There are many important things you need to know in order to successfully trade and invest in the stock market or any other market. 12 of the most important things I can share with you based on many years of trading experience are listed below.
1. Buy low and sell high. As simple as this concept seems to be, the vast majority of investors do the exact opposite. Your ability to buy low and sell high will determine the success or failure of your investments. Your rate of return is 100% determined by the time 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.
All things being equal, the longer you stay in the stock market, the more money you 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 move in the opposite direction will be once the trend changes. This is also known as “the trend always changes the rule”.
4. If you’re looking for “reasons” why stocks or markets make big directional moves, you’ll probably never know for sure. Since we are dealing with the perception of the markets, not necessarily the reality, you are wasting your time looking for the many reasons why the markets move.
A big mistake most investors make is assuming that the stock markets are rational or capable of determining why the markets do something. To profit from trading, you only need to know that the markets are moving, not why they are moving. Stock market winners only care about direction and duration, while market losers are obsessed with whys.
5. Stock markets typically move ahead of news or supportive fundamentals, sometimes months in advance. If you wait to invest until you are totally clear on why a stock or market is moving, you must assume that others have done the same and it may be too late.
You need to position yourself before the biggest directional trending move occurs. The market’s reaction to good or bad news in a bull market will be positive most of the time. The market’s reaction to good or bad news in a bear market will be negative most of the time.
6. The trend is your friend. Since the trend is the basis of all profits, we need long-term trends to make significant money. The key is knowing when to join a trend and stick with it for a long period of time to maximize profits. There is a lot of money to be made by capturing big market moves. Day trading or short-term stock investing can
capture the shorter moves while waiting for the longer-term trend to establish.
7. You must let your profits run and cut your losses quickly if you want to have any chance of success. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If you don’t practice highly disciplined trading, you won’t make any money in the long run. 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 its root shares many of the same false premises as the perfect competition paradigm 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 act accordingly. Most non-professionals trade strictly on emotion and lose a lot more money than they make.
The combination of superior information for some investors and the usual panic as losses from buying high and selling low mount for others creates inefficient markets.
9. Traditional fundamental and technical analysis alone may not allow you to consistently make money in the markets. Successful market timing is possible, but not with the analysis tools most people employ.
If you remove optimization, data mining, subjectivism and other statistical tricks and data manipulation, most trading ideas are losers.
10. Never rely on the advice and/or ideas of trading software providers, trading system vendors, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc., unless they are trading with their own money and have operated successfully for years and/or provide third party performance verification.
Keep in mind that those who have traded successfully for long periods of time are very few. Keep in mind that Wall Street and other financial firms make money by selling you something, not by instilling wisdom in you. You must 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 big loss on their position or portfolio. Market timing can help avoid this all too common experience.
You can avoid making that big 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 to determining your total return, if you buy low, your long-term investment results are irrefutably better than someone who bought high.
12. The most successful investing methods should take most people no more than four or five hours per week, and for most of us only one or two hours per week with little or no stress involved.
