Pain and Gain

By Greg Guenthner, The Daily Reckoning Dec 20, 2013, 12:40 PM 

Today, I have three trading rules to help you on your journey to a successful (and profitable) new year.

But first, a quick review:

This trading week has been the perfect microcosm of 2013′s most powerful trends.

Think about it…

Stocks sprinted higher despite legions of naysayers proclaiming that the bull market was cooked. Investors put worries over the Fed’s decision to taper next month on mute, pushing the averages toward new highs with only seven trading days left in the year. While stocks continue to deliver outsized returns, gold plummeted more than $30 to close below $1,200 for the first time in more than six months. The yellow metal is now well within striking distance of new 52-week lows…

Longs stocks, short gold was easily the trade of 2013. You can’t argue with these numbers…

While the S&P has marched to a 29% gain on the year, gold has dropped nearly 26%. And if you’re really a glutton for punishment, just check out the miners. The Market Vectors Gold Miners ETF (NYSE:GDX) continues to plummet. It’s down more than 54% year-to-date, making that losing gold position look downright attractive…

With just a few trading days left this year, it’s time for you to figure out how to attack the markets in 2014. Here are the three most important rules you need to keep in mind to optimize your gains:

Rule 1: Forget about calling the top in stocks.

Here’s a simple idea that can save you a lot of hassle. Repeat after me: every market dip is not “the top”. Many investors love to try to cherry pick market turning points. But if you’re constantly positioning yourself for a big downside break, you’re going to lose more money than you’ll make by simply following the trend.

Your guesses (and mine, for that matter) are irrelevant. Price will tell us when its time to sell or go short…

Rule 2: Bottom-picking doesn’t usually work, either.

Gold miners’ performance in 2013 is the perfect example as to why speculating on bottoms just creates unnecessary pain and suffering.

If you’re reading an analyst report or a financial news article, and someone is quoted as saying that there’s no way in hell a particular asset could possible go any lower, it will move lower every time. Cheap can always get cheaper. Oversold can become more oversold. The market really doesn’t care what we think…

Again, only price can tell us when the downtrend could finally be over for good. Don’t jump the gun.

Rule 3: Ignore the news.

Financial news commentary is not only misleading — it also gets in your head and will inevitably cost you money if you listen too closely.

I’ve written a million and one times that you can’t trade headlines. Exactly one year ago this week, every pundit on the news was telling you that the impending fiscal cliff was going to spell disaster for the market during the upcoming year. Well, now we know how that turned out.

Price pays. Everything else is a sideshow.

Stay smart in 2014 and the market will reward you…

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