It has been some time since I have said more about trading than "control risk", my signoff.
Let us assume that the trader is ignorant of stock trading and has no clue about which way a market will go. But it makes sense that if the trader buys a stock and it goes up for quite awhile he will make money on the stock.
Let's dissect that last sentence. There are three things that need to happen for the trader to make money. First: Buy some stock. Second: stock goes up. Third: for awhile. Meaning over time.
The trader has control of the first. Hopefully! He can buy and sell a stock. Anytime he wants. Without conflict in his mind or his finances. This first part is really the key.
The second part. The stock goes up. This may or may not occur after the trader buys. The trader must be able to recognize if the stock has gone up, or down, after he bought some stock. Not so hard, right! I hope not.
Third. If the trader is to make significant money the stock has to go up for a period of time. It is possible that the stock will surge overnight and give the trader extraordinary gains, but it is not likely. And the definition of "not likely", in my trading mind, is that it means not "probable". And the trader must put probabilities in his favor if he intends to succeed over time. He cannot hope to get rich quick. Just steadily.
I consider Jesse Livermore the greatest trader of all time. And from what I can see he has been the inspiration for some of the greatest traders, including some of the most successful hedge fund operators. One of his sayings was that "the big money is made in the big move". Or to that effect. Meaning the really big money is made over time as a stock makes that big move.
How do we make sure we are there for the big move up, and not there for the big move down. When we have bought?
Here is the simple secret:
Buy on the way UP!
Decide what a full position size is for you. Divide that by 3. Now, when you decide a stock is going to make a move up buy 1/3 of a full position. Wait for the stock to go up. IF it goes up buy another third. Then wait. IF the stock goes up again buy another third. Now you have on a full position and the stock is trending in your favor. TRENDING. If you only buy on the way up you are only adding to those stocks that are making you money.
If you make your initial purchase and the stock declines limit your initial lost to 5-7% of your initial purchase. Control your risk. Your timing was wrong. So get out!
If the same stock looks, or starts to rise, and you think this is the time, start the buying process over.
Look for those "pivot" points. The spot where the stock takes off for a sustained move. It may not be the big move, but if you buy as it starts you will have a risk free start. Then make additional buys as the strength continues. As you see the market go up after a period of selling. The trick to spotting a strong market is not spotting the rise. It is seeing how the market acts after a rise.
If you control your risk in this manner, and adjust your timeframe to one that suits you, you will start consistently making money.
The absolute key is that you MUST control your EGO.
Do not guess or hope a stock will go up. It may or may not. And it is not hard to tell just by looking. IF it makes a big move you will have a large position on. If it doesn't, you will not be out much money. Sometimes it takes several tries to get a good position. Don't get down on yourself if you have false starts. But ask yourself if you are really right in expecting a big move. Act accordingly.
After you have a full position on and a stock is working in your favor you have to sit tight as long as you can. This is the hardest part for me. I can take a loss and forget about it overnight, if it is a small loss. But as a stock goes up and your profits grow large it is might hard to let the market keep pouring money in your pocket. When to get out takes some practice. You can always get back in if you want. It is just putting on the initial position in a low risk way again. And don't let price bother you. It doesn't not matter what price you pay. The thing that matters is that you make money on the trade. In other words what matters is putting the probability of having a win in your favor. The price may seem high, but what matters is that it goes higher. We are not out to buy the absolute low and sell the absolute high of a move. That never happens. That goal is for bragging rights. And we will not allow ourselves to brag about any trade. The EGO wants to brag. We want to make money. The two are not compatible.
Now. I think I will go outside and try to distract my attention from the shipping stocks that are filling my pockets. AAARRRGGH!
Try that on for size.