• Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Decoding Markets

  • Top Posts
  • Courses
  • Resources
    • Books
  • Free Class
  • Blog
You are here: Home / Investing / 4 Reasons To Use Investing Rules

April 26, 2015 By Joe Marwood Leave a Comment

4 Reasons To Use Investing Rules

investing rulesRegular readers of this blog will know that I am a fan of quantitative trading methods. I’m not a very good discretionary trader so I get around that fact by using rules to make investment decisions.

It pays off since it stops me second-guessing my trades and getting out at precisely the wrong time (which is what usually happens).

Here are four reasons why I use investing rules and why you should too:

#1. First of all, using a set of rules saves time

Once a strategy has been set up, scanning for potential stocks takes just a few seconds. And once that’s done, you can narrow down your choices in a matter of minutes or hours.

This is a much more efficient and logical way to look for investments. And ultimately, it means you can invest for yourself and manage your own money.

It also means that you can automate many parts of your investment process and end up making passive investment choices.

#2. Minimise emotion

The second advantage is that rules greatly reduce the impact of emotional trading.

Psychology plays a huge part in the stock market and the worst thing you can do is to sell a stock based on an emotion or feeling, such as fear, greed, or hope.

The aim is to buy low and sell high, but too many investors get their fingers burnt by doing the exact opposite. They sell when the market is crashing, because of fear, and they buy when the market has already gone up, out of hope or greed.

By following a set of rules, you can invest in a business-like manner, and have confidence that your decisions are the right ones. This is a far better strategy than relying on personal judgement or opinion.

#3. Warren Buffett uses rules

The third reason to use rules is that you’ll be in great company. Nearly all of the investment greats use some kind of rules-based strategy to aid their investing.

Warren Buffett uses a set of rules to determine company value that he has derived from the work of Benjamin Graham. And a good book that describes Buffett’s rules in detail is Buffettology by Mary Buffett.

benjamin graham investing rules

Ben Graham rules courtesy of investmenttools.com

Likewise, John Templeton, Peter Lynch, Joel Greenblatt, David Harding, many of the world’s greatest investors use rules to help select stocks and make profitable trades.

In the case of Peter Lynch, he favours use of the PEG ratio, and the price-to-earnings line. And these techniques helped him to make 30% returns over 13 years.

In the case of Joel Greenblatt, he’s a big proponent of the Magic Formula.

Meanwhile, David Harding is a trend follower who utilises a systematic approach for his managed futures trading fund. Read more about trend following methods here.

#4. Rules narrow down a selection

Lastly, rules are the best way to narrow down a list of companies so you can focus in on a smaller selection. You can then do your homework on those companies and evaluate whether to invest or not.

There are over 8,000 stocks listed in the United States so using rules in this way is a great timesaver.

And if you’re interested in scanning for stocks see this list of free stock screeners.


Thank You For Reading

joe marwood profile pictureJoe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. If you are interested in more quantitative trading strategies, investing ideas and tutorials make sure to check out our program Marwood Research.


Disclaimer

This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst. The reader agrees to assume all risk resulting from the application of any of the information provided. Past performance is not a reliable indicator of future returns and financial trading is full of risk. Please read the Full disclaimer.

Filed Under: Investing, Lists, Strategies/ Systems Tagged With: investing, lists

Recommended Educational Resources:


  • Discover New Trading Strategies
  • Learn Japanese Candlesticks (Free)
  • Mental Models For Trading (Free)
  • Indicators For Amibroker (Free)
  • Tools For Options Traders (Free)
  • Historical Data For 8000 Stocks (Free)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published.

Primary Sidebar

Access Marwood Research image

Popular

Backtesting a finviz stock screen

Good Results From Backtesting A FINVIZ Stock Screen

The more frequently you can trade your edge, the faster you can play out your expectancy and the quicker you can recover from any drawdown.

The Downsides Of Trading Systems

Slide 3 Books

The 100 Best Trading And Investing Books Of All Time

vrsn example moving average pullback trade

The 200 Day Moving Average Pullback Doesn’t Work

The System Traders Feedback Loop – Don’t Get Stuck In The Back-Testing Spiral

The Truth About Intraday Momentum

10 things that dont work trading stocks featured image

10 Mistakes To Avoid When Trading Stocks

Double top pattern with adjustable parameters

Double Top Pattern – Backtest Rules & Results

Search

Recommended Resources

  • Discover New Trading Strategies
  • Learn Japanese Candlesticks (Free)
  • Mental Models For Trading (Free)
  • Indicators For Amibroker (Free)
  • Tools For Options Traders (Free)
  • Hist. Data For 8000 Stocks (Free)

Financial Disclaimer

Financial trading is risky and you can lose money. Joe Marwood is not a registered investment advisor and nothing on this site is to be regarded as personalized investment advice. Past performance is not indicative of future results. Data errors and mistakes do occur. Please see the full disclaimer.

Footer

About The Author

Joe Marwood is an independent trader and investor specialising in financial market analysis and trading systems. He worked as a professional futures trader for a trading firm in London and has a passion for building mechanical trading strategies. He has been in the market since 2008 and working with Amibroker since 2011.

Joe Marwood Profile PIc

Recent Posts

  • Trend Following With ETFs and Large Cap Stocks
  • Should You Trade This Earnings Pullback Strategy?
  • Simple Algo Trading With Alpaca And Streak
  • Is Value Investing Dead? Dissecting The Value Investing Narrative
  • How To Screen For Stocks With Norgate Data
  • Do Stocks Have A Floor?
  • What Trading Signals Work Best For Long-Term Investors?
  • Is The Biden Trade Priced In?

Search

Privacy policy | Contact | Disclaimer | All Rights reserved. JB Marwood.