Stock Trading Info

Most people who want to learn to trade, or are beginning to trade the markets (less than 3 years) usually try to search for tools to help them win. They go from program to program, attend seminars, get books, and generally are searching for the holy grail idea that will unlock the mystery of the markets and make the millions. They see enough stuff that “kind of works” that it continues to lead them down then path to find perfection.   In addition, they are under the false belief that the big “winners” all have some secret tool that works 95% of the time.
In reality, this perfection does not exist. Even if you had a trader sitting next to you who makes 10 million a year day trading, you would find that the nuances of knowing when to trade and not trade and stock selection are the true keys.  Sure they use indicators and tools to help them find ideas – the key is using your learned skills to FILTER this and 20 other things that are going on so you know WHEN to trade.   There is no holy grail indicator or program that leads to mass riches.  Sure the guys who make a killing use tools to assist them, but basically most of the success of any trader is knowing the proper exit strategy and money management.

Almost everyone is always interested in the perfect entry point. Why? Because frankly, it sucks to buy some stock and immediatly lose money and have that continue.  This causes you to second guess your entry.   That initial pain leads people to try to minimize it through this search for the perfect tool.  This perfect tool does not exist, but through extensive research on the web, including reviews of stock trading systems and indicators, some decent stuff can be found.

There are tools that can help with entry timing.  But everyone should realize THERE IS NO PERFECTION.  Its all an odds game – MOST of the time X and Y happen, the price moves up some.  That is it.  If X and Y happen, and the price moves down more, that is what stops are for.  As a trader, you are only trying to put the odds in your favor as much as possible.  Once you are in a trade, that is all you have – there is nothing you can do to influence the price.

Even if there was a perfect tool, the key to anything (profit wise) is how to get out. A perfect tool will predict an uptrend (or a downtrend) which will happen, but unfortunately the MAGNITUDE always gets in the way. Does the stock go 1 point up then sell, 5 points, or maybe 15 points? No one really knows until hindsight, but a skillful trader will have a gut feel based on many factors. This is where skill comes in, money management and the other finer points of trading experience.

This is where most beginners lose out.  They think every trade will be a big winner and stick around too long – especially if the prior trade they cut up .50 and it went another 3.  You can only make what the market offers – sometimes its easy to see it will run more, but the reality is most of the time its impossible to know.  You have to take profit (or stop out) at a level where it COULD stop and turn.  Everyone should realize there is a high degree of uncertainty at all times – you make a decision in real time based on what is happening now.  Don’t fall into the trap of second guessing based on information you did not have at the time you decided to exit.

So lets say you found a close to perfect tool that can call turning points, but its still possible to lose money. How? Easy. If you have no clue how much money you should target, its easy to have a winning trade turn into a losing trade. You think it can move 3 points, but after 0.75 it starts going down.  Does it go all the way down, below entry and to your stop?  Does it back off .40 then continue much higher??  There is no way to know that.  The tool predicted the push, but not how much.  Even stocks that go 15 points up never do it in a straight line. Its always push, back fill, push, back fill.

The issue here is a 15 point winner and a .75 point winner look identical in the beginning most of the time.  I would go so far as to state that the 0.75 winner LOOKS like it will go 15, and the 15 point winner LOOKS like it will only go small.  The market has a funny way of doing that.  The only difference is the 15 point winner turns around after the back fill, pushes higher to a new higher high, then repeats the process. And even a 15 point winning trade may go against you some. So the .75 winner now goes against you. Then a bit more. Then the market sells off, and that accelerates. Eventually it hits your stop out point.

But I have a perfect tool? How can I lose? Exactly what happened here happens every day and is exactly why there is no such thing as a perfect tool or indicator.  The tools are only as good as the user implementing them.  You cannot predict the magnitude of a move very well.  All it takes is a bigger guy that thinks the opposite to stop a move in its tracks – that is completely random.  So you have to just observe behavior, look where support and resistance are, and monitor the trade for what its worth – that is all you can do.
This type of scenario usually filters a lot of people who want to trade out of the market (of trying to trade the market). Even though there is no such perfect indicator, people are trying -and think they have found it – every day. The traders that stay around longer term realize that chasing this holy grail idea is a waste of time. Its much easier to find some decent ideas for scanning stocks (to filter them), using some money management and skills to make some money.