How to Win at Stock Picking When You're Wrong

I have been heavily influenced by two traders in my life, Tom Carter (RIP) who wrote 'Stock Market Speculation' (out of print) in the 1980's and William J. O'Neil who wrote 'How To make Money in Stocks'.

I try and follow the advice they laid out for speculators in these books to become a successful trader. I don't day trade and I don't borrow on margin to invest. Never have and never will.

These books are filled with so much buying, selling and money management advice, one really has to read them 2-3 times and take notes so you can fully understand the years of trading experience they convey. In future blog posts I will attempt to pass on more of what they had to say on making successful trades. 

It is really hard to list anything that's the MOST important because they're all important and work together in concert to help us become successful.

To do that, protecting capital is the #1 priority. NEVER lose money. We hear this all the time from professionals and amateurs alike. DON'T lose money. Yet, we do, don't we? Yes we lose money on bad trades and by making bad decisions or listening to bad advice.

That is going to happen because we're human. We fall for it every day. Only a few of us admit it.

Do I get every trade right? Do all my trades make money? Not a fricken chance in hell. Here's the most important thing about trading you have to remember if you want to MAKE MONEY!

Cut Your Losses Early

"The whole secret to winning big in the stock market is to not be right all the time, but to lose the least amount possible when you're wrong."  
- William J. O'Neil

• ALWAYS without exception you must limit your loss on capital to between 7-8% per trade. If your guts are telling you sooner, then do it.
• investing is NOT gambling, it is investing
• if you time your buys by looking at a chart then losing 8% becomes hard to do
• you look for those stocks coming off of a base and are starting to rise. This is your buy point.
• never ever buy into negative momentum. You buy your position as the stock starts moving up. If you make a mistake you use your sell rule of 8%
• letting your losses get out of hand is the WORST mistake investors make
• hoping and praying your stock goes up in price is NOT a sound strategy

Cutting your losses using this rule would have saved you from the financial crisis of 2008/9. You would have sold everything before everything started to meltdown. This is my strategy for the next crisis.

TAKE YOUR LOSSES QUICKLY AND YOUR PROFITS SLOWLY

When to Sell and Take Profits

• I sell if I can make 20% 
• we hit singles and round the bases to win
• I'm not trying to hit home runs, I never could
• the best offense is the best defense

"everyone loves to buy stocks, nobody likes to sell them"
- p. 248 "How to Make Money in Stocks"

• always weed the garden and sell your worst performers FIRST

Other Important Points to Remember

• swallow your pride
• forget your ego, stocks don't care
• never argue with the market
• don't get emotionally attached to any stock that is losing money
• never lose your confidence
• keep studying the market, become a student of the market
• ignore everyone making recommendations, friends, TV gurus and advisors
• analyze your every trade and keep track of your profits and losses
• personal opinions don't matter, just watch what the market is telling you

IF YOU DON'T SELL EARLY YOU'LL BE LATE

Don't argue with a declining market, keep losses as small as possible. I am no longer buying penny or junior stocks for trading, they just tend to drop too soon for me to react.

Keep your trading account to just a few stocks. Too much diversification will kill your reaction time. CONCENTRATE your trade in just a couple positions. I only use two at the moment at $4K a piece.

I'm not going to get rich quick (which this is not) but I will be able to keep a better eye on my stocks.

I only gamble with money I can afford to lose.

I NEVER USE MY RETIREMENT MONEY TO TRADE IN AND OUT OF 

STOCKS!

You can look at our retirement holdings here.

If you are looking at ways to save money this new book The Cashflow Cookbook can help you find some savings to then use to invest.

If you are having trouble getting your financial house in order and organized then you need to read Worry Free Money. Both of these books written for Canadians by Canadians.

What are your thoughts on trading stocks?