1. Don’t apply logic to the stock market.
So often I see people make decisions in the market on what makes sense to them. It makes sense to buy stocks when the company insiders are buying. It makes sense to buy stocks that are making positive announcements. It makes sense to listen to what the CEO has to say about the company’s prospects. However, all that matters is what the market thinks of the company and whether the buyers are more motivated than the sellers. So often, the market does things that do not make any sense until we later learn of what motivated the market to do what it did. Remember, the market is forward looking. Often what makes sense is judged on what has happened in the past.
2. Never Average Down on a Losing Position
Legendary Hedge Fund Manager Paul Tudor Jones said it best, Losers, Average Losers. Buying more of a bad thing is not much different than continually betting on a losing horse. Winners win for a reason and losers lose for a reason. Your stock has to prove that it is a winner. Until it does, don’t add more to a bad situation. If you like a company whose stock is losing you money, sell it. You can always buy it back later when the market starts to like it again.
“Losers, Average Losers”
Paul Tudor Jones
3. Successful Investing is Not About Being Right, It is About Making Money
Most good traders are usually wrong. They will lose small amounts often and make big amounts occasionally. What matters is how much they make over a large number of trades. Don’t try to always be right, simply work to make money.
4. Get Out of Your Comfort Zone- Resist Doing What Feels Comfortable
We have a tendency to look for the market to prove our decision is a correct one before we make our move. The problem is that this often means we are too late to capitalize on the opportunity. We have to move before the crowd, and that often feels like a dangerous thing to do.
5. Anyone Can Get Lucky in the Short Term, Only Good Traders Succeed in the Long Term
Don’t confuse making money in the stock market with knowing what you are doing. It is easy to get lucky on a stock or on a sector and enjoy gains that give credence to your analysis method. However, short term winners often give back all of their gains because they fail to recognize their success as luck.
6. Be Patient With Your Winners, Not With Your Losers
The natural tendency is to sell your winners too early and hold on to your losers, hoping for a turnaround. A simple, but not easy, thing to do is reverse this tendency. When the market proves you right, wait to sell on a signal that indicates the stock is likely to go lower. When the market proves you are wrong, let the trade go and take the loss.
7. Publicly Available Information is Priced in to the Stock, Don’t Rely on it to Make Decisions
Once information, no matter how good, is made public, it loses its usefulness to you. Public information is priced into the stock. Information only has value to you if the market has not priced it in or if you use it differently than others (see things others don’t).
8. Make Sure Your Trading Strategy Has an Edge
A trading strategy is only worth trading if it can be shown that it consistently makes money. Establish your trading rules and test them over a variety of market conditions so you know that it is effective. Time spent testing a strategy to prove it is a money maker can save you a lot of money in the market.
9. People Lie, Markets Don’t
I have learned the hard way to never trust what people say, their actions say much more. Learn to read the market and understand its message. No matter how much insight a person may have, recognize that they have a bias based on their own emotional attachment to money.
10. It is Easier to Trade with the Trend Than Against It
Understand the mood of the market and trade with it. Don’t chase euphoria, but seek to buy stocks that are in the control of the buyers. Don’t sell on fear, but seek to sell stocks that are under seller control.