Finally, I came to realize that what I was most passionate about was freedom—freedom to do what I want, when I want, where I want. (Location 148)
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Harvey Mackay said it perfectly, “Optimists are right. So are pessimists. It’s up to you to choose which you will be.” (Location 154)
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Books written by great traders provided me with a foundation to build on—a passing of the torch, one might say. (Location 240)
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Without a doubt, the stock market gives you incredible exhilaration when you win and deep humility when you lose. (Location 243)
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To realize profits from investing in stocks, you must make three correct decisions: what to buy, when to buy, and when to sell. Not all of your decisions will turn out to be correct, but they can be intelligent. (Location 244)
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Over time the average investor realizes only mediocre or inconsistent results at best. (Location 257)
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Among those who acquire the necessary knowledge, many fail to develop the emotional discipline to execute a winning plan. (Location 260)
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Largely, it boils down to the fact that few individuals truly believe they can achieve superperformance in stocks. (Location 262)
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As with any great achievement, superperformance is attained through knowledge, persistence, and skill, which is acquired over time through dedication and hard work. (Location 271)
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Success in the stock market has little to do with luck. On the contrary, the more you work a sound plan, the luckier you will become. (Location 276)
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Trading his relatively small account, he started to understand how to make consistent trades and manage his risk. (Location 288)
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There are many of us out there who started small and ended up rich. What we have in common is that we refused to let others convince us it couldn’t be done. (Location 297)
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people are basically the same emotionally. Trading can get very emotional, and emotions can easily lead investors to false conclusions. (Location 307)
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road to success in the stock market is not a system or strategy; it’s within you, and it will be realized only to the extent that you are able to control and direct your emotions as you encounter challenges, of which I assure you there will be many. (Location 318)
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If you want superperformance, you are going to have to go the extra mile. But first you need to understand that your greatest challenge is not the stock market. It’s you. (Location 321)
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If you aren’t prepared to invest a good portion of your time before you invest your money, you’re just throwing darts. At some point, you will surely be taken to the cleaners. (Location 336)
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I decided it was time to make money and stop stressing about my ego. I began selling off losing stocks quickly, which meant taking small losses but preserving the lion’s share of my hard-earned capital. (Location 356)
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you want to reap big gains in the market, make up your mind right now that you are going to separate trading from your ego. (Location 361)
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They try to forget the losses and keep doing what they’ve always done. (Location 375)
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In the end, it all comes down to having your gains on average be larger than your losses, nailing down a profit, and repeating the process. (Location 405)
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This is the exact opposite of what we know to be a key factor for superperformance: a relatively small number of shares in the float. (Location 421)
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Because you are reading this book, I assume that one of your goals is to become the best stock trader you can be or at least to improve your investment results. (Location 475)
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Love’s studies from 1962 to 1976 focused on the characteristics of stocks that went up a minimum of 300 percent in a two-year period; he called them superperformance stocks. (Location 547)
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“The Anatomy of a Stock Market Winner.” The article discussed the findings from a study of superior securities: stocks that went up a minimum of 100 percent in a calendar year. (Location 551)
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focused on the similarities between them. As I cross-referenced the two, my confidence increased that this approach (known as reverse factor modeling) (Location 558)
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Although the names differed and each had his or her own tactics for exploiting this phenomenon, a collective body of knowledge existed and waited for new explorers to build on that foundation. (Location 589)
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The SEPA approach, which I will explain in detail, allows me to find those elite candidates that have the potential to become superperformers. (Location 619)
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Virtually every superperformance phase in big, winning stocks occurred while the stock price was in a definite price uptrend. (Location 627)
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Most superperformance phases are driven by an improvement in earnings, revenue, and margins. This typically materializes before the start of the superperformance phase. In most cases, earnings and sales are on the table and measurable early on. (Location 629)
Not all stocks that display superperformance characteristics will result in gains. Many will not work out even if you place your buys at the correct point. (Location 646)
Superperformance stocks are often small-cap companies, although occasionally a big-cap name could see a surge in price after a turnaround or a period of depressed stock prices resulting from a bear market. (Location 703)
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Investors interested in superperformance should keep a constant lookout for small to medium-size companies in the growth stage of their life cycle (accelerating earning and sales). (Location 706)
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Although it may come as a surprise to you, historical analyses of superperformance stocks suggest that by themselves P/E ratios rank among of the most useless statistics on Wall Street. (Location 756)
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This is why it’s important to concentrate on companies that are reporting strong earnings, which then trigger upward revisions in earnings estimates. (Location 761)
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Most investors look for bargains instead of looking for leaders, and more often than not they get what they pay for. (Location 779)
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However, stocks with high P/E ratios should be studied and considered as potential purchases, particularly if you find that something new and exciting is going on with the company and there’s a catalyst that can lead to explosive earnings growth. (Location 787)
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That period was precisely when Internet technology stocks were making new 52-week highs and trading at what appeared to be absurd valuations. (Location 792)
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The company had scored triple-digit profit growth in the two most recent quarters. (Location 842)
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misjudged. The ideal situation is to find a company whose growth prospects warrant a high P/E: a company that can deliver the goods—and the longer it can maintain strong growth, the better. (Location 848)
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Value doesn’t move stock prices; people do by placing buy orders. Value is only part of the equation. Ultimately, you need demand. (Location 885)
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As a rule of thumb, I’m very reluctant to buy shares of a company trading at an excessively low P/E, especially if the stock is at or near a 52-week low in price. A (Location 928)
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Trading with disregard for a strong directional trend will ultimately lead to buying into a precipitous decline. (Location 942)
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These people buy stocks that were previously expensive, thinking they will go back up. (Location 951)
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They stayed away when the stock was a market leader (probably because it looked expensive), and now they fail to (Location 958)
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recognize a broken leader. (Location 958)
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Seek out companies with the greatest potential for earnings growth. Companies growing revenues at a rapid pace are your best choice. (Location 977)
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You could estimate future earnings and apply the expanded P/E number to get a rough idea of the stock’s theoretical potential. (Location 1009)
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Let’s say you buy a stock with a P/E of 20 at its initial breakout from a sound base. (Location 1011)
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If this occurs, look for signs of decelerating growth and signs of weakness in the stock price as your signal to reduce your position or sell it out. (Location 1014)
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The bigger point is that the P/E ratio doesn’t have much predictive value for finding elite superperformance stocks. There is no magic number when it comes to the P/E. In fact, the P/E is far less important than a company’s potential for earnings growth. (Location 1024)
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Leave the overintellectualizing and complex theories to the professors and academicians and the valuation tactics to the Wall Street analysts. (Location 1028)
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a superperformance trader, you learn to spot and ride trends to big profits and learn to detect when once-advantageous (Location 1031)
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Your goal is to make money consistently, not accumulate a lockbox of assets that you really don’t own—just pieces of paper that were made for trade. (Location 1033)
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When I am screening for superperformance stocks, my initial filter is rooted in strict qualifying criteria that are based purely on a stock’s technical action and is designed to align my purchase with the prevailing primary trend. (Location 1042)
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For example, I will never go long a stock that is trading below its declining 200-day moving average (assuming 200 days of trading exist). (Location 1046)
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be, I won’t consider buying a stock that is in a long-term downtrend. Why? I want to see some interest in the stock, preferably from big institutional investors. (Location 1047)
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On the roster of market gurus and prognosticators were Ned Davis, founder of the well-known institutional research firm Ned Davis Research, and Marty Zweig, publisher of the popular market newsletter The Zweig Forecast, Marty coined the phrase “the trend is your friend.” (Location 1057)
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What I found through my study of the biggest price performers was that virtually every superperformance stock made its big gain while in stage 2 of its price cycle. (Location 1075)
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You should avoid buying during stage 1 no matter how tempting it may be; even if the company’s fundamentals look appealing, wait and buy only in stage 2. (Location 1100)
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One thing is certain, however: a proper stage 2 will show significant volume as the stock is in strong demand on big up days and up weeks, and volume will be relatively light during pullbacks. (Location 1125)
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During these basing periods, the stock will basically go sideways for a while, as if it’s catching its breath before making the next push higher. (Location 1267)
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Bases 1 and 2 generally come off a market correction, which is the best time for jumping on board a new trend. As (Location 1281)
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By the time a fourth or fifth base occurs (if it gets that far), the trend is becoming extremely obvious and is definitely in its late stages. (Location 1283)
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You want to get on board when institutional money is pouring into a stock and lifting it significantly higher. To do that, you need confirmation that this inflow is starting to happen before you invest. (Location 1300)
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Keep in mind that if the institutional investment community doesn’t see what you see, your stock could sit dormant for an extended period. (Location 1304)
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The goal is not to buy at the cheapest price but to sell your stock for significantly more than the price you paid in the shortest period. That’s how superperformance is achieved. (Location 1308)
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more important, respect a change in trend. Stocks very often top out while earnings still look good. Investors who wait for the earnings picture to dim before hitting the bid in the face of a stage 3 top or stage 4 decline often end up with a huge loss or at the very least give back much if not all of what they made on the upside. (Location 1313)
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When a stock shows signs of topping or, even worse, enters a stage 4 decline, you should trust what you see, not what you hear. (Location 1337)
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Institutional investors can become wary of what had been a strong performer; they can suddenly send a stock plummeting as they get out. When (Location 1365)
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If your stock experiences its largest daily and/or weekly price decline since the beginning of the stage 2 advance, this is a sell signal in most cases even if it comes on the heels of a seemingly great earnings report. (Location 1367)
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want to develop an expectation of its prospective earnings growth and find out whether those prospects are widely recognized and therefore discounted in the current stock price. (Location 1412)
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My favorite type of stock to invest in—the area where I have made most of my money trading—is the market leader. (Location 1424)
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Market leaders are easy to spot, but most investors have psychological difficulty deciding to buy them. (Location 1426)
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unbelievable price strength causes most investors to think these stocks have run up too far; (Location 1427)
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The main questions should be: What is the company’s competitive advantage? and Is the business model scalable? Then it’s a matter of whether management is executing successfully and delivering the goods, namely, earnings. (Location 1439)
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Market leaders in the high-growth stage are almost always going to appear expensive. (Location 1448)
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Here’s the beauty about ultrafast growers: these companies grow so fast that Wall Street can’t value them very accurately. This can leave a stock inefficiently priced, providing a big opportunity. (Location 1449)
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A category killer is a company whose brand and market position are so strong that it would be difficult to compete against it even if you had unlimited capital. A (Location 1462)
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The industry groups with a healthy number of stocks hitting new highs early in a bull market will often be the leaders. Your portfolio should consist of the best companies in the top four or five sectors. (Location 1638)
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The top relative strength leaders in these groups typically lead their group’s advance from the beginning and are likely to show the greatest appreciation. (Location 1647)
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Therefore, I focus on stocks and let them point me to the group. Not always, though. I still stay in touch with what is happening on an industrywide level, and if I see something that attracts my interest, (Location 1652)
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The stock market cares little about the past, including the status of a company. What it cares about is the future, namely, growth. (Location 1735)
These stocks are the ones with the strongest potential, and they seldom are found in the bargain bin. (Location 1736)
In real estate, the mantra goes “location, location, location.” In the stock market, it’s earnings, earnings, earnings; after all, it’s the bottom line that counts. (Location 1749)
Many institutional investors, encompassing a relatively large number of investment professionals, use investment models that identify earnings surprises, that is, reported earnings that beat analysts’ expectations. (Location 1754)
When a company reports quarterly results that are meaningfully better than expected, analysts who follow the stock must reexamine and revise their earnings estimates upward. (Location 1758)
Stocks move for two basic reasons: anticipation and surprise. (Location 1762)
Anticipation means expectation, for example, rumors that a large contract may be awarded to a contractor. (Location 1764)
Let’s define what Wall Street means by an earnings surprise: simply stated, a company’s earnings are better (or worse) than the consensus of analysts’ estimates. (Location 1777)
Efficient market theory holds that the market reacts instantaneously and fully prices in new information completely. Experienced traders know that this theory is false for several reasons. (Location 1783)
Liquidity is also a factor; only so many shares are available to be bought and sold. (Location 1785)
surprise. Be on the lookout for companies that are beating earnings estimates; the bigger the earnings surprise, the better. (Location 1787)
Because earnings surprises have a lingering effect, we want to focus on companies that beat estimates and avoid firms that have negative earnings surprises. (Location 1799)
Analysts are typically conservative in making earnings estimates. Since the market likes upside surprises and Wall Street firms are in the business of selling stocks to consumers, you can see how this happens. (Location 1810)
Years ago, it was popular to discern the whisper number on the Street, a shadowy figure that was more realistic than the published estimate or consensus. (Location 1817)
companies. In general, the rule states that if a company releases certain information to certain individuals, such as analysts, it also has to make a public disclosure of that information. (Location 1823)
When a company reports a meaningful earnings surprise, analysts who follow that stock are likely to revise their earnings estimates. I like to see estimates raised not only for the current quarter but also for the current fiscal year. (Location 1827)
Look for companies for which analysts are raising estimates. Quarterly as well as current fiscal year estimates should be trending higher; the bigger the estimate revisions, the better. (Location 1844)
As the stock’s price rises quickly because of the prospects of improving fundamentals from institutional buying, additional quantitative models kick in and price momentum players start to buy the stock purely on the basis of a strong price trend and price momentum. (Location 1856)
However, three out of four times, the very best performers will show meaningful earnings increases in the most recent quarter from the same quarter a year earlier. You should demand not only that the most recent quarter be up by a meaningful amount but that the past two or three quarters also show good gains. (Location 1875)
Many successful growth managers require a minimum of 20 to 25 percent year-over-year increases in the most recent one, two, or three quarters. (Location 1880)
Really successful companies generally report earnings increases of 30 to 40 percent or more during their superperformance phase. (Location 1882)
look to find companies delivering increases in earnings of 40 to 100 percent or more in the most recent two to three quarters. (Location 1883)
More than 90 percent of the biggest stock market winners showed some form of earnings acceleration before or during their huge price moves. (Location 1930)
It’s not uncommon for new market leaders to show triple-digit sales growth in the most recent two, three, or more quarters. (Location 1943)
This is what really accounts for superior stock performance: strong earnings growth backed by brisk sales, not accounting gimmickry. (Location 1948)
only show strong earnings but also show strong sales, (Location 1950)
Life is not perfect, and so if one quarter here or there doesn’t accelerate, it may not be a big deal. (Location 1955)
A surprisingly good earnings report could be the beginning of a string of successful quarters. Strong quarterly results should translate into strong annual results. Just one or two quarters of good earning isn’t going to be enough to drive a stock’s price significantly higher for an extended period. (Location 1962)
It can be a fairly significant event if earnings suddenly break out to the upside from a range that was established over several years. (Location 1972)
For a true superperformer, there should definitely not be a huge sell-off that breaks the whole leg of the stock’s upward move. (Location 2123)
Many studies have shown that the effect can persist for months after an earnings announcement. (Location 2128)
Think of inventory as merchandise waiting to be sold. Under most conditions, inventories should rise and fall in a pattern similar to that for sales. (Location 2211)
When inventory grows much faster than sales, it can indicate weakening sales, misjudgment by management of future demand, or both. (Location 2212)
However, by the time a big advance asserts itself in the broad market indexes, many of the best stocks may have been running up for weeks in advance. (Location 2280)
Top-performing stocks will lead the broader market averages at important turning points. As a bear market is bottoming, leading stocks, the ones that best resisted the decline, will turn up first and then sprint ahead—days, weeks, or even months before the Dow, S&P, and Nasdaq indexes put on their running shoes. (Location 2282)
The legendary Jesse Livermore built his fortune by trading in leading stocks in the 1920s and 1930s. I made 99 percent of my profits in the stock market by trading in leading names. (Location 2289)
When you see this rotation occurring, it’s a warning that the market rally may be entering its later stage. (Location 2295)
The problem for most investors is that they fail to notice the important nuances and clues from leading stocks near turning points, and that causes them to lose perspective. (Location 2299)
More than 90 percent of superperformance stocks emerge from bear markets and general market corrections. The key is to do your homework while the market is down; then you will be prepared to make big profits when it turns up. (Location 2309)
During the first few months of a new bull market you should see multiple waves of stocks emerging into new high ground; general market pullbacks will be minimal and probably will be contained to 3 to 5 percent from peak to trough. (Location 2319)
If the major market indexes ignore an extremely overbought condition after a bear market decline and your list of leaders expands, this should be viewed as a sign of strength. (Location 2325)
The true market leaders will show strong relative price strength before they advance. (Location 2339)
finally companies in a specific industry group. As I’ll show you in several examples in this chapter, many of the very best leading stocks tend to bottom and top ahead of their respective sectors, whereas specific industry groups can lead a general market turn. (Location 2342)
The stocks that hold up the best and rally into new high ground off the market low during the first 4 to 8 weeks of a new bull market are the true market leaders, capable of advancing significantly. You can’t afford to ignore these golden opportunities. (Location 2360)
Market leaders tend to stand out best during an intermediate market correction or in the later stages of a bear market. (Location 2368)
After an extended bear market correction, look for stocks that hold their ground or, even better, work their way higher while the general market averages trend lower. (Location 2370)
declines. It’s important to study carefully the price action of individual companies with new positive developments and strong earnings per share during major market declines. Many of the most strongly rebounding stocks and the ones that hold up the best are likely to become the next up cycle’s superperformers. (Location 2372)
A growing number of stocks displaying positive, divergent price behavior during a general market decline can tip you off to where the next group of market leaders may emerge or what stocks are likely to blast off first when the market starts to rally. (Location 2444)
Coming off a market low, I like to buy in order of breakout. (Location 2469)
Let the strength of the market tell you where to put your money, not your personal opinion, which rarely is a good substitute for the wisdom of the market. (Location 2471)
The stocks that emerge first in the early stage of a new bull market with the greatest power are generally the best candidates for superperformance. (Location 2472)
When a market is bottoming, the best stocks make their lows ahead of the absolute low in the market averages. As the broader market averages make lower lows during the last leg down, the leaders diverge and make higher lows. (Location 2482)
moves. The smart money that moved into those stocks ahead of the curve will move out swiftly at the first hint of slowing growth. (Location 2501)
History shows that one-third of superpeformers give back all or more of their entire advance. On average, their subsequent price declines are 50 to 70 percent, depending on the period measured. (Location 2506)
Investing in leading stocks is indeed very risky if it is timed incorrectly. (Location 2527)
As a general rule, I buy strength, not weakness. (Location 2541)
In addition to keeping your lineup of candidate buys current, this practice will sharpen your feel for the overall health and quality of the market and keep you focused on the very best companies. (Location 2543)
market. You should also keep an eye on stocks that held up well during the market’s decline and are within striking distance (5 to 15 percent) of a new 52-week high. (Location 2547)
As the overall market is bottoming, your watch list should multiply over a number of weeks. The better stocks start moving into new high ground as the market rallies off its lows. (Location 2556)
The leaders of the past bull market rarely lead the next rally, so expect to see unfamiliar names. Fewer than 25 percent of market leaders in one cycle generally lead the next cycle. (Location 2559)
Charts enable us to see what’s going on in a particular stock as buyers and sellers come together in an auction marketplace. They distill the clash for emotional, logical, and even manipulative decisions into a clear visual display; the verdict of supply and demand. (Location 2590)
If I had to pick, I would put myself in this group. I rely on price and volume as well as fundamentals. (Location 2621)
Chart patterns are not the cause; they’re the effect. The supply and demand picture does not dictate to the market; human behavior does, and human behavior hasn’t changed and isn’t likely to change much in the future. (Location 2628)
Price and volume analysis can help you determine whether a stock is under accumulation or distribution (being bought or sold in size). (Location 2653)
The key is not knowing for sure what a stock is going to do next but knowing what it should do. Then it’s a matter of determining whether the proverbial train is on schedule. (Location 2658)
The first mistake I see amateurs make time and again when using charts is ignoring the first step: the big picture. (Location 2670)
You should limit your selections to those stocks displaying evidence of being supported by institutional buying. You’re not trying to be the first one on board; rather, you’re looking for where momentum is picking up and the risk of failure is relatively low. (Location 2678)
A common characteristic of virtually all constructive price structures (those under accumulation) is a contraction of volatility accompanied by specific areas in the base structure where volume contracts significantly. (Location 2711)
As a rule of thumb, I like to see each successive contraction contained to about half (plus or minus a reasonable amount) of the previous pullback or contraction. (Location 2728)
Typically, most VCP setups will be formed by two to four contractions, although sometimes there can be as many as five or six. This action will produce a pattern, which also reveals the symmetry of the contractions being formed. I call these contractions Ts. (Location 2731)
The immediate distinguishing features of the VCP will be the number of contractions that are formed (typically between two and four), their relative depths throughout the base, and the level of trading volume associated with specific points within the structure. Because I track hundreds of names each week, I created (Location 2744)
Tightness in price from absolute highs to lows and tight closes with little change in price from one day to the next and also from one week to the next are generally constructive. (Location 2773)
failure. I can assure you that almost every failed base structure that you experience can be traced back to some faulty characteristic that was overlooked. (Location 2783)
Evidence that supply has stopped coming to market is revealed as the trading volume contracts significantly and price action quiets down noticeably. (Location 2806)
A stock making a new 52-week high during the early stages of a fresh bull market could be a stellar performer in its infancy. (Location 2815)
stages. How do you know that the stock is attracting institutions? Even a good start can get derailed if the fundamentals aren’t really there, and you end up buying a bounce that fizzles and the stock stays in stage 1 limbo or, worse, breaks down and declines. (Location 2821)
When a stock declines precipitously, it is likely that there is a serious problem in the company, its industry, or perhaps a bear market is unfolding. (Location 2843)
Second, even if the fundamentals are not problematic yet, a stock that has experienced a deep sell-off must contend with a large amount of overhead supply: (Location 2846)
I rarely buy a stock that has corrected 60 percent or more; a stock that is down that much often signals a serious problem. Most constructive setups correct between 10 percent and 35 percent. (Location 2849)
improve your odds, you want to see one or more price shakeouts at certain key points during the base-building period. This will also allow for the elimination of weak holders and allow a sustained move higher. (Location 2882)
Informed investors who understand price action are on the lookout for evidence of price shakeouts within the base before they buy. (Location 2890)
volume. A spike in price on overwhelming volume often indicates institutional buying, which is exactly what we’re looking for. After a price shakeout, it’s a good sign if the stock rallies back on big volume. (Location 2913)
of companies that are unfamiliar to you. Do some detective work and get familiar with stocks that are forming a primary base. (Location 3429)
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my focus on sticking to my trading plan. My goal, as always, was to make as much money as possible, but only by executing the best trades at the optimal time, never by taking impulsive actions that deviated from my trading regime. (Location 3452)
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by Money Manager Verified Ratings. The point of this story is simple. The uneven playing field of highly leveraged options and futures traders trading against straight stock guys could have pressured me to take on too much risk or overtrade. (Location 3484)
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If there’s one thing I’ve learned over the years, it’s that risk management is the most important building block for achieving consistent success in the stock market. Notice that I said “consistent.” (Location 3492)
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Once I make a profit, that money belongs to me. Yesterday’s profit is part of today’s principal. Don’t fall into the faulty reasoning of amateur gamblers. Through consistent play and conservative wagering, a player picks up $1,500 at the blackjack table. (Location 3508)
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I’m not suggesting that you not allow a stock to go through a normal reaction or pullback in price if you believe the stock can go much higher. (Location 3517)
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Evaluate your stocks on the basis of the return you expect from them in the future versus what you’re risking. (Location 3519)
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it’s what you keep year in and year out. Adherence to sound risk-management principles will not only allow you keep the profits you’ve acquired but will also keep your feet on the ground when your head is in the sky because you’ve become overly ambitious after a period of success. (Location 3525)
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spent a lot of time talking about loss cutting as the key to my success. At one point during the interview, Jack stopped the tape recorder and said, “Mark, this stuff is great, but it’s a cliché; it’s what all the successful traders say.” (Location 3529)
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“It takes a lot of unspectacular practice to get spectacular results.” (Location 3536)
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“Maybe you should learn to stand before you learn to flip.” (Location 3543)
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Every day, remind yourself that the key building blocks for success include executing the basics better than the other guy and doing it over and over again. Greatness is built on a solid foundation of fundamental principles. (Location 3545)
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When you lose money on a stock trade, you will need a greater percentage gain to get back to even because losses work against you geometrically. (Location 3549)
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future investments. The lesson here is never to permit yourself to lose an amount of money that would jeopardize your account. The larger the loss is, the more difficult it is to recover from it. (Location 3556)
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Your average loss should be much less, maybe 6 or 7 percent. (Location 3558)
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pro will tell you that there is no room for ego. The market can and will break anyone who ignores the risks and dangers. With each bear market a new group of investors learn this lesson the (Location 3604)
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The first discipline you need to learn to be a successful stock trader is simple to comprehend mentally, but for the majority of traders it’s the most difficult to perform regularly: the best way to stay clear of the market’s wrath is to accept its judgment. (Location 3606)
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when you’re wrong?” My answer is always, “The stock goes down.” It’s that simple. As a matter of fact, I will often sell a stock if it doesn’t go up shortly after I buy it. (Location 3612)
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place. Regardless of your methodology or approach to stock investing, there is only one way to protect your portfolio from a large loss, and that is to sell when you have a small loss before it snowballs into a huge one. In three decades of trading, I have not found a better way. (Location 3617)
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this advice is followed only by an extremely small group of people even among professionals. (Location 3620)
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The tendency to sell winners too soon and to keep losers too long has been called the disposition effect by economists. (Location 3628)
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Most investors are simply too slow in closing out losing positions. As (Location 3638)
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Every major correction begins as a minor reaction. You can’t tell when a 10 percent decline is the beginning of a 50 percent decline until after the fact, when it’s too late. (Location 3652)
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immediately folding the ones that didn’t work out as expected. (Location 3697)
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I knew that when I had a winning hand, I could make back (Location 3699)
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The Achilles’ heel of most gamblers and speculators is the desire to play every hand, a common human weakness that allows impatience to override good judgment. (Location 3704)
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By limiting your losses, you will put yourself way ahead of the majority of investors because most investors lack discipline. (Location 3706)
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If you’re going to become a stock trader, you will be trading for years, maybe even decades. If you regard each trade as just one out of a million over time, it becomes much easier to take a small loss and move on to the next trade. If you stay disciplined, apply good judgment, and play the high-probability situations, the odds will distribute over time and you will be profitable. (Location 3715)
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question is this: What’s the difference if you continue to hold the stock that has declined by 10 percent, waiting for it to come back and overcome the negative news, or buy a fresh new name that looks good from the start? The answer is: nothing but your ego. (Location 3725)
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You get to see the market’s “cards” before you bet, free of charge. This is a wonderful advantage, yet few exploit it. (Location 3738)
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Wait until the probabilities are stacked in your favor before you act. (Location 3740)
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No one will ever be so good that he or she will never take a loss. Being wrong is unavoidable, but staying wrong is a choice. (Location 3750)
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losses and they will never leave you broke. Making you feel stupid is the market’s way of pressuring you to act foolish. Don’t succumb. Remain disciplined and cut your losses. The alternative to managing risk is not managing risk, and that never turns out well. (Location 3760)
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To have lasting success in the stock market, you must decide once and for all that it’s more important to make money than to be right. Your ego must take a backseat. (Location 3777)
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Losses are a part of trading and investing; if you are not prepared to deal with them, then prepare to eventually lose a lot of money. (Location 3784)
Individual stocks are not like mutual funds, they don’t have a manager and they don’t manage themselves; you’re the manager. (Location 3786)
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Risk is the possibility of loss. When you own a stock, there is always the possibility of a price decline; as long as you are invested in the stock market, you are at risk. (Location 3801)
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your strategy requires discipline. Even if you have a sensible plan, if you lack discipline, emotions will creep into your trading and wreak havoc. Discipline leads to habit. (Location 3817)
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you manage your portfolio with your emotions and without discipline, prepare for a volatile, exhausting (Location 3823)
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Good trading is boring; bad trading is exciting and makes the hair (Location 3825)
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on the back of your neck stand up. You can be a bored rich trader or a thrill-seeking gambler. It’s entirely your choice. (Location 3825)
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I don’t like to leave anything to chance in my trading. If I go into a casino and play blackjack, I know what the odds are, and if I feel like taking a chance, that’s the best I can hope for. (Location 3834)
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Your goal should be to trade without hassles and surprises. To do that, you need to develop a dependable way to handle virtually every situation that is thrown at you. (Location 3837)
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Before the open of each trading day, mentally rehearse how you will handle each position based on whatever could potentially unfold during that day. Then, when the market opens for trading, there will be no surprises; you already know how you will respond. (Location 3844)
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This tends to occur when the market is experiencing general weakness or high volatility. (Location 3861)
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This show of strength is a favorable sign. Often, the second setup is stronger than the first. (Location 3862)
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You shouldn’t assume that a stock will reset if it moves against you. (Location 3864)
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Amateurs are scared of positions that stop them out once or twice or just weary of the struggle; professionals are objective and dispassionate. They (Location 3867)
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To guard against that, you could move up your stop loss to breakeven or trail a stop to lock in the majority of the gain. (Location 3877)
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Selling into strength is a learned practice of professional traders. (Location 3883)
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You can unload your position easily when buyers are plentiful. (Location 3884)
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You have no control over how much a stock goes up, but you can, however, control the amount you lose on each trade. You should base that amount of loss on the average mortality of your gains. (Location 3910)
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That is, your reward/risk ratio must be greater than one to one (net of costs). To achieve this, your losses obviously need to be contained on average to a level lower than that of your gains. (Location 3914)
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the dollar amounts the profitable trades have been much larger than the losses on average. (Location 3918)
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always keep your risk at a level that is less than that of your average gain. (Location 3919)
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A rule of thumb could be to cut your losses at a level of one-half of your average gain. (Location 3929)
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Allowing your loss on a trade to exceed your average gain is what I call the trader’s cardinal sin. (Location 3933)
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When setting a stop loss, I have a rule of thumb that the amount of loss should be no more than one-half the amount of expected gain based on one’s real-life trading results. (Location 3936)
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In my experience, a 10 percent decline signals that something is wrong with the trade, assuming that you purchased it correctly in the first place. (Location 3942)
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However, keep in mind that there’s also an absolute level at which you need to cut your loss: the “uncle point.” (Location 3945)
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Systems that rely on a high percentage of profitable trades never impressed me very much; they expect the best and plan for the best. I (Location 3953)
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The problem with relying on a high percentage of profitable trades is that no adjustment can be made; you can’t control the number of wins and losses. What you can control is your stop loss; you can tighten it up as your gains get squeezed during difficult periods. (Location 3956)
My goal is to maintain at least a 2:1 win/loss ratio with an absolute maximum stop loss of no more than10 percent. (Location 3960)
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You just carry out your plan; you should write down your sell price before you buy each stock. (Location 3969)
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Not defining and committing to a predetermined level of risk cost traders and investors more money than any other mistake. (Location 3971)
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Letting losses run out of control is the most common and fatal mistake made by virtually every investor, including professionals. (Location 3973)
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My trading results went from mediocre to outstanding once I finally made the decision to draw a line in the sand and vowed never again to let a loss get out of control. I suggest that you make that same commitment right now. (Location 3978)
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“On the next rally I’ll get out.” Then one of two things happens. The stock rallies and in many cases these investors still don’t sell because they feel comfortable that the stock is fine again, or the stock never rallies but keeps falling and becomes even more difficult to sell. (Location 3986)
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Sooner or later, however, one of your stocks will dive under your sell price before you can react; this is called slippage. (Location 3996)
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Take whatever the next bid price is. Such a hard-falling stock is sending a warning. (Location 3997)
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So what! Stop-loss protection is about protecting yourself from a major setback or, worse, devastation. (Location 4003)
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The old adage holds true: your first loss is your best loss. (Location 4006)
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Broad losses across your portfolio after a winning record could signal an approaching correction in a bull market or the advent of a bear market. (Location 4011)
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It’s not time to buy; it’s time to sell or even possibly go short. Keep yourself in tune with your portfolio, and when you start experiencing abnormal behavior, watch out. (Location 4014)
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fast; that can lead to much bigger losses. Instead, cut down your position sizes; for example, if you normally trade 5,000-share lots, trade 2,000 shares. (Location 4018)
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Following this strategy will help keep you from trading yourself into the ground when things turn sour, which they definitely will at some point. When you take a large loss or get hit repeatedly, there’s a tendency to get angry and try to get it back quickly by trading larger. (Location 4021)
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is no shame in losing money on a stock trade, but to hold on to a loss and let it get bigger and bigger or, even worse, to buy more is amateurish and self destructive. (Location 4034)
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When I come out of a 100 percent cash position, generally after a bear market or intermediate-term correction, (Location 4043)
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This is like an athlete warming up and assessing the competitive environment. Themes can come in the form of how prices are acting in general, industry group leadership, overall market tone, and economic and political influences. (Location 4045)
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If your trading is causing you difficulty or stress, something is wrong with your criteria or timing or you’re trading too large. (Location 4050)
If you were going sailing, you wouldn’t go out on a dead calm and sit there floating in the water all day waiting for the wind to pick up. Why not just wait for a breezy day to set sail? (Location 4051)
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make big money in the stock market you do not have to make all-or-nothing decisions. Stock trading is not an on-off business; moving from cash into equities should be incremental. (Location 4061)
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If you’re not profitable at 25 percent or 50 percent invested, why move up to 75 percent or 100 percent invested or use margin? (Location 4066)
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By pyramiding up when you’re trading well and tapering off when you’re trading poorly, you trade your largest when trading your best and trade your smallest when trading your worst. This is how you make big money as well as protect yourself from disaster. (Location 4069)
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key difference between professionals and amateurs is that professionals scale into positions whereas amateurs average down. (Location 4075)
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The amateur buys his position, usually at one price, and if the trade goes against him, he may decide to average down, doubling up on a losing position. (Location 4079)
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The lesson: never trust the first price unless the position shows you a profit. (Location 4083)
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If the stock continues to rise, I start to look for an opportunity to sell on the way up and nail down my profit. (Location 4089)
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strongly disagree. Most often, high volatility is experienced during a tough market environment. (Location 4097)
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If you’re trading poorly and your batting average is dropping off below the 50% level, the last thing you want to do is increase the room you give your stocks on the downside. This is not an opinion; it’s a mathematical fact. (Location 4116)
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You will never achieve superperformance if you overly diversify and rely on diversification for protection. (Location 4139)
Depending on the size of your portfolio and your risk tolerance, you should typically have between 4 and 6 stocks, and for large portfolios maybe as many as 10 or 12 stocks. (Location 4144)
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In my career, I have had many periods in which I put my entire account in just four names. This of course corresponds with some of my most profitable periods. (Location 4154)
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