After trading stocks for quite some time, every once in awhile, I get an email congratulating me on the predictions on the stock market. I also get asked by many new traders how to predict the stock market. News on the financial blogs and websites give “predictions” of how the future will unfold in the financial markets. I got news for you. “YOU CAN’T PREDICT STOCK MARKET”
But wait, Warren Buffet did it right? Along with the greatest traders and investors, they do it all the time right? Names like Paul Tudor Jones, George Soros, Jesse Livermore, Peter Lynch and William O’Neil and published all over the news and media, stating that they made their millions by being right in their predictions. This is all media misunderstanding.
During my early years of trading, after losing a significant amount of money in the stock market during the dotcom bubble in 2000, I set forth on a journey to figure how to “predict” the stock market. I found something interesting when reading the best books on trading, that these great traders DID NOT in fact make predictions to make millions. The methodology these men used were systematic risk management.
Famous quote by Warren Buffet were his infamous 2 most important trading rules:
1. Don’t lose money
2. Always remember Rule #1
When I first heard this, I threw my hands in the air with great frustration. It took me years for this to sink in, the is the truth and essence of successful investing. You might ask, HOW THE HELL DO I DO THAT!!!
The answer: RISK MANAGEMENT
A) Knowing where you will enter a trade will ensure that if the market goes against you, your losses will be small. This is done by understanding Chart patterns, support and resistance levels, and understanding the market direction.
B) Knowing how many shares to trade will make sure that the bet is not so large that you get wiped out in a single trade. You also must know that too small of a trade will not yield big profits.
C) Knowing what stock are best to trade. This increases your probability that a trade is succesful. You want to buy what the big players are buying. Mutual funds, hedge funds, and legendary investors are big players. They buy GROWTH STOCKS. The big money flows into growth stock, this is where the action is, this is where you want to be.
D) Knowing when to exit a trade, will help you minimize losses. Keeping the losses small is crucial for investment survival.
THE ONLY THING YOU CAN PREDICT IS: HOW MUCH YOU MIGHT LOSE ON A TRADE
After many years of trading, the secret lies in risk management, small losses, with large profits. A trader always goes through a losing streak–ALWAYS. What’s important is that you live another day to fight the ongoing battle in the markets. And a trader ALWAYS has winning streaks. The point here, is that those losses are small. This takes discipline. You must not be emotionally involved in trading, and the only way to do this is to have a trading system. Breakout Theory is a complete trading system. It has all the element to make you successful in trading the markets. Please take time to master this system, then once you have mastered it, you can tweak it to your own style.