A trading system is essential to success in the market. NOBODY makes consistent profits without a system. But a system is not magic. It is merely a statistical edge. If you win 60% of the time and lose the other 40%, but your winning trades are 3 or more times greater than losers you come out ahead. If you trade on margin, or an asset with inherent margin (futures, options, forex) you can win much less than 50% and still make money.
The market is rigged for the average person that thinks the market is linear. For example people think 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 sky rocket soon. This is gambling. You either find a company that’s earning a lot of money (revenues or ideally profits) but has a stock that’s trading at a discount to it’s intrinisc value (the true value of the stock calculated by it’s earning), and hope that over time the market brings it back to it’s fair value (equilibrium). This is investing based on the fundamentals. There’s no guarantee the stock every rises back to where it should. You can only cut your risk by investing in 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, some may go bankrupt, but overall if the market continues it’s average historic 8-10% compounded return, you will make money slowly. The downside is this takes 10+ 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 any thing else fundamental in nature and focus only on the statistics. The fact is stocks are priced based on future expected earnings but earnings are only release quarterly so the rest of the time it’s all just speculation. This technical or quantitative trading. Trading and investing are not the same. In trading you are capitalizing off 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 stay in cash. The financial markets are inherently risky and are set up in a way every single last penny of foolish and uninformed peoples money. You can be like everyone else and try to do the obvious.
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 commissions which reduces or eliminates 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 12 years who lives and breaths the market 14-16 hours a day.
8. They think it’s possible to jump into the market and instantly begin making money when in fact it takes years to learn how to trade profitably.
9. They don’t manage risk and instead just “let it ride.”
10. They think luck pays 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 $1000 and somehow come out ahead???
12. They focus of trading obscure OTCBB penny stocks or other illiquid stocks which barely move. Traders make money by finding stocks which have enough volatility to cause a stock to move towards their targets.
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