Successful trading and investing are simple in theory. You buy 'good' stocks with promising charts or fundamentals at attractive prices and then wait for them to rise in price. If you make a mistake, then 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 produce solid returns if you cut losers quickly and stick with winners.
If it was that simple or easy, then it wouldn't be so potentially lucrative. It is because it can be so difficult and challenging that we can produce great returns. Picking good stocks is the easy and fun part of the process. It is what happens next that will determine if you succeed or not.
There are three primary issues that you will confront after you pick a stock. How you deal with each of these issues will determine your level of profits.
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.
Since we will always have the potential problem of bad luck, we have to diversify our trading and investing sufficiently so that no one situation can do us too much harm. It is going to hit us at some point, and we must 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 market 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 never forget that luck is a big part of trading and investing, and you will never be able to remove it from the equation. Be prepared for it to hit and have a plan for dealing with it.
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.
Traders are always looking for an explanation on why a stock is moving the way it is. The problem is that there are many reasons why someone may be buying or selling, and it may have nothing to do with the merits of the stock. There are huge programs and ETFs that buy big baskets of stocks all the time and create movement that is largely meaningless, but we still are inclined to believe that someone may know something that we don't.
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, 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. 'Buying the dip' is one of the most profitable strategies you can use within an uptrend. Some dips may be traps, but a great number of them are just random volatility, and that creates opportunity.
To be an effective trader, you have to be able to tolerate a certain level of randomness. Define your 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 they sell, 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 your dollars working hard for you all the time. You can't sit there and wait while other opportunities are developing, but 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, so they chase 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 pay off 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.