Wall Street Sayings and Trading Rules

This page is a collection of the most popular trading sayings, adages, quotes, and rules. While some of them remind us of useful habits, all the rules should be taken with a grain of salt. Most of them are right and profitable in some market conditions and wrong in others. You will also find some of the rules contradict each other.

Trading strategies

"Time in the market beats timing the market"

This quote refers to the fact that market tops and bottoms are very hard to predict and most people trying to "time the market" (catch the exact perfect time to buy or sell) end up worse than if they stayed invested all the time. For vast majority of people (and according to various studies, majority of professional fund managers), this appears to be true.

"Buy low, sell high"

I was hesitating to include this one, because it is so general and not limited to financial markets. It is common sense, but I've read and heard it so often it deserves a mention. It is also one of the most undeniably true rules in this list. If perfectly reflects the fact that trading is both very simple and very difficult.

"Trend is your friend"

This saying became popular with the rise of trend following, which came to fame in the highly volatile markets of 1970's and 1980's. It is based on the assumption that market prices move in trends: When price has been growing for a while, it is more likely to continue to grow than to reverse, and vice versa. Therefore trading in the direction of the trend is a better strategy than trying to catch trend reversals (trade against the trend).

"Trend is your friend until it ends"

Adding to and reversing the above, this saying reminds us that most trends eventually come to an end, and it may be costly if you were following the trend blindly.

So which of the trend sayings is right? Market history shows, both and none. Some markets and some periods of time tend to favor the trend following approach, while others tend to mean revert, making trend strategies work not so well.

"Be greedy when others are fearful; be fearful when others are greedy"

This quote, attributed to Warren Buffett, says that being a contrarian pays. When everybody else is optimistic and buys, chance is prices are inflated and it is best to sell or stay aside. Conversely, the times of maximum fear and panic and often the best opportunities to buy at bargain prices. The rule fits well with the value investing philosophy.

When a position goes against you

"When in trouble, double"

This quote is often said more as an expression of confidence in an investor's losing positions rather than to actually double their size – an encouragement to stick with the stocks we believe are undervalued (and becoming more so as the market makes new lows).

Like most of the other sayings, it is sometimes true and sometimes not (and sometimes outright dangerous).

"It's not a loss until you sell"

This is a softer version of the above. When you hold a position for a good reason (e.g. the stock is a good value based on your analysis), the price going against you is not a reason to quit. In other words, paper losses don't matter; only the actual (realized) profits and losses do.

"Rule number one: Never lose money; Rule number two: Never forget rule number one"

This is another quote attributed to Warren Buffett. Sounding obvious and general, this quote can be interpreted in numerous ways. What is believed that Buffett actually meant by this is something similar to "It's not a loss until you sell". In other words, when you have done your "homework" and are confident in your investment being a good value, the fact that its price declines does not make it bad. You should stick with your position.

"Cut your losses, ride your winners"

A more verbose version is "Cut your losses short and let your profits run." This is directly in opposition to the rules above. It works in trending markets, not so much in value investing or in mean reverting markets. Cutting losses is absolutely essential when trading with leverage.

Risk management

"Don't put all your eggs in one basket"

In one word, diversify.

"Pigs get slaughtered"

The full version is "Bulls make money, bears make money, pigs get slaughtered." Bulls are traders who take long positions and profit from the market going up. Bears are the short sellers who profit from market going down. Pigs don't have a strategy or maket view – they just want to make money, a lot of it and fast.

There are times when bulls make money and other times when bears do. The pigs, however, lose money at all times, regardless of the market's direction. The bottom line is don't be a pig, i.e. know what you are doing and don't be too greedy, don't try to "get rich quick" and make a fortune in one fast oversized trade. Take trading seriously, have realistic expectations, and above all, respect risk. Else you will get slaughtered.

"The market is always right"

So you have done a thorough analysis and believe this stock is massively undervalued. You bought the stock, expecting your analysis to prove correct and the stock price to rise to "fair value". But others apparently don't share your view and the market keeps falling. The market must be wrong! In reality, it doesn't matter what you think. You can be right and still lose a lot of money if the market doesn't share your view. The only thing that matters to your bottom line is what the market does. The market is never wrong.

"The market can stay irrational longer than you can stay solvent"

This saying, usually attributed to John Maynard Keynes, is an extension of the above. A perfect example is the dotcom bubble in the late 1990's, when some otherwise very successful investors correctly assumed the market is indeed in a bubble and speculated on its decline. However, the bubble took much longer and prices went far higher than they had expected, and some of the short sellers had to abandon their bets. In 2000 the bubble finally burst and proved them right, but it was too late. They were right about the market, but still lost money, because they underestimated the market's ability to stay "irrational" for a long time.

Seasonality

"Sell in May and go away"

The best known seasonlity based popular trading rule refers to the pattern that the stock market often shows good performance in the first part of the year and not so good in the rest. In other words, all or most of the gains canbe made from January to May, and in the rest of the year, it is better to stay aside. While this rule may prove useful in some years, generally for the long term investor, the most profitable way is to stay invested in the market all year round, continuously.

"As goes January, so goes the year"

This quote refers to the belief that the stock market's performance in January is a good predictor of its performance for the whole year. It is based on the assumption that investors reset their views at the beginning of a new year, and the developments in January set tone for the entire year.

One More

"This time it's different"

In most cases, when someone says this, they mean it irronically – they mean the quote is not true. In other words, history tends to repeat itself and the human (and crowd) psychology that moves the markets remains the same, even when the details – the macroeconomic context, technology, or the stories of the day – change a bit. This saying (when meant irronically) should remind you to stick to your experience and not break your rules, however unique and "different" the situation feels and however tempting it may be to "break the rules just this one time".