70 points-a-game.  A few NFL teams even got in on the fun.  The offense was fun to watch and caught defenses off guard with its “playground style” of adapting on the fly.

However, defenses quickly caught up with this new-fangled offense.  Today, despite many coaches trying, only a select few are able to consistently win with this offense and the days of scoring 80 or 90 points-a-game are gone.

Similarly, day trading is an action-packed strategy that, at one point, seemed to be unstoppable.  During the market bubble of the late 1990s, sensational stories of day traders becoming millionaires from home brought in a surge of eager students hoping to learn their keys to success.  They all wanted to learn how to make their fortune trading in and out of stocks with super-fast trades held for less than a day.

Like the Run & Shoot offense, the market quickly adapted to the latest day-trading strategies and profit margins became slimmer and slimmer.  Today, only a very small percentage of those who try make good money day trading.  That doesn’t mean one CAN’T be successful with day trading, it simply means that it’s much more difficult than one would believe based on some of the sensational success stories of the past.

THE WISHBONE – VALUE INVESTING

There was a time when the Wishbone offense was the most popular offense used by coaches at the high school and college levels.  Championships were abundant with this offensive strategy in the 1970s and 1980s.  This run-heavy offense relied on a very conservative strategy that was focused first and foremost on not making mistakes (turning the ball over or losing yardage) and would also benefit from the occasional breakaway run that resulted in a long touchdown.

The Wishbone offense, philosophically, could not be stopped.  Its triple-option approach gave the QB three different options for moving the football on every play.  Assuming he chose right, the offense would rack up at least four or five yards on every play.  If he chose wrong, the play would be stopped quickly, but the damage would be minimal.

Statistically, the Wishbone offense remains the most successful offensive system in the history of college football.  However, few teams still run it largely because fans think it’s boring to watch.  It’s not as exciting to see four-yard-runs on every play when the team down the road is passing the ball all over the field.

Like the Wishbone offense, value investing has been statistically proven to consistently outperform the market.  The more historical testing that gets done, the more proof we have that very simple value investing strategies beat the overall market again and again.

However, also like the Wishbone offense, value investing is seen by many as boring and “old fashioned.”  It requires patience and a long-term view.  In our adrenaline-fueled culture that is constantly seeking excitement and speed, value investing is often ignored.

Value investors, like Wishbone coaches, don’t mind being ignored.  They simply continue to rack up victories with a low-key and reliable system.

So there you have it, the football equivalent of the most popular investment strategies being implemented today.

The important thing to remember is that there is no single “Holy Grail” system that works all the time.  Each of these systems will work if executed properly.  There may be periods where one system works better than another, but fortunes have been made using each of them.

The key is to find the system that fits you best.

Also, like the coach who can adapt his strategy from season to season based on the strengths and weaknesses of his players, you don’t have to choose one and only one strategy to use for the rest of your investing days.  As long as you keep separate accounts, feel free to implement more than one strategy.

Just make sure you don’t mix and match in the same account.  You’d never expect to see a coach switch from the spread offense to the Wishbone offense after a few negative plays.  In the same way, you never want to let a swing trade turn into a value investment.  You must know your primary objective heading into the season – or trade – and stick with it.

* If you’re interested in trend trading, I recommend the Darvas System, one of the most powerful trend trading systems ever created.  You can learn this system with a subscription to Darvas Trader PRO.  Each issue of Darvas Trader PRO includes our updated portfolio and watchlist of current Darvas Stocks – with EXACT buy points and sell points.  Start your 30-DAY TRIAL to Darvas Trader PRO right now and instantly receive my FREE trading course by clicking here.

* * If you’re interested in swing trading, check out Darvas Trader’s 3 DAY TRADE swing trading system.  This is basically a condensed version of the Darvas System where breakout trades are held for just three days at a time.  Start your 30-day trial to 3 DAY TRADE by clicking here.

While there is no shortage of new and interesting investment books published each year, a few classic titles have become legendary on Wall Street.

These are books that have reached elite-level status among traders and investors.  They were written decades ago and are still read and re-read by Wall Street’s best.  They’re handed out to new traders by some of the greatest investors of our time and they’ve become essential reading for anyone who wants to enter the stock market.

If you were going to name the three titles that are most often given this “classic” status, they would be The Intelligent Investor by Benjamin Graham, Reminiscences of a Stock Operator by Edwin Lefvre, and How I Made $2,000,000 in the Stock Market by Nicolas Darvas.

The Intelligent Investor is considered the bible of value investing and in 2003, financial writer Jason Zweig gave this book the star treatment by adding extensive updates and commentary in an effort to “modernize” the classic text from Benjamin Graham.

Reminiscences of a Stock Operator is the unofficial biography of legendary trader Jesse Livermore.  It is to trading circles what The Intelligent Investor is to investing circles.  In 2010, Jon Markman gave this definitive trading tome the star treatment it deserved with an updated, expanded, and annotated edition.

Now, Steve Burns has stepped in to give Nicolas Darvas’ classic book its long overdue revision.  The result is nearly 100 pages of expanded commentary to go with the original work from Darvas.

I interviewed Steve Burns to discuss why he felt it was important to update this legendary Wall Street book, how he went about completing this overwhelming task, and how this new version of the book will help today’s traders benefit from the wisdom of the Darvas System.

QUESTION: I think the best compliment one can give about a book is to say, “I wish I had written that book.”  When your book first came across my desk, THAT was exactly my reaction.  I’ve often felt that How I Made $2 Million in the Stock Market deserved an extensive modern revision and you obviously felt the same way, but tell our readers why you felt compelled to update this Wall Street classic?

STEVE BURNS: Well, I think a lot has changed since Nicolas Darvas wrote his first book.  Many think that he just got lucky or was in the right place at the right time.  In reality though, he stumbled upon the principles that allow people to win big in the stock market and I wanted to go inside his story, between the lines, and explain what those principles were and why they still work today.

Q: I can’t think of a better person to write this new edition of Darvas’ book than someone who actually used the system to make a lot of money with it in today’s stock market.  Tell us about your success with the Darvas System?

SB: My really big money was made by trading Darvas-type stocks during market Uptrends.  I was very heavy into the tech sector in the late nineties and actually had enough capital at that time to pay off my house in March 2000 if I had chosen to do so.  Unfortunately, I would learn some hard lessons about position sizing and risk management as I lost 50% of my account by 2002.

After reading Darvas’ book, I was back to even by 2004 and went on to grow my accounts to $250,000 by 2007.  I sidestepped the 2008 meltdown in my two primary investment accounts by simply going to cash.  After the financial panic was over and an Uptrend began in March of 2009, I got back into the market and I have continued to grow my accounts.

The key to my success was being focused on trading stocks with growing earnings that continually made higher highs. Some of my favorites over the years have been Research in Motion, Apple, Google, and Priceline.

Q: Updating a book like this had to be an overwhelming process.  How did you go about determining what needed further explanation and what needed to be updated for the new version of the book?

SB: I read the book again with fresh eyes, asking myself if a first-time reader or new trader would understand the underlying wisdom of what Nicolas Darvas was doing in his trading.  Also, I realized the Darvas did not have stock options in his day, but he did use full margin and special “rights” that were granted on one of his stocks.  So, I thought that given the chance, Darvas would likely use options if trading during our time to control risk and make big bets.

Also, while he used price boxes for his trading, in modern times, he may have liked charts and moving averages that have the same meaning as a specific price support level had in his time due to the easy availability of stock charts now.

Q: In your book, I felt you made a very compelling case that Darvas would use options if he were trading today.  I also strongly agree with you that one of the big mistakes traders make today in trying to apply the Darvas System is being too focused on the specifics of his famous “Darvas Boxes.”  The real key has always been the recognition of valid support and resistance levels.  “Darvas Boxes” help with this recognition, but there are several other ways – often more appropriate ways – to evaluate these levels.  For example, other proven chart patterns, significant moving averages, etc.  Are there any other major ways you think the Darvas System has been misunderstood by modern traders?

SB: I completely agree, “Darvas Boxes” were only a tool he used in his era because price levels are what people watched on ticker tapes at that point in time.  With the proliferation of technology and instant charts, everyone is now able to use charts and moving averages to measure movements.   I believe Darvas would accept anything that worked to make him money in the markets.

I think the other misunderstood aspect of Darvas’ method is that he was a gambler.  Readers should understand that Darvas managed risk with automatic stop losses and trailing stops.  He had “insurance policies” in place at all times.  His losses were generally small, his stops were fairly tight.

A lot of people also think that Darvas just got lucky.  In reality, he was trading the right stocks, using the right system, at the right time.  This was not luck.  He did his homework and his persistence finally paid off for him.

Q: Every time I go back and read How I Made $2,000,000 in the Stock Market – and I’ve done this too many times to count – I’m always struck by the fact that I still pick up new pieces of insight or new trading lessons.   I never stop learning from this book.  I assume you can relate to this.  As you went back through this book in order to update it, what were some of the key lessons that stood out to you?

SB: Yes, I have the same experience.  This time the asymmetric risk dynamics of his trades really stood out.  That is, tight stops for a very limited downside, but an unlimited upside.  He would let winners run for as far as they would go.  This was one of the main reasons he was so successful, beyond merely picking the right stocks.  Also this was the first time I realized that the “rights” he had loaded up on with one of his stocks (Thiokol) were similar to modern-day options.  Darvas would have been an option trader given the chance!

Q: A lot of people hear the story of how Nicolas Darvas turned $30,000 into $2.25 million in 18 months and they assume that Darvas’ incredible experience was too good to be true, that it was a fluke occurrence.  When I first heard the story, that was certainly my reaction.  After all the research you’ve done on Darvas and his story for this book, how do you respond to that type of reaction?

SB: While I had the same initial reaction, I have come to understand that Darvas was using all the key principles of successful traders.  He discovered these principles through his reading of hundreds of the best investing books of his time and through losing his own money in real trading.  He was also a technician who studied price action and took the scientific approach in trying to discover what really made money, not just relying on his own opinions of what should make money in the markets.

Q: A lot of people hear the Darvas story and think that his strategy may have only worked because he took advantage of a certain period on Wall Street when such methods were easier to profit from.  In other words, they think that while a strategy like the Darvas System worked in the 1950s and ‘60s, it would not work as well in modern markets.  How do you respond?

SB: So many people have proven that it works in many different bull market cycles. William O’Neil, who recommends the Darvas book as one of the best, made more than $200,000 and bought a seat on the New York Stock Exchange in his twenties.  Dan Zanger made $42 Million in the Internet bubble in less than two years and credits Darvas as a main influence.  There are so many of these stories.  As long as there are Darvas-type stocks, there will be big winners using the Darvas System.  Just this year, I rode Apple and Priceline for hundreds of points to have a 51% gain on my trading account in one quarter.

Q: I think Nicolas Darvas and his story have been gaining popularity among traders in recent years.  My feeling is that this is due to the fact that trend following has had such overwhelming success over the last couple decades and Darvas is being recognized as one of the fathers of the trend following method.  What’s your take on why Darvas’ popularity seems to be increasing these days?

SB: People love success stories and want to know how to become rich.  Well, Nicolas Darvas makes a bold statement with the title of his book – How I Made $2,000,000 in the Stock Market.  I think that draws people to it.  They want to learn how he pulled off such a feat.

Q: You write about this a lot in your book, but could you briefly share a few key “updates” to the Darvas System, concepts that you think are important for the modern trader to understand in order to benefit from the Darvas System in today’s market conditions?

SB: I think my two biggest innovations with the Darvas Method is using in-the-money stock options in place of stock to capture moves with much less capital needed and much less risk.  Also, in many cases I have started using the 5-day exponential moving average line and the 10-day simple moving average line as support levels in place of price boxes.  That is, if one of these moving averages is acting as support on a chart.

Q: It’s difficult to find a trading strategy with a success record as long as the Darvas System’s.  Darvas originally published his book in 1960 and traders continue to use it and endorse it today.  Why do you think some traders or investors have a hard time buying into the Darvas method?

SB: Many simply do not believe in it, they think it is just a gimmick.  These are people who have not done their homework.  The Darvas Method is simply one of the very first trend following systems for stocks.  It’s shorter-term investing in the best growth stocks with the most price momentum – investing in companies that are currently changing the world.

Q: I know you’re passionate about educating traders, especially helping newbie traders avoid the bad habits that can cost them a lot of money.  What one or two pieces of advice would you like to give traders who are either brand new to the game or those who are going through a particularly disappointing period?

SB: One, find a mentor that can give you a shortcut to success, someone you can interact with and ask questions.  Darrin, your Darvas Trader PRO newsletter is one of the few that I can say is excellent for executing the Darvas principles.

Two, do not focus on the money you can make, focus on the money you could lose.  ALWAYS control your positions sizes and cut your losses at your predetermined stop. If the support level fails, get out.

Q: Thank you, Steve, I really appreciate your kind words about me and my newsletter.  And I really appreciate you taking the time to answer these questions and share your wisdom with so many traders.

SB: Thanks for having me back again, and thanks for all you do.

* * *

You can order Steve Burns’ new updated and expanded edition of Nicolas Darvas’ classic book, How I Made $2,000,000 in the Stock Market, by clicking here.

—————

* Learn to trade the Darvas System, one of the most powerful trend trading systems ever created, with a subscription to Darvas Trader PRO.  Each issue of Darvas Trader PRO includes our updated portfolio and watchlist of current Darvas Stocks – with EXACT buy points and sell points.  Start your 30-DAY TRIAL to Darvas Trader PRO right now and instantly receive my FREE trading course by clicking here.

Nicolas Darvas (along with so many other legendary traders) said that knowing the health of the general market was CRUCIAL to his strategy’s success.  Darvas knew that one couldn’t rely solely on the action of individual stocks.  The market’s overall direction had to be clearly determined before Darvas would make a trade.

Determining the health of the market isn’t as easy as it sounds.

In hindsight, anyone can see when the market was bullish, when it was bearish, and when it was choppy.  You can simply look at a long-term chart and say, “Here’s where it was going up, here’s where it was going down, and here’s where it was moving mostly sideways.”  Sounds simple enough, right?

But when you’re trading the market every day and you’re in the heat of the battle, it can be much more difficult to rationally decipher just how healthy or unhealthy the market is.  

“Is this just a short Uptrend or are we in the early stages of a new bull market?”  “Is the latest sharp pullback the end of an Uptrend or simply a constructive resting period?”  “Did the recent reversal signal a trend shift or is a whipsaw environment destined to continue?”

These are the types of questions traders must constantly try to answer – and the answers aren’t always clear.

The following list includes 10 distinct signs that the market is in an Uptrend.  The market can stay in good health even if it’s violating a few of these signposts, but the more violations you start to see, the more trouble a bull market is getting itself into.

1. Leading growth stocks and popular names are outperforming the indices.
Leaders are called leaders for a reason; they’re supposed to LEAD the market.  If you start seeing high-growth stocks and hot names lag the indices, you’ll know the market is headed for a slowdown.

2. Distribution Days are few and far between.
I’m constantly discussing Distribution Days and Accumulation Days in my newsletter, but to those who are unfamiliar with this concept, a Distribution Day occurs when the market declines on increased volume.  In a healthy market, Distribution Days are rare occurrences – one or two every couple weeks.  When Distribution Days start showing up more often, especially in bunches, it means the market is in trouble.

3. The market regularly opens in the red and works its way green.
In a bull market, new or inexperienced traders often get frustrated by the opens.  The market opens in the red and traders freak out, thinking this may be the end of the rally, time to cash out.  However, as the day goes on, stocks climb higher and end up finishing positive.  This is classic bull-market behavior and it drives newbies crazy.

4. The market ignores bad news.
In a bull market, doomsday headlines get completely ignored.  Such headlines may cause a negative open, but the big money uses each bad-news-fueled dip to buy more stock.  On the opposite side, during a bear market, even seemingly great news gets ignored and the market continues to drop.

5. Leading stocks ignore bad news.
Just like the general market, leading growth stocks ignore bad news in a strong Uptrend.  Even a disappointing earnings report may lead to an initial drop in price, but the stock will be back on track and racing to new highs just a week or two after the news was reported.

6. Leading stocks move up on INCREASED volume and pull back on DECREASED volume.
Just as the general market’s Distribution Days are few and far between in a bull market, the same is true for leading stocks.  Yes, leading stocks will pull back and they may even do so for a couple weeks at a time, but these pullbacks will occur on much weaker volume compared to when the stocks are moving higher.

7. Even subpar stocks go on big runs.
In a bull market, even stocks with so-so earnings – or even negative earnings – will suddenly surge higher, sometimes for weeks at a time.  These runs are usually short-lived, but they last just long enough to make headlines and suck in novice traders.  While a Darvas/momentum-based trader doesn’t want to buy into these subpar stocks (we should instead be focused only on the leaders), we do like to see weak stocks surge here and there because it tells us the market is healthy.  It tells us that investors want so badly to be invested in this market that they’re even willing to buy subpar stocks.

8. The market, and individual stocks, easily blast through expected resistance levels.
The most obvious resistance levels include things like new 52-week high marks and key “rounded numbers,” such as $100 for a stock or 3000 for the NASDAQ.  These are the types of resistance levels that everyone sees in advance and everyone talks about.  In fact, everyone expects to see stocks at least pause at these levels.  In a bull market, stocks surprise everyone by blasting through these levels quickly and with little resistance.  Stalling at these levels doesn’t necessarily mean that a bull market has ended, but jumping through these levels as if they weren’t even there is the sign of a very strong market.

9.  You see clear Uptrends on weekly charts.
It’s not hard to find short-term Uptrends on a daily chart.  When you can identify Uptrends on a weekly chart, you know the market is especially healthy.

10. Bases on leading stocks look better.
In a bull market, the bases formed by leading stocks will look much more like the classic chart patterns you’ve studied in textbooks.  They’re less sloppy and much more traditional-looking.  When you start to see bases form that look less than ideal and more erratic, you’ll know the bull market is in trouble.

Commit these 10 signs of a bull market to memory.  If most of these signs are being upheld, you’ll know the market is safely moving upwards.  If you see more of these signals being violated, it’s time to start raising cash, locking in profits, and preparing yourself for a Downtrend.

* Learn to trade the Darvas System, one of the most powerful trend trading systems ever created, with a subscription to Darvas Trader PRO.  Each issue of Darvas Trader PRO includes our updated portfolio and watchlist of current Darvas Stocks – with EXACT buy points and sell points.  Start your 30-DAY TRIAL to Darvas Trader PRO right now and instantly receive my FREE trading course by clicking here.

Drawdowns are the necessary evil of trading.  Nobody likes to have drawdowns, but they’re an unavoidable part of the trading game.

For those unfamiliar, a “drawdown” is the decline your portfolio experiences from its peak.  If a portfolio reaches $100,000 and then pulls back to $80,000, it has experienced a 20% drawdown.

Usually, but not always, the bigger the annual return you aim for means that you must be prepared to withstand a bigger drawdown.  It’s not at all uncommon for some of the best trend traders in the world, traders with streaks of 100%-plus annual returns, to experience drawdowns of 50% or more.

Drawdowns are caused by two factors.  The first factor is a streak of losing trades.  For the trend trader, losing-streak-induced drawdowns are usually not too severe.  This is because trend traders like to EASE into positions that have just broken out and because they keep tight stops to minimize the damage caused by a trade that goes against them.

A professional trend trader is likely to initially risk no more than 1% of his portfolio on a new breakout.  It would take a streak of 10-straight losing trades to create a drawdown of just 10%.  A drawdown in the range of 10%-20% is quite manageable.

The second major cause of drawdowns is when a large winning position reverses and breaks its trend.  This factor is much more significant for trend traders.  

The key to successful trend trading is riding a trend until it breaks.  Usually, once a stock has broken out, a trend trader will add to his position as the stock climbs.  By the time the stock is up, say, 50% or more, a trend trader who got in at the initial breakout is HEAVILY invested in the stock.

Of course, all great trends eventually come to an end, and this is where a trend trader experiences significant drawdowns.

While a trader may have been up 100% year-to-date thanks to a powerful trend he caught, a drawdown of 20%, 30%, or more can come along very quickly.  The fully-leveraged trend trader can easily watch his portfolio go from up 100% to up 50% in less than a month.

The “glass half-full” perspective can remind the trader that he’s still up 50% from where he started.  But no trader I know takes comfort in that perspective.  Instead, they feel the pain of a 50% drawdown.

How can a trader minimize the pain of these types of drawdowns?

The simplest way I know is something called “reverse pyramiding.”

Standard “pyramiding” means adding to a position as it shows strength.

For example, a trader may initiate half of their intended position on the breakout, then add another quarter position once the stock breaks through a second resistance area, and then add the final quarter position when the stock bounces back from a pullback, etc.

“Reverse pyramiding” means unwinding a position as it pulls back after a massive run.

For example, if a trader catches a trend and becomes fully-invested in that trend, he should start easing out of the position when the stock starts pulling back.

Reverse pyramiding can be applied to your whole portfolio.

Here’s an example.

If your portfolio drops 5% from its peak, immediately scale back 25%.  That is, if your portfolio reached a peak of $100,000 and then pulled back to $95,000, you’d want to eliminate one quarter of your holdings.

You can eliminate these holdings by cutting each of your positions down by 25% or you can cut back larger amounts from the stocks that are struggling the most.  I recommend the latter, but either option will immediately limit the drawdown your portfolio may be on the verge of.

You would continue with this “reverse pyramiding” process with each 5% drop from your portfolio’s peak.  If it drops to $90,000, you want to cut another quarter of your holdings.  If it hits $85,000, cut another quarter.  If it hits $80,000, you’d eliminate the final quarter and a 20% drawdown is the MOST you’d experience.

The nice thing about this method is that with each quarter of your holdings you cut, it gets harder for your portfolio to drop significantly (because you now have smaller positions).  In other words, this strategy makes it very difficult to actually hit a 20% drawdown because most of your positions would have already been exited.

Pyramiding, in either direction, is a powerful trading tool.  Learn to use it effectively.  It’s a simple way to maximize your profit potential and minimize your drawdowns.

* Learn to trade the Darvas System, one of the most powerful trend trading systems ever created, with a subscription to Darvas Trader PRO.  Each issue of Darvas Trader PRO includes our updated portfolio and watchlist of current Darvas Stocks – with EXACT buy points and sell points.  You can instantly download the latest issue of Darvas Trader PRO and our FREE trading course by clicking here.

Mottos and maxims are as much a part of Wall Street culture as stock charts and annual reports.  But regardless of whether these well-known sayings originated in a classic book, a popular movie, or hard-won trader experience, not all of them are true.

Here are five fairly common stock market clichés that are simply NOT true.  A wise trader can exploit these five MYTHS and profit from them.

Myth No. 1: Monday Sets the Tone for the Week

This is one of those sayings repeated constantly on news programs, usually at the beginning or end of a Monday session.  Yet, there’s really no truth to it.  In fact, Mondays are one of the most erratic days of the week for the stock market.

In my own experience, I’ve found that breakouts tend to have a higher failure rate if they occur on a Monday.  This is likely due to the fact that just as the “smart money” tends to act later in the day, it also tends to act more aggressively later in the week.  Therefore, late-week moves are a much better indicator of market conviction than early-week moves.

The Lesson: Consider making much lighter entries on Monday.  If you’re a short-term trader, consider avoiding entries altogether on Monday.

Myth No. 2: Times are Changing Fast and the “Old Ways” Won’t Work Anymore

Every few weeks, you’ll see some market guru on TV explaining why the old methods of investing or trading won’t work anymore.  It just so happens that most of these “experts” are usually trying to sell you their services, which offer you the keys to their “new” way to trade.

Yes, the stock market is a constantly-changing animal, but at its core the more it changes, the more it stays the same.

Discount brokers, program trading, ETFs, high-frequency trading, etc. have all changed the way the stock market works, but none of it really changes what the stock market is.

Ultimately, the stock market is one big speculation machine based on the emotions and opinions of individuals.  That will NEVER change.  And that’s why tried-and-true methods of the past (ranging from value investing to trend following to momentum swing trading) will always work if executed properly.

The Lesson: Find a method with a proven track record and stick with it, regardless of what you hear self-proclaimed “experts” say.

Myth No. 3: The “Little Guy” Can’t Beat the Market

It’s amazing that this myth is so easily accepted.  Despite the fact that money managers have a notoriously poor track record when it comes to beating the stock market, again and again we hear that the “little guy” doesn’t stand a chance against the “pros.”

Interestingly, Peter Lynch, the mutual fund manager with history’s best track record in beating the market, has actually written books proclaiming not only that the “little guy” can beat the market on his own, but that it’s EASIER for him to do so!

Remember, the massive marketing campaigns by financial companies are geared at doing everything they possibly can to convince you, the lowly amateur investor, that you can’t play this game and that you need to hand over your money to them.  They promise to take care of you.  Unfortunately for these companies, their track records often prove otherwise.

The Lesson: While it’s certainly not easy, someone who is truly committed to beating the market CAN do so.  It takes a lot of hard work, but it can be done.  In many ways, the “little guy” actually has a tremendous advantage over the large fund manager.

Myth No. 4: News Moves the Market

Every day after the market closes, news outlets will conclude that the day’s action – whether up or down – was due to some newsworthy event.  The fact is, on any given day, “good news” or “bad news” has little impact on the market.

A strong bull market will completely ignore “bad news” (remember the ‘80s?).  A bad bear market will continue to blow off even the most optimistic news items.

News does not move the market, emotion does.  In particular, fear and greed cause the market to move the way it does each day.

The Lesson: Ignore the news and follow the trend.

Myth No. 5: It Doesn’t Matter When You Enter, As Long As You’re on the Right Side of the Trend

This is an idea that’s been picking up steam in trend-following circles over the past several years.  It’s based on the principle that proper risk management will keep you out of trouble even if you were to enter the market completely at random.

The concept, in theory, is correct.  If you’re always operating with a 2-to-1 or better reward-to-risk ratio, hypothetically you’ll never get into too much trouble if every random trade has a 50-50 chance of being successful for you.  The problem is that not every trade has a 50-50 success rate, especially if you’re entering randomly and depending on a 2-to-1 reward-to-risk long-term outcome.

Plus, the objective of trading isn’t to stay out of trouble; the goal is to make a life-changing amount of money!

The Lesson: Your buy point is absolutely crucial to the success of your trading.  Buying at the wrong time will whittle away at your portfolio, no matter how well you’ve managed your risk.

These are just five well known stock market myths that are simply not true.  Don’t accept anything to be true just because you hear it often enough, especially when it comes to the stock market.

Do your homework and learn to separate the facts from the fiction.  Doing so will not only keep you from following the erroneous advice that everyone else is following, but it will also present you with tremendous profit opportunities.

* Looking for a stress-free way to trade with a long track record?  Learn to trade the Darvas System with a subscription to Darvas Trader PRO.  Each issue of Darvas Trader PRO includes our updated portfolio and watchlist of current Darvas Stocks – with EXACT buy points and sell points.  You can instantly download the latest issue of Darvas Trader PRO and my FREE trading course by clicking here.