By Peter Leeds
Peter Leeds is an expert in stock investment, with over a decade of experience working with financial planning, derivatives, stocks, fixed income, project management, and analytics. He is the author of several books, including “Penny Stocks for Beginners.” He publishes the financial newsletter “Peter Leeds Stock Picks” and has appeared on NBC, CBS, Fox, CNN, and several other outlets.
Why Some Investors Always Lose
Some investors usually lose when trading stocks. This can happen to you as well, where it seems that any investment you make immediately starts moving in the wrong direction. The majority of investors perform average in relation to overall performance. If the market rises by 10%, they might achieve 8% or 12%, but they are essentially keeping pace with the overall trend.
What Successful Investors Consistently Do
There are also investors who seem to make profits consistently when trading stocks. What is the element that distinguishes their successful approach that seemingly drives continuous profit? What do they do differently from the majority of the people we mentioned earlier?
Well, their successful and consistent approach to buying and selling stocks resembles something like this:
They Have a Plan
If you don’t know where you’re going, any road will take you there. Having a plan is important because it keeps you on track and allows you to measure your progress. Only with a trading plan can you identify and clarify the aspects that work in your trading approach. Which parts help you move towards the destination you desire?
Your plan should include realistic criteria, such as:
- Types of investments (prices, industries, company size, etc.)
- The time frame you intend to hold the stock
- The volatility (beta) of the stocks
- The risk profile (how risky or speculative the investment is)
- What is the potential upside in earnings you expect from each stock?
- What sources of information will you use / trust?
You should monitor the investments you’ve made and your reasons for each investment. Track the results in terms of profits or losses. This monitoring will help you see which types of trades have been the most profitable for you – which in turn helps you fine-tune your plan as needed.
Establish Strong Rules
You must have trading rules in place. It’s hard to fully express the importance of this aspect of “new investing,” so let’s say it again: You must have trading rules.
For example, you may decide never to invest in companies from foreign markets, those companies that have a stock price under $2, or stocks from certain industries or those with certain debt loads or revenue amounts. It could be anything really, and it should be developed and adjusted over time. Always keep the purpose in mind – to protect yourself from the silly mistakes we all make from time to time.
Once you establish a rule, you should stick to it 100%. You can adjust the rules based on the results you achieve with each type of trade. By modifying them while learning and performing, you will continuously strengthen your strategy and protect yourself while seeking profits.
Continuous Learning
Even if you have been trading penny stocks since you were fourteen and have been leading the industry in every aspect of penny stocks, you will learn new things every day (or you should be).
In other words, your journey to becoming a great investor involves continuous and unending learning. The more you absorb new approaches and soak up more strategies, protocols, and information, the more frequent your investment approach will generate profits.
Limitations
Stop Loss
One of the most important and effective trading tactics is using stop loss orders to mitigate any negative risks. Simply put, if you buy shares at a certain price, you choose a stop loss price, which is around 3%, 5%, or maybe 8% lower than the level at which you bought the shares. For example, if you bought shares at $102, you might set your “stop loss” price at $99.
Then, if the shares drop to that specified point for any reason, you sell immediately. This way, you limit the maximum losses to a small amount, perhaps around 3%, 5%, or 7%.
You can endure a lot of small losses in bad trades before they have any significant impact. At the same time, you avoid more drastic severe drops, where you might see the shares fall by 50%, 75%, or even 100%.
Moreover, by using stop loss orders and limits as described, you remain invested as long as the shares do not drop to the price limit you set. This way, you stay “locked in” the investment, allowing you to enjoy the profits if the shares start to rise.
For example, if you bought shares at $3 (and set your stop loss at $2.75), if the investment drops to $1.12, you would have already sold at $2.75 (losing only 8%). However, if it rises to $4 or $5, you would still benefit from all the profits in addition to protecting your maximum stop loss.
Determining the Proper Position Size
Determining position size relates to ensuring that each investment you make is of a safe and appropriate size. Appropriate means that no part of your portfolio is overly invested in any single stock or asset.
If you have a portfolio worth $10,000 and you put $8,000 into one investment, that is considered a very poor position size. It is likely that a $10,000 portfolio contains 10 different investments. This strategy sets the size of each of these purchases to only 10% of the portfolio while diversifying across various assets.
If you have a portfolio of only $2,000, placing 25 different investments would be a poor position size. The transaction costs for trading stocks would be relatively high – 25 purchases with a trade commission of $10 each means $250 (or 12.5%) of your total portfolio goes toward commission fees alone. Then there are 25 more commission fees when you eventually sell each share.
Thus, to properly determine position size, you must minimize exposure across different assets so that you do not have “too much” exposure to any one asset. Ensure you consider risks, diversification, and commission costs in terms of percentage and total portfolio size.
Monitoring Financial Trends in the Economy and Industry
Monitoring financial trends is similar to the “continuous learning” mentioned earlier. If you are heavily investing in a digital printing company, you need to understand the digital printing industry as well as evaluate how social and economic trends can affect the company in question.
Similarly, if you want to participate in the biotechnology field, you need to closely follow all events happening in that industry or your specific field. The same applies to oil production, air travel, retail companies, basic metal mining, and more.
Read
Industrial publications and follow comprehensive financial data as much as possible. If there is an intention by the Federal Reserve to raise interest rates, or if the government plans to launch a massive tax cut, or if there is an outbreak of war in Saudi Arabia, you should be aware of these issues and understand how they affect your investments. Significant events will impact the investments you make, and your job is to understand how these situations will affect the prices of the stocks you own, whether in the short term or the long term.
Control Emotions and Avoid Impulsiveness
Controlling emotions is easier said than done, but it is very important to manage your feelings when trading. Do not place all your hopes and ambitions on a particular stock, and do not “marry” it in your mind.
Good investing is boring and emotionless. If the investment is not behaving the way you hope, you should be able to dispose of those stocks immediately without thinking twice.
Also, you should not hold onto stocks that make you feel stressed or keep you awake at night. In any such case, those stocks may not be right for you.
Adjust the Plan and Rules
Your trading plan and trading rules are not set in stone. You should develop them carefully and adhere to them, of course. However, you should allow yourself the ability to modify them based on your trading results and new information you learn.
For example, you may have incurred losses in three different biotech companies in a row. You might want to adjust your trading rules to state that you will never trade biotech stocks again. Or you might be performing better with small-cap stocks under $3, so you might focus more of your attention and resources on that type of investment.
Stay the Course
It has been proven time and again, the more active you are as an investor, the worse your trading results tend to be. People tend to jump from one investment or trend or fad to another without giving their current investments enough time to play out as they ultimately should.
Make a plan and stick to your trading rules, and be patient.
Source: https://www.thebalancemoney.com/why-some-investors-always-profit-4129257
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