It’s a fact that most people fail at trading penny stocks because they don’t use a trading system and a trading system is essential to one’s success in the market. Nobody makes consistent profits without having a trading system. But a trading system is not magic. It is merely something that provides a statistical edge. If you win 60% of the time and lose the other 40%, but your winning trades are two to three or more times greater than losers, you come out ahead. This is just simple math and nothing more. If you trade on margin, or an asset with built-in margin such as futures, options, and forex, you can win much less than 50% and still make money.
The Reality of The Stock Market
The market is rigged for the average person that thinks the market is linear. For example, people believe you make money in the market by finding an unknown company that either has a product or is designing one that is gonna revolutionize. Everyone talks about how they know someone that told them about XYZ which does ABC and is gonna skyrocket soon. Unfortunately, this is just gambling.
You need to find a company that’s earning a lot of profits or growing its revenues, but has a stock that’s trading at a discount to its intrinsic value and hope that over time the market brings it back to its fair value. This is investing based on the fundamentals. There’s no guarantee the stock ever rises back to where it should, but this is how fundamental analysts place their bets.
Investors versus Traders:
As a long-term investor, you can only cut your risk by investing in a basket of different asset classes with inverse correlations (move opposite of each other) and hope that history continues to repeat itself. Some assets will do poorly, and some may go bankrupt, but overall if the market continues its average historic 8-10% compounded return, you will make money slowly. The downside is this takes 20+ years and if you start with only a small amount you won’t make much.
Otherwise, you forget entirely about what a company says they do, whether a company makes money, or anything else fundamental in nature, and focuses only on the statistics. The fact is stocks are priced based on future expected earnings but earnings are only released quarterly, so, the rest of the time it’s all just speculation. This is technical or quantitative trading. Trading and investing are not the same. In trading, you are capitalizing on the miss pricing of securities which comes from the lack of knowledge and understanding by uninformed market participants.
It’s more about human psychology than anything else. You find opportunities where the odds of success of a stock doing what you expect are in your favor, and only then do you put your money at risk. The rest of the time you do nothing and keep your money in cash. The financial markets are inherently risky and are set up in such a way to take every single last penny of foolish and uninformed people’s money. You can’t act like everyone else and try to do the obvious and expect to get different results.
Most people fail at trading stocks because:
1. They treat trading like a casino and just gamble.
2. They don’t have a systematic approach.
3. They trade based on emotions and gut feelings or stock tips and picks, instead of sound research.
4. They over-trade causing excessive fees that reduce or eliminate their profits.
5. They chase stocks past their ideal entries resulting in near-guaranteed losses.
6. They think the stock market is a hobby when in fact it is a business.
7. They don’t realize they are up against a person like myself that has been trading full time for nearly two decades and live and breath the market 14 hours a day.
8. They think it’s possible to jump into the market and instantly begin making money when in fact it can take years to learn how to trade profitably without a mentor.
9. They don’t manage risk and instead just “let it ride” and go all in.
10. They think luck plays a part in trading when in fact trading has very little to do with luck and everything to do with preparation and having a better understanding than your competition.
11. They think you can start trading with a few hundred or a couple thousand and somehow turn that into a fortune in a short period of time.
12. They focus on trading obscure OTCBB penny stocks or other illiquid stocks that barely move. Traders make money by finding stocks that have enough volatility to cause a stock to move toward their targets.
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