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There are many important things you need to know in order to successfully trade and invest in the stock market or any other market. Here are 12 of the most important things I can share with you based on many years of business experience.
1. Buy low, sell high. As simple as this concept seems 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 at 100% 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 must reflect 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 will make. The longer you stay wrong with the stock market, the more money you lose.
3. Every market or stock that goes up will go down and most markets or shares that go 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 are looking for “reasons” why stocks or markets make big directional moves, you will 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 markets move.
A big mistake most investors make is assuming that the stock markets are rational or that they are able to determine why the markets are doing something. To make a profit in 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 the whys.
5. Stock markets generally move ahead of news or supporting fundamentals, sometimes months in advance. If you wait to invest until you are totally clear about why a stock or market is moving, you should assume that others have done the same and it may be too late.
You need to position yourself before the largest directional trend move occurs. The market reaction to good or bad news in a bull market will be positive most of the time. The market 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 generate considerable profits. The key is knowing when to enter a trend and sustaining it for a long period of time to maximize profits. There is a lot of money to be made by catching big market movements. Intraday trading or investing in short-term stocks can
Capture the shorter movements while waiting for the longer-term trend to set in.
7. You must let your profits run and reduce your losses quickly if you are to have any chance of success. Business 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 money in the long run. This is a stock trading “system” unto itself.
8. The efficient market hypothesis is fallacious and is actually a derivative of capitalism’s perfect competition model. The efficient market hypothesis at its 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 act accordingly. Most non-professionals trade strictly on emotions and lose much more money than they make.
The combination of superior information for some investors and the usual panic as losses mount from buying high and selling low for others creates inefficient markets.
9. Traditional fundamental and technical analysis alone may not allow you to consistently make money in the markets. It is possible to be successful in the moment to market, but not with the analytics tools that most people employ.
If you remove optimization, data mining, subjectivism, and other statistical tricks and data manipulation, most business 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, trade authors, etc., unless they trade their own money and have traded successfully for years and / or provide a third party performance verification.
Keep in mind that those who have traded successfully for very long periods of time are very few. Keep in mind that Wall Street and other financial firms make money selling you something, not infusing you with wisdom. You must make your own business decisions based on a rational analysis of all the facts.
11. The worst thing an investor can do is take a large loss on his position or portfolio. Market timing can help warn of 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 returns are irrefutably better than someone who bought high.
12. The most successful investment methods should take most people no more than four to five hours per week and, for most of us, only one or two hours per week with little or no stress involved.