Most common reason for underperformance is poor asset selection. Rather than paying up for something good, people would much rather try to find out where the market is wrong. Most often that is a costly strategy.
Active management of investments becomes more important the older you become. When you are young there is a lot more time to make up for a large price decline in the market. It is often best to conserve trading costs, utilize tax shelters, etc. Historical market returns suggest that sticking with the long-term is generally the most prudent course of action at a younger age.
But as you get close to or are in retirement, the ability to “make up” significant drawdowns in a passive investment strategy can be very difficult. Often you are using the funds to live on and simply cannot afford to lose 30-50% of your net worth. Recovering a loss like that may take years, years you may not have. By managing actively, you are reducing the likelihood of a substantial loss occurring as the strategy aims to cut losing positions quickly.
Good things tend to happen when prices are above the 20 Month moving average and bad things tend to happen below the 20 Month moving average.
Its always better to size a trade slightly smaller instead of larger. Smaller positions allow for less emotional reactions to normal price gyrations and allow us to stay with a trade long enough to let it develop as it needs too.
Markets move in waves and cycles. To be successful we have to do a good job of identifying what is a normal corrective cycle and what is more likely to lead to a larger problem.
The pattern is of most importance. It’s not the news or your opinion that matters most. Following the pattern and trend is what makes the big money.
The hardest skill to master in the market is that of patience. Being able to sit and do nothing will save you more money than you can imagine.
Probably the worst thing traders do is chase moves with no real plan. Chasing extended moves leads to shakeouts which leads to frustration and then to a lack of confidence. This is commonly called “buying high and selling low”.
The second worst thing traders do is try to buy stocks that are falling with no sign of reversal. They assume the stock is too “cheap”. Most often the market knows more than we do and its speaks to us, it is our job to listen.
Mental capital is just as important as our actual capital. We can have the best trading method around, but if we don’t have confidence in our ability to execute the plan it doesn’t matter.
Trade entry is only one part of a successful strategy. Most fixate too much on how to enter a stock when they should be focusing much more on trade management and exit strategy.
You can give 10 people the same entry signal and they will all make different amounts on the trade. Position management, emotional control, and discipline are more important than the entry.
Markets are masters of making us do the worst thing at the worst time. Most traders are impatient, emotional, and lack a plan. Most traders lose money. If you want to make money, you have to do what most traders do not.
If you are wrong in a trade the worst thing you can do is stay wrong assuming it will come back. If you are wrong, admit it and move on.
Ego has very little place in a successful trading strategy. If you can’t change your mind when the facts prove you incorrect, this will be an expensive game.
Doing what feels most comfortable in the market is rarely the most profitable.
You don’t have to guess what is going to happen to be successful, none of us have a crystal ball. Observing what is actually happening and reacting to it is all we need to do.
Most winning strategies are generally right no more than 50% of the time. But they cut losses quickly on the trades that don’t work and let profits run on the ones that do. Aim for big winners and small losers.
It’s easier to trade in stocks that are generally doing well. Think of it as swimming with the current vs against it. Trade with the trend.
Don’t ever assume you know more than the market. The current price is the direct reflection of all available knowledge and all participants reaction to that information. It would be incredibly arrogant to think you know more than the collected worth of all market participants, and is often a costly opinion to have.
The first question we should be asking when we are in a losing position is “are we wrong?”. So many convince themselves that anytime they lose money it is because “the market is manipulated”, or “the market is wrong”. The market is not wrong, our positioning is.
It never matters what we think should happen, if the price action is not confirming our positioning then we are losing money. Our goal is to make money, not be right all the time.