The stock market is a difficult place to consistently make profits unless you have learned and implemented the proper trading strategies, methods, techniques, principles and psychology. There is a steep learning curve which will take years of proper trading education and experience if you want to become an elite trader or investor. The purpose of this article is to provide you with a few important methods used by the world’s best stock market traders, past and current. Each one of these methods you learn and then implement in your stock trading will improve your overall results. The methods in this article will only be concerned with buying a stock or going long, not short selling, which is a whole different ballgame.
The best traders always put as many factors in their favor as possible before taking a position in the stock market. It’s like rafting on a river. Going with the current is much easier than going the opposite direction which would be against the current. Jesse Livermore called this the line of least resistance. It’s also called being in harmony or in tune with the market.
The general market direction is a crucial factor when it comes to success in the stock market. About 75% of all stocks follow what the general market is doing. It’s very important to only make a new stock purchase when the general market is in an uptrend or confirmed rally. Its best if the uptrend is during a bull market phase. You can find the current market direction on my website. I will update immediately when there is a change in the market trend.
Stocks tend to run or move in packs. Every stock is part of a sector and breaking it down more, also part of an industry group. When a sector is strong and doing well, it tends to help most of the stocks in that particular sector. When an industry group is strong or doing well, this also have a positive effect on stocks from that particular industry group. About 50% of a stock’s price gain is directly tied to the sector and industry group a stock is part of. So make sure the stock you are considering is part of a strong sector and industry group. You can e-mail me the name and symbol of the stock you are considering and I will gladly provide you with sector and industry group information concerning your stock. Another excellent source for this information is Investor’s Business Daily.
Next let’s do a little analysis of the individual stock you are considering. Make sure your stock has strong fundamentals. Earnings per share and sales should be up at least 20-25%, and better yet, accelerating each quarter. You want your stock to be trending upward in price before you buy it. Best scenario would be your stock breaking out of a sound pattern with heavy volume. This is something I can cover in a future article. At the very least make sure your stock is trending upward. One way you can do this is make sure your stock’s price is above a simple daily moving average such as the 10 or 20 day average. Learning at least basic technical analysis would be to your great benefit.
An area of great importance is money management. You absolutely must cut all your losses short to be successful long term in the stock market. A basic way of doing this is to never let your stock price drop more than 10% from its buy point. If you bought your stock at 20.00 per share, no matter what, you close out your position if the stock drops to 18.00. I suggest putting in a sell stop right after you buy your stock. This way you will be automatically taken out of your position if the price drops to the predetermined level of your sell stop. If your stock moves up nicely, then you can move your sell stop up to at least the breakeven point. You can also keep moving your sell stop up as your stock keeps doing well. This will help protect some of your profits.
In summary, before making a new stock purchase, make sure the general market is in an uptrend or confirmed rally. Check to see if your stock is in a strong sector and industry group. Look for strong fundamentals such as solid earnings per share and sales. Make sure your stock is in an uptrend. Always use proper money management. I have only touched on a few important factors that will improve your trading if implemented. There is a lot more to learn if you want to become a master trader and join that elite group that consistently makes money in the stock market and amasses a fortune over time. Learning and implementing the information in this article is a solid step in the right direction. Always keep reading and learning from the trading legends. It will be well worth your time in many ways.
