In theory, trading and investing success is pretty simple. You buy 'good' stocks at attractive prices and then wait for them to rise in price. If you make a mistake you cut your losses and move on to the next stock and wait for it to work. Over time you should have sufficient winners to product some good results.
The theory is easy to understand but there are some significant obstacles even if you are a very adept stock picker. Good stock picking will provide a major advantage but even if you do find good stocks there are still some very common issues that must be deal with.
Many market participants fail to appreciate the role of luck in trading and investment. No matter how smart you might be or how much research you might do, you will still have good luck and bad luck. It is the nature of speculation. You can not control it because there is no way you can predict the future.
Because we will always have the potential problem of bad luck, we have to diversify enough that it can't do us too much harm. It is going to hit us at some point and we have to be able to take it in stride and move on. The worse thing you can do is try to fight it and not take steps to cut the damage it does
You will also have good luck and when you do find yourself in a position where the gods are smiling upon you then you need to take advantage. Press your bets, lock in some gains and do what you can to maximize the returns. You never know when it will hit but if you focus on good setups in good stocks you can increase your odds of success.
Just neve forgot that luck is a big part of trading and you will never be able to remove it from the equation.
Luck is a trading certainty and so is randomness. One of the biggest mistakes I see traders make is to underestimate the level of randomness in stocks they own. The majority of price action simply isn't meaningful and if you are overly sensitive to it, then you will be shaken out of good trades all the time.
The challenge of dealing with randomness is that you have to decide how far it can go before it is necessary to cut a position due to prudent money management. While a stock may make a sizable drop for no real reason at times we still have to focus on protecting capital. Too often traders will convince themselves that nothing has changed, average down and then find out that Lady Luck is not on their side.
Randomness can be the source of great opportunity if you are comfortable with it. This past week was a good example. Many stocks were hit in the broad dip caused by the 'trade war' but some of it was just market induced randomness. Nothing had changed fundamentally and there is a good chance to find entry points as a result.
To be an effective trader you have to be able to tolerate a certain level of randomness. Define you parameters and then don't worry when things bounce around.
A third stumbling block for many traders is a lack of patience. I see this issue cause underperformance all the time. A trader will be sitting in a good stock that isn't doing much but the trader wants action and grows impatient. As soon as he or she moves on the stock does what was anticipated for so long.
Lack of patience often goes hand in hand with limited capital. When you have limited funds, you want the dollars working hard for you all the time. You can't sit there and wait while other opportunities are developing but then you will be disappointed often if you want instantaneous action. The best trades take some time to develop. My biggest scores come when I 'stalk' a stock over time and build a position while I await a trigger.
Many traders seek immediate action but chasing big moves and high volume. That can work but even in those cases you still need to let conditions develop. The best thing you can do is enter into a trade with the expectation that it will not payoff immediately. Think about it strategically and give it some room to work. Randomness requires that you have patience. If you don't then you will never hold a stock long enough for the big payday.
When you combine good stock picking along with the recognition of the roles that luck, randomness and patience play in trading you will produce superior returns. The only other thing you need is persistence and that is totally under your control.