# Should investing/trading be rule based ?



## lonewolf (Jun 12, 2012)

Is it best to have a rule based system for trading/investing or set no rules & fly by the seat of your pants ?


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## lonewolf (Jun 12, 2012)

Rules for what to buy ?
Rules for when to buy ?
Rules for when to sell ?
Rules for money management ?


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## lonewolf (Jun 12, 2012)

Should a trader write a 500 plus page book on the rules they must follow ?

OR

Should a trader keep it simple & be able to write all the rules on a business card & keep it in thier wallet & be able to pull it out now & then or reciet the rules in front of a mirror?


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## Squash500 (May 16, 2009)

lonewolf said:


> Should a trader write a 500 plus page book on the rules they must follow ?
> 
> OR
> 
> Should a trader keep it simple & be able to write all the rules on a business card & keep it in thier wallet & be able to pull it out now & then or reciet the rules in front of a mirror?


 I personally just try to keep things very simple. I could explain my trading strategy to a smart 12 year old and he/she would probably understand it--LOL.


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## HaroldCrump (Jun 10, 2009)

Buy low sell high.
Simple, innit?
;o)


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## BlackThursday (Apr 25, 2011)

lonewolf said:


> Should a trader write a 500 plus page book on the rules they must follow ?
> 
> OR
> 
> Should a trader keep it simple & be able to write all the rules on a business card & keep it in thier wallet & be able to pull it out now & then or reciet the rules in front of a mirror?


If a trader needs to do either of these things then a trader should just put his money back in his piggy bank to keep it safe.


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## fatcat (Nov 11, 2009)

this is exactly what programmed trading is all about ...
computers crunch data (or the news) and make trades

i would love to be able to create a set of rules and then walk away from the system
but those rules would be harder to create than just watching the portfolio

anything that removes emotion but not the other skills would be great


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## doctrine (Sep 30, 2011)

I only make the trades that make money 

Every investor should have a few guidelines. I have a few rules on what stocks I invest in. I may bend one or two of them, but 90%+ time I stick to my guns.


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## fatcat (Nov 11, 2009)

doctrine said:


> I only make the trades that make money
> 
> Every investor should have a few guidelines. I have a few rules on what stocks I invest in. I may bend one or two of them, but 90%+ time I stick to my guns.


me too but that 10% can kill you :tongue-new:


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## brad_g (Apr 12, 2013)

It's been shown over and over again that investors are their own worst enemies. Eg. Dalbar's, Quantitative Analysis of Investor Behavior reports which identify a "behavior gap", the difference between investor returns and those of the funds they invest in. Much of this gap is attributable to investor's poor decisions, likely spurred by emotion entering the process. 

Larry Swedroe on this topic: http://www.cbsnews.com/8301-505123_162-57402744/why-investors-are-their-own-worst-enemy/

Having a rules-based approach sounds like a great idea to help shrink the behaviour gap. Personally I would keep it high-level, strategic and not tactical. Actually a good Investment Policy Statement should cover most of this.


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## 6811 (Jan 1, 2013)

fatcat said:


> me too but that 10% can kill you :tongue-new:


Amen to that!!!


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## lonewolf (Jun 12, 2012)

fatcat said:


> this is exactly what programmed trading is all about ...
> computers crunch data (or the news) and make trades
> 
> i would love to be able to create a set of rules and then walk away from the system
> ...


 One rule for how much to buy
One rule for what to buy
One rule for when to buy
One rule for when to sell

More is not always better. One indictor is all that is needed, that does not mean more then one indictor can not be used if those indictors are grouped togeather to form one indictor. The bones of the sytem do not have to be complex but if they are they should be easy to follow. Black box without understanding whats inside is not for me.

The more black & white of the actions that should be taken & the less gray the less stress ?


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## fatcat (Nov 11, 2009)

lonewolf said:


> One rule for how much to buy
> One rule for what to buy
> One rule for when to buy
> One rule for when to sell
> ...


well, depending on how complex your rules are, you can accomplish much of this with a google spreadsheet and a set of formulas

it won't do the trading for you but it will tell you what to: i.e. telus drops/rises by x percent in x days or weeks then color a cell green indicating "take action" .. you can do this for pe, yield and a whole bunch of variables especially if you use yahoo which gives a lot of data to work with

you could also scan for keywords i think also

is that what you are talking about ?


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## Rusty O'Toole (Feb 1, 2012)

There is plenty of evidence that our instincts will cause us to lose money when it comes to investing. If you want to invest by the seat of your pants you will have to be the one in a million whose instincts are the opposite of everyone else. Or revise your whole way of thinking. Or lose your money.

The best investors have rules. Over the years they hone them, add new ones, discard old ones, develop new plans when the old ones stop working and new opportunities present themselves. But they all have rules they follow.

Of the world's best traders, no two follow the same rules and no two invest alike. Buy psychologists have found that they share certain mental characteristics, and these characteristics can be taught.

Van K. Tharpe has spent 25 years testing the top traders and figuring out what these characteristics are. He has a couple of books out and also teaches.


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## Rusty O'Toole (Feb 1, 2012)

The most successful rule set comes from Benjamin Graham, inventor of security analysis and the author of Security Analysis and The Intelligent Investor. His followers include Warren Buffet and many others. The method they use is called value investing. It is a safe and profitable method, but boring. Unless you have the soul of an accountant it is a very difficult method to follow. The method,and the math are simple. It just goes against normal human instincts. But it works.


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## cainvest (May 1, 2013)

Totally agree that investing should be rule based.


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## Squash500 (May 16, 2009)

cainvest said:


> Totally agree that investing should be rule based.


 Not necessarily. IMHO it totally depends on your risk tolerance and ability to sleep at night--LOL. What's the point of having an IPS (Investment policy statement) of 40% equities and 60% fixed income if at the first sign of trouble you'll liquidate all your equities at very low prices etc.


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## Rusty O'Toole (Feb 1, 2012)

Squash500 said:


> Not necessarily. IMHO it totally depends on your risk tolerance and ability to sleep at night--LOL. What's the point of having an IPS (Investment policy statement) of 40% equities and 60% fixed income if at the first sign of trouble you'll liquidate all your equities at very low prices etc.


Good point. Random rules that don't work, are no better than random actions that don't work. You need rules that are proven to have a positive result.


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## cainvest (May 1, 2013)

Squash500 said:


> Not necessarily. IMHO it totally depends on your risk tolerance and ability to sleep at night--LOL. What's the point of having an IPS (Investment policy statement) of 40% equities and 60% fixed income if at the first sign of trouble you'll liquidate all your equities at very low prices etc.


Rules should still apply, it's up to you to make good ones or bad ones with the possibility of turning bad to good ones. 
Adopting established rules is probably a good place to start, following said rules is a problem for a fair number of people.


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## Squash500 (May 16, 2009)

cainvest said:


> Rules should still apply, it's up to you to make good ones or bad ones with the possibility of turning bad to good ones.
> Adopting established rules is probably a good place to start, following said rules is a problem for a fair number of people.


 Not to argue semantics here...but what really are the established rules? IMHO there aren't any. Ask 10 different financial advisors how to invest a $300000 portfolio (for example) and you'll probably get 10 different answers.


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## cainvest (May 1, 2013)

Squash500 said:


> Not to argue semantics here...but what really are the established rules? IMHO there aren't any. Ask 10 different financial advisors how to invest a $300000 portfolio (for example) and you'll probably get 10 different answers.


You're right, many different rule set out there, some even make you pay to learn their rules and it varies with the type of investing/trading you are doing. It's up to you to decide on which rules to follow or base your own rule set from.


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## MrMatt (Dec 21, 2011)

You need good rules.

"I think they're cool" isn't enough.


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## metatheta (Oct 1, 2012)

Let's hear some rules.


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## humble_pie (Jun 7, 2009)

metatheta said:


> Let's hear some rules.


*be flexible*


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## Islenska (May 4, 2011)

Only one rule for decent trading.......

Marry Rich!each:


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## humble_pie (Jun 7, 2009)

*she who hesitates is lost*


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## Rusty O'Toole (Feb 1, 2012)

You need to check out the work of Van K Tharp. He has spent 25 years finding out what makes a successful trader. The answer is not what most people would think. There are certain principles at work in the way they look at things and the way they operate. Even though no two of them invest alike. Some invest in stocks, others in bonds, still others in options or commodities. You might find one buying when the others are selling. But all have some method or rules they follow.

Once you find out what characteristics go into making a successful trader you can first, figure out if you have them, and if not, if it is worth your while to learn them.

I don't have them and don't want to learn them.

Fortunately trading and investing are different. It is possible to be a lousy trader and a successful investor. In fact some top investors admit they are terrible at timing the markets, in other words, terrible traders.

I have reluctantly come around to the view that the simplest, least risky, most lucrative approach to investing (not trading) is the value method as first expounded by Ben Graham.


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## Rusty O'Toole (Feb 1, 2012)

When you think you do have the secret formula, back test it and paper trade it to find out if it really works. It's bad enough to see a beautiful theory destroyed by a gang of ugly facts. Even worse when they take your account with them.


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## humble_pie (Jun 7, 2009)

.

"follow lonewolf's 40-year Kondratieff cycles"
.


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## GoldStone (Mar 6, 2011)

*THE RULES*

courtesy of Josh Brown, The Reformed Broker blogger

Always seek out differing opinions and challenge your beliefs. Except when you know you're right, then that other bullshit just becomes a distraction. Good luck with that.

It is very important to be flexible and open-minded. But invest with set rules and an iron discipline. Good luck with that.

Technical analysis and charts only tell you about what has already happened in the past. It's much better to use the information from the future that we have when making decisions. Good luck with that.

Never run with the herd. It's much better to be all alone on open ground, running in the wrong direction and wholly conspicuous to predators. Good luck with that.

Take your losses quickly. But don't get scared out of a good position. Good luck with that.

Amateurs trade in the morning, pros trade in the afternoon, junkies trade overnight and lots of guys on TV just trade on paper. Good luck with that.

Be tactical and stay informed! But don't try to time the market. Good luck with that.

If you missed the ten best days in the market over the last 50 years, your results suffered. If you didn't miss the worst ten days in the market over the last 50 years, your results suffered. Good luck with that.

Never listen to someone who is talking their own book. But also never listen to someone who has no skin in the game. Good luck with that.

Don't fight the Fed. Except when the Fed is wrong. Good luck with that.

Pigs get slaughtered and no one's ever been wrong taking a profit! But let your profits run and don't sell your winners. Good luck with that.

No one ever made money by panicking! But your first loss is your best loss and it's better to be the first guy out rather than the last guy. Good luck with that.

Know your investments inside and out, study the management team and fundamentals and balance sheets and income statements until you know the company better than anyone. But don't know it too well - because then you've got a "sunk cost" syndrome happening with the amount of time you've spent and you'll be too attached. Good luck with that.

Buy the rumor, sell the news. Except if the rumor is false or the news is just a rumor. Good luck with that.

Buy when there's blood in the streets. But never catch a falling knife, which could lead to there being more blood in the streets. Good luck with that.

Look for cheap stocks with cheap valuations. Except when they're going to get cheaper - that's not going to be fun. Good luck with that.

The trend is your friend and stick with what's working. But skate to where the puck will be and buy what everyone else hates. Good luck with that.

And don't get emotional.

Good luck with that.


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## GoldStone (Mar 6, 2011)

Hmmmm..... THE RULES is my post number 666 on CMF.

That can't be a mere coincidence. The matrix is telling me something. :abnormal:


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## humble_pie (Jun 7, 2009)

*watch out for people who keep on saying Good Luck With That*


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## humble_pie (Jun 7, 2009)

*don't visit rival sites*


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## lonewolf (Jun 12, 2012)

Trading rule 101

follow your method


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## Rusty O'Toole (Feb 1, 2012)

"Let's hear some rules."

If I was going to follow any rules, it would be these. Doesn't get simpler, safer or more effective. 

By the way I stole this from Norm Rothery's web site.

http://www.ndir.com/SI/index.html

Graham's Simplest Way

Benjamin Graham is often called the father of value investing and during his lifetime provided the world a variety of useful stock-selection techniques. Remarkably, some of his simplest methods have continued to outperform long after his passing. Although many of Graham's methods are easily described, their continued success relies on the fact that they can be psychologically hard to put into practice.

Very few people truly have the temperament to be value investors and while it's relatively easy to find value stocks holding them is the real test. Value stocks usually become inexpensive for a variety of unappealing reasons. As a result, even when value stocks are identified, relatively few investors want to buy them.

Graham described a basic value screen in a 1976 article called The Simplest Way to Select Bargain Stocks which was recently republished in Janet Lowe's book The Rediscovered Benjamin Graham (ISBN 0471244724). As always, Graham sought stocks with a margin of safety which means that he wanted a stock to be cheap and relatively safe.

Graham's Simplest Way demanded that a stock have an earnings yield that was at least twice as big as the average yield on long-term AAA corporate bonds. Furthermore, Graham thought that at no time should investors buy a stock with an earnings yield of less than 10%.

Earnings yield is the reciprocal of the more common price-to-earnings ratio. Instead of dividing price by earnings, as you do for P/E ratios, the earnings yield takes earnings divided by price as a percentage. So, if a stock earned $1 per share last year and it is trading at $20 per share then its earnings yield would be 5% (i.e. $1 / $20 * 100%).

On April 8th the average yield on AAA 20-yr U.S corporate bonds was 5.37%. So according to the Simplest Way a stock is cheap if it has an earnings yield of more than 10.7% (or a P/E ratio of less than 9.31).

Graham looked for safety by demanding that companies have little debt. He stuck to stocks with leverage ratios (the ratio of total assets to shareholder's equity) of two or less. Although the stock of low-debt firms is relatively safe, it is important to remember that returns of such stocks are by no means guaranteed.

When it came to selling, Graham suggested waiting for either a 50% profit or no later than the end of the second calendar year after purchase.

When Graham back-tested his method in 1976, he found that it provided a fairly consistent 15% average annual returns during the prior fifty years. More recent studies continue to show that buying low price-to-earnings ratio stocks has been a winning strategy over the long term.

With Graham's criteria in hand, I turned to msn.com's deluxe stock screener, which contains information on over 6,700 U.S. stocks. Graham's two criteria narrowed this large universe of stocks down to only 113 stocks. However, many of the companies were small and I decided to focus on U.S. stocks with market capitalizations of more than $500 million, which are shown in Table 1. Even with these limitations, the list remains quite long at twenty-seven stocks. As a result, Graham's screen is a good place to start and there is even some room for additional discretion.

It is a little surprising that the Simplest Way has continued to do well. However, investors looking to make fast profits may be disappointed. After all, occasional short-term weakness tends to frighten many investors which has the side effect of prolonging Graham's long-term success. In addition, investors should not expect uniform success and some Simple Stocks will inevitably do poorly.


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## humble_pie (Jun 7, 2009)

*rule posts must be 19 words or less*


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## doctrine (Sep 30, 2011)

I like Graham's approach. Stocks with P/Es at or below 10, if they are not 'danger' stocks, can really give solid 10-20% annual returns. I don't need 30-50% a year, my goal is 10% nominal returns which has been fairly easy the last couple of years.


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## canadian_investor (Jul 4, 2011)

i don't have hard and fast rules of my own but if someone does want to have rules of investing let me take a crack at a few.
let me know if this at least make sense or i am totally smoking what rob ford is smoking.

*1.* _Never buy a dividend paying stock. Always buy long call options on it : _there is no benefit to buying non dividend paying stocks vs. just buying LEAP calls on it.
this will only work for stocks with high volume liquid options and good delta.

*2. *_Never sell a stock. Just keep selling otm calls on it until assigned : _if called away, you get to keep the premium. if stock drops, close the call. the profit from the call will offset the loss a little bit.

*3. *_Never buy a stock. Just keep selling otm puts on it until assigned : _similar to above.

*4. *_If you have to buy a stock, buy just before close on a day when the closing price might be above the 50 day simple moving average._

that's all i can think of for now.
tell me if i am totally lost it.


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## humble_pie (Jun 7, 2009)

.

:listening_headphone

:biggrin:​
:tongue-new:​
:cool-new:​


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## Ethan (Aug 8, 2010)

One problem with Benjamin Graham is that the investment landscape has changed considerably since he wrote Security Analysis. Much of his investment gains and beliefs were formed in the aftermath of the 1929 stock market crash. There was so much investor pessimism regarding stocks in that period that Graham was often able to buy profitable companies for less than their working capital (good luck with that in 2013 ). I also think that Graham was focussed too much on price instead of quality. This Buffett quote sums it up perfectly:

"I'd rather buy a wonderful business at a fair price than a fair business at a wonderful price."


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## Ethan (Aug 8, 2010)

Rule no 1 - never lose money
Rule no 2 - never forget rule no. 1

-Warren Buffett


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## Ethan (Aug 8, 2010)

1.Don’t buy into promotional companies 
2.Don’t ignore a good stock just because it is traded over-the-counter 
3.Don’t buy a stock just because you like the tone of its annual report. 
4.Don’t assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price 
5.Don’t quibble over eighths and quarters 

- Philip Fisher


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## canadian_investor (Jul 4, 2011)

i'm sorry, there was a typo in my first rule.
it is meant to be:
1. Never buy a *non* dividend paying stock. Always buy long call options on it.


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## humble_pie (Jun 7, 2009)

yea i knew there was a typo

you weren't serious about these, were u?

:listening_headphone :biggrin: :tongue-new: :cool-new:


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## MrMatt (Dec 21, 2011)

1. Buy because you think it is a good investment to buy. Not because of what others think.
2. Sell when you have something better to do with the money, or when you're offered much more than you think the investment is worth.


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## canadian_investor (Jul 4, 2011)

humble_pie said:


> yea i knew there was a typo
> you weren't serious about these, were u?


oh no I was half kidding half serious. i didn't mean these should be set in stone inviolate rules. that part was the half kidding part.
but the half serious part was that these are good strategies to follow on a regular basis.
yu thinking i was kidding is got me worried now.
may i ask what is wrong with the first rule for example? what is benefit of buying a non dividend paying stock, rather just buy a 2 year out leap on it?
less capital required you get 100/1 leverage.


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## Rusty O'Toole (Feb 1, 2012)

Ethan said:


> One problem with Benjamin Graham is that the investment landscape has changed considerably since he wrote Security Analysis. Much of his investment gains and beliefs were formed in the aftermath of the 1929 stock market crash. There was so much investor pessimism regarding stocks in that period that Graham was often able to buy profitable companies for less than their working capital (good luck with that in 2013 ). I also think that Graham was focussed too much on price instead of quality. This Buffett quote sums it up perfectly:
> 
> "I'd rather buy a wonderful business at a fair price than a fair business at a wonderful price."


This is a good point. There are times when the value approach just stops working. When there are no value stocks to buy. This is typically when a market bubble is peaking.

Warren Buffet did very well for the investors in his partnerships through the fifties and into the sixties. Then there were 3 or 4 years when he just couldn't find anything worth buying. His investors got antsy and insisted he quit sitting on his hands and do something. 

In the late sixties he announced that he was retiring from the investment business. The methods he used so successfully no longer worked and he was too old to learn the new methods of the go-go funds that were so popular then. He dissolved the partnerships and concentrated his efforts on Berkshire Hathaway.

Dow 1000 in 1968 was the peak of the market. He got out right at the peak without ever trying to time the market or paying attention to market cycles. He just knew he couldn't find underpriced stocks anymore the way he used to. His mentor Benjamin Graham put this down to the fact that there were now thousands of trained security analysts beating the bushes for every stock that was even a little underpriced.

In 1974 Buffett came out of retirement. All of a sudden there were bargain stocks all over the place." I feel like an oversexed guy in a harem" he said. "I don't know what to grab first".

That was the bottom of the market. The Dow bounced along for 8 years, while Warren soaked up cheap stocks, then in 1982 it breached 1000 and went up for the next 15 years.

So, he timed the market perfectly without ever attempting to time the market. This lesson has served me well in other markets like real estate. When every rental property has negative cash flow, stay away. Positive cash flow, good buying opportunity. Stick with this rule and you won't get burned by a real estate bubble. I imagine the same rule applies in other markets.


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## praire_guy (Sep 8, 2011)

It's not that value investing stops working but that there are no buying opportunities, so you wait it out. That's what value investing is. 

The problem is that instead of waiting it out, you switch investing styles and jump on another band wagon, often at the wrong time. 


Everything works. Nothing works all the time. Pick something you are comfortable with and stick with it.


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