Bob Farrell is one of Wall Street’s old experts, who wrote his 50 years of experience in investing under the name “Bob Farrell 10 Rules”. Although Bob Farrell educated in fundamental analysis, he attracted to technical analysis and could achieve success in this sector. The “10 rules of Bob Farrell” shaped over decades, which is the result of his experiences by facing Bull market, Bear market, neutral market, declines, and bubbles. In this article we are going to explain 10 rules of Bob Farrell, which could help make better decisions in trading. You can use these rules either for trading in cryptocurrency market or any other financial markets.
1- Bob Farrell 10 rules; The markets tend to return
The overextended trends, tend to return to their long-term average. Even though the trend be a strong uptrend or downtrend. The figure above shows Ethereum price chart from first days of Ethereum creation to March 2020 along with 52-week Exponential Moving Average. The Blue color arrows show several price returns.
2- Excessive expand in one direction will open into an excessive expand in opposite direction
When the price overshoots upward, it will overshoot downward later on. The figure above shows Bitcoin price chart. The Bitcoin price overshot from $5,800 close to $20,000, but it dramatically declined to $8,000 immediately.
3- There are no new eras, excesses are not permanent
Since 100 years ago, markets always experienced price bubbles. The most dangerous phrase in investing is that “This time is different”. Jesse Livermore says: the first lesson I learned early in the market is that there is nothing new in Wall Street. In fact, whatever happens in the market today has happened before and will repeat in the future.
4- Excessive and rapid rising or falling the price mostly go further than you expect and it would not be slight and calm during the price correction
Although the market will return to its main trend, a strong trend can extend for a long time. Once the trend ends, the price correction would be a sharp move. The figure above shows Bitcoin price chart. As the chart shows, Bitcoin downtrend extended for a month, but the price corrected around 50% during two weeks. It is notable that the blue color rectangle doesn’t show the price correction.
5- Bob Farrell 10 rules; The public mostly buy at the top and sell at the bottom
The average individual investors act Bullish at market tops and Bearish at bottoms. In theory, the strong sentiment of buying stimulated at tops. On the other hand, the desire to sell increases at bottoms.
6- Fear and greed are stronger than long-term decisions
Do not let the emotions to impact your long-term decisions.
Fear and greed are stronger than a long-term resolve. Plan your trades and trade accordingly. Meanwhile, be prepared for different scenarios to do not get surprised by sharp price movements. Sharp price declines increase the fear and lead the trader to take panic decisions. Meanwhile, a sharp price surge will lead to overconfidence and deviation from a long-term plan. When the emotions are running high, take a break, step back from the market and analyze the situation for the next greater trend.
7- Bob Farrell 10 rules; Markets are strongest when they are broad and weakest when they narrow
Breadth is one of the most important factors. A jump with narrow breadth indicates limited contribution and the chances of failure are above average. The market would not be able to jump with participation of just few large-caps. In order to have a credible jump, the participation of small and mid-caps is also required. A price rally is happening in favor of all participants have more chance for further gains.
8- A bear market has three phases; sharp fall, reflexive rebound and a lengthy fundamental downtrend
A bear market begins with a sharp and quick decline. After this dramatic fall, there would be a jump, which retrace a part of that decline. Then, the decline continues, but it would be slowly. Dow theory also suggests that bear markets include three down legs with reflexive rebounds in between.
The figure above shows the Bitcoin price chart. A sharp decline happened in around two months. After that, an upward jump occurred, which took a month and finally the downtrend continued for 10 months.
9- When all forecasts and experts agree, something else will happen
When all analysists agreed to buy, only one way remains and that is the appearance of a downtrend. Excessive bullish sentiment from experts and analysts should be considered as a warning sign. An investor should buy when the market lost its popularity and the news are frustrating. Patient investors make profit by using this strategy.
10- Bull markets are more popular than bear markets
The mass is more tuned with bull markets than bear markets.
Bob Farrell 10 rules; Conclusion
The Bob Farrell rules are not 100% practical and true the same as all Wall Street rules. However, they help one in order to become a professional trader beyond the public sentiments, news and personal emotions. By being aware of the emotions and their consequences, it helps to do not buy at tops and sell at bottoms, which against human natural instinct. In fact, the natural instinct increases self-confidence at tops and makes one pessimistic at bottoms.