Monday, April 6, 2015

Surefire Way To Make Money!

Originally a post on FaceBook by yers truly.

So the way to buy a stock is to buy it as it goes up. And the only way to know that it is going up is because it has gone up. This sounds like the reverse of the time honored advice to buy low and sell high, but this is the only way to buy if you are a trend follower, and the “trend is your friend’ is the best advice anyone can ever give regarding how to make money investing or trading in financial markets. If you think a stock is going to go up, one way to do it is just buy as much as you can and wait for it to pour money in your pockets. But it usually doesn’t work this way if you have been buying what you thought was the bottom. It usually isn’t the bottom and the trend grinds on. But if you do get lucky and the stock rises you will have a hard time believing your good fortune because the dozen losing trades just like this one have jaundiced your eye, so you sell it for a relatively small gain as soon as it looks like it is going to turn down again. And these poor trades grind down your account and your confidence.
Bottom picking must be done with care or the picker will tend to have smelly fingers and a small account. And there is rarely a sharp long term bottom in any stock although some short covering rallies are certainly worth the effort to catch. Most bottoms take time to form and buying the low price of the movement is rare and often after several months of see-saw action the buyer has remorse as the money has been parked in a range bound stock. But if one can be patient and wait for a long bottom to form and then buy the high price as the price moves up and out, as the trend looks to change, sometimes a good trade can be started. At least the price is moving in the right direction to make money. But don’t buy too much. There are still a lot of stock owners who bought early and are sitting on a loss and will tend to sell if the stock looks set to resume a downtrend. Overhead resistance, to use the parlance. But give it some time, watch how it acts at the obvious resistance areas. They are usually previous highs where selling in the past had proved the right decision and where many found the nerve to buy in the first place.
But if your stock can weather some selling and move back up and then press on higher, well, buy some more. It IS moving in the right direction and now you have a bigger position on in a stock that is in an uptrend.
As you do this watching and waiting you are taking the pulse of this stock. After awhile you kind of get to know how the stock acts and all stocks do tend to have a personality in the way the price moves. This is called “reading the tape”, and it is a good skill to have.
So your stock acts all hunky dory and you have built up a pretty large position as you average in on higher prices. This does mean that your average price is somewhere below where the stock is trading, so if you are watching and showing some restraint about your purchases it is hard to lose money on the trade after awhile. But one day the stock opens up strong or breaks out above a trading range and the selling comes in strong and pushes it back in the range and then down out of the range. So you sell.
And that is trading. And if you keep in mind that this principle of buying and selling works in many timeframes you can see how it can be made to fit the personality of most anyone who wants to try their “luck” at the stock market. Maybe you only hold a stock for a month as it moves up, adding as it goes, and you get out and look for another trade. You will be feeling how the stock acts and picking those trades that fit your comfort zone. But if you don’t have time to watch a stock from minute to minute all day and just want to glance at a price chart in the evening for a few minutes. The same principle of buying new highs will work. The price swings will be greater as the timeframe is greater, but the possibility of much larger percentage wins grows as well, so your position size as a percentage of your account will not be so large.
The point of all of this is predicated on the trader or investor having the sense to sell those purchases that don’t work out. Don’t let any trade cost more than a percent or two of your capital. Period. No matter what your feelings are about the prospects for the company. If the price is not going up, but down, sell it. If the company is a winner the price will go up when the world comes to see it, not before. If they do. Perhaps those sellers know something that you don’t. Be smart enough to not hold losers for long. Survival of the fittest, so to speak. At the very least your timing is wrong.
So there you go. If a stock is working for you, buy more. If it is costing you money, sell it. If you can do this in a dispassionate manner you can not help to make money in any active market. If you can do this totally dispassionately you are not a human being. Your mind will be your own worst enemy in trading. So get practicing.
And these principles work great in life as well. Add to the winners and cut the losers short.
And that is why I always sign off with,
Control your risk,

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