There are many important things you need to know to trade and invest
successfully in the stock market or any other market. 12 of the most important
things that I can share with you based on many years of trading experience are
enumerated below.
1. Buy low-sell high. As simple as this concept appears to be, the vast
majority of investors do the exact opposite. Your ability to consistently buy
low and sell high, will determine the success, or failure, of your investments.
Your rate of return is determined 100% by when you enter the stock market.
2. The stock market is always right and price is the only reality in trading.
If you want to make money in any market, you need to mirror what the market is
doing. If the market is going down and you are long, the market is right and you
are wrong. If the stock market is going up and you are short, the market is
right and you are wrong.
Other things being equal, the longer you stay right with the stock market,
the more money you will make. The longer you stay wrong with the stock market,
the more money you will lose.
3. Every market or stock that goes up will go down and most markets or stocks
that have gone down, will go up. The more extreme the move up or down, the more
extreme the movement in the opposite direction once the trend changes. This is
also known as "the trend always changes rule."
4. If you are looking for "reasons" that stocks or markets make large
directional moves, you will probably never know for certain. Since we are
dealing with perception of markets-not necessarily reality, you are wasting your
time looking for the many reasons markets move.
A huge mistake most investors make is assuming that stock markets are
rational or that they are capable of ascertaining why markets do anything. To
make a profit trading, it is only necessary to know that markets are moving -
not why they are moving. Stock market winners only care about direction and
duration, while market losers are obsessed with the whys.
5. Stock markets generally move in advance of news or supportive fundamentals
- sometimes months in advance. If you wait to invest until it is totally clear
to you why a stock or a market is moving, you have to assume that others have
done the same thing and you may be too late.
You need to get positioned before the largest directional trend move takes
place. The market reaction to good or bad news in a bull market will be positive
more often than not. The market reaction to good or bad news in a bear market
will be negative more often than not.
6. The trend is your friend. Since the trend is the basis of all profit, we
need long term trends to make sizeable money. The key is to know when to get
aboard a trend and stick with it for a long period of time to maximize profits.
Contrary to the short term perspective of most investors today, all the big
money is made by catching large market moves - not by day trading or short term
stock investing.
7. You must let your profits run and cut your losses quickly if you are to
have any chance of being successful. Trading discipline is not a sufficient
condition to make money in the markets, but it is a necessary condition. If you
do not practice highly disciplined trading, you will not make money over the
long term. This is a stock trading “system” in itself.
8. The Efficient Market Hypothesis is fallacious and is actually a derivative
of the perfect competition model of capitalism. The Efficient Market Hypothesis
at root shares many of the same false premises as the perfect competition
paradigm as described by a well known economist.
The perfect competition model is not based on anything that exists on this
earth. Consistently profitable professional traders simply have better
information - and they act on it. Most non-professionals trade strictly on
emotion, and lose much more money than they earn.
The combination of superior information for some investors and the usual
panic as losses mount caused by buying high and selling low for others, creates
inefficient markets.
9. Traditional technical and fundamental analysis alone may not enable you to
consistently make money in the markets. Successful market timing is possible but
not with the tools of analysis that most people employ.
If you eliminate optimization, data mining, subjectivism, and other such
statistical tricks and data manipulation, most trading ideas are losers.
10. Never trust the advice and/or ideas of trading software vendors, stock
trading system sellers, market commentators, financial analysts, brokers,
newsletter publishers, trading authors, etc., unless they trade their own money
and have traded successfully for years.
Note those that have traded successfully over very long periods of time are
very few in number. Keep in mind that Wall Street and other financial firms make
money by selling you something - not instilling wisdom in you. You should make
your own trading decisions based on a rational analysis of all the facts.
11. The worst thing an investor can do is take a large loss on their position
or portfolio. Market timing can help avert this much too common experience.
You can avoid making that huge mistake by avoiding buying things when they
are high. It should be obvious that you should only buy when stocks are low and
only sell when stocks are high.
Since your starting point is critical in determining your total return, if
you buy low, your long term investment results are irrefutably better than
someone that bought high.
12. The most successful investing methods should take most individuals no
more than four or five hours per week and, for the majority of us, only one or
two hours per week with little to no stress involved.
