Thursday, June 30, 2011
Every day, thousands of people decide that they want to "trade stocks and make millions". Unfortunately, there are no shortage of snake oil salesmen willing to encourage them, and sell books, and fancy technical indicator and charting software.
The truth is that if you approach the stock market with a small amount of capital, and expect to get rich quickly, you are setting yourself up for failure:
1. You might gamble a large percentage of your money on one or two risky trades.
2. Pay too much in expenses (commissions, fees, books, software, DVDs, seminars, etc).
3. Use technical analysis and charting.
4. Get involved in futures and options.
The stock market is a fantastic way to make your money grow and work for you, but you can't expect it to triple or quadruple a small stake. Instead, count yourself as a good trader or investor if you can reliably generate between 10 - 20% per year consistently.
Please do not buy into hype about technical analysis and charts. Now, you do need to use technical (i.e. price based) rules for deciding buy and sell points, but these are about managing risk and taking profits from positions determined through fundamental analysis. But, you need to beware of depending on charts and technical indicators to predict when stocks will go up or down.
Most of these technical indicators have been recycled and sold since the 1970's, when computers and calculators were available for the first time. "Trading gurus", who make more money from selling systems than actually trading, found they could create indicators that sometimes gave reliable signals, and then could cherry pick these examples for their sales pages.
Chart patterns and technical indicators are seductive because most people - especially successful professionals from other fields - think in an employee mentality - rather than an entrepreneurial mindset. In other words, they want a consistent paycheck and reliability. They want a boss to give them instructions. In this case, the trading guru gives them a well defined job - buy when this line crosses this, or sell if this chart pattern occurs. They don't want to think for themselves, take risks, and invent their own systems.
This is why many doctors, lawyers, and engineers make lousy traders and business owners.
I never consistently made money with traditional technical analysis. I only became consistently successful when I turned unconventional and developed my Stock Trading Riches system.
The Stock Trading Riches formula is technical, in that it works on price, and it is as easy to apply as a moving average or oscillator. But, it is not trying to predict when to buy or sell a position, or trying to predict the market. It's a tool for managing a position - lightening up when the position has increased and bulking up the position when it is down.
I found the secret to trading a stock is not to jump in and out. The key is to always hold core position and mathematically adjust the number of shares, depending on a formula.