Whenever I attend investment conferences or speak to a group of traders, there are always a few people looking for the “Holy Grail.” In other words, they are searching for some magical formula or a crystal ball to tell them when to get in and out of the market. I have news for you: IT DOESN’T EXIST! After trading for 16 years, the only “magical formula” I found is: hard work, gain experience, learn from mistakes, and build confidence.
Assuming we agree there is no magical formula, it doesn’t mean you can’t improve your probabilities. You can at least give yourself a better chance of success by exposing yourself to “high probability situations.” Here are a few examples:
1) Expose capital during healthy times. Look for a “follow-through day” coming out of corrections, make sure the institutions are accumulating stock, and look for the major indexes to be above their 50-day moving average.
2) When we are in a “confirmed uptrend,” look for stocks that have strong earnings and sales growth. The higher the growth, the better. Only buy the BEST you can find! Do not be afraid of higher-priced stocks or companies that you have never heard of.
3) Use technical charts to look for “safer entry points.” Getting a good entry point is very critical so make sure to study charts. You will find that many patterns repeat themselves over and over.
4) Don’t forget proper risk/reward techniques. It doesn’t make sense to take a $2 profit on a stock if your stop is $2. You will never make progress! I can’t tell you what parameters to set because I don’t know your timeframe, but once you decide your plan, do your best to stick to your targets.
5) The most crucial point: CUT YOUR LOSSES! Again, exposing yourself to high probability situations does NOT guarantee that you will be correct. Sometimes, I find a perfect setup that I have huge conviction in, I aggressively get into the trade, and then the market proves me wrong. This is where separating your ego from your trading and making sound decisions comes into play. When it doesn’t work, it’s okay, just keep in mind there will always be plenty of ideas down the road.
Good luck trading!