December 2002

The January Effect is a seasonal upward bounce in the stock market that often occurs between December 31st and the end of the first week in January.  In recent years, the January Effect has slipped forward into December...and has been referred to as the 'Santa Claus Rally'.  As you all know, there wasn't a Santa rally this year.  Will there be a January Effect this year?

During the past 52 years, when the Standard & Poor's 500 index has posted gains during the month of January (34 times), it finished down for the year only three times. The 18 times it fell in January it finished the year down 66% of the time.  History would suggest that the stock market has a better chance of finishing higher in 2003 if it gets off to a fast start.  The January Effect has been attributed to the old saying, 'As January goes, so goes the year'.

Small-cap stocks have provided the best gains during the January Effect.  The January Average return from 1970-1999 (for Small-cap stocks) has been 3.51%.  Not a bad return for 1 month.

The January Effect has been often associated with investors selling-off stocks at the end of the year, so they can write off losses against their capital gains.  Investors put their money back into the market in January, causing a rally.  There isn't any guarantee that a January Effect will occur, and some analysts are now brushing it off as a non-event.  However, it is still another historical occurrence to factor into your trading decisions during the coming week.

Many traders maintain and refine a set of Trading Rules that they attempt to follow.  The rules are intended to encourage and remind traders to have some discipline, or to follow a trading system with exactness.  A good set of Trading Rules will often prevent greed and plain stupidity from creeping into your trading.  Almost any trader can identify a losing trade, and then say, 'If I had only followed my rules I wouldn't have had that losing trade'.

The following list of general Trading Rules is a compilation from many different sources.  They are not in any particular order of importance.  Many of the rules are common sense and you have heard them before.  You may see a rule that you would like to add to your own Trading Rules list.

• Trade with the Trend.
• Cut your losses short, and let your gains run.
• Trade the Chart, not the Money.
• Don't chase the Market.  Wait for a 2nd chance.
• Never buy because it seems too low.  Never sell because it seems too high.
• Trade only symbols that have sufficient volume and liquidity.
• Never add to a losing position.  Just get out and start over.
• When in doubt, get out, or stay out.
• Know where to exit a position before entering a trade.
• Never have an opinion about the market.  Lose your opinion, not your money.
• Trade what you see, not what you believe.
• Think for yourself.
• Don't borrow money to invest.
• Don't trade tips.
• Focus on Trading, rather than on making Money.
• Avoid Impatience.  You don't always have to be in the market.  Wait for good trade opportunities.
• Always place a stop.
• Follow your Rules.
• Never 'Go for Broke'.
• Don't get sloppy after successful trades.
• Control your losses.
• If you wouldn't take the trade now, then don't stay in a current trade.  Get Out.
• Don't trade without a plan.
• Lock-in profits.
• Move stops to a break-even (risk free) exit point as soon as possible.
• Focus on not-losing, more than winning.
• The trend is your friend.

The beginning of a new year is a good time to set Goals, and refine your trading strategies and rules.  A smart man learns from his mistakes, a wise man learns from the mistakes of others.  Use your Trading Rules to have a successful trading year in  2003.