There are many important things you need to know to trade and invest successfully in the stock market or in any other market. Eight of the most important things that I can share with you arebased on many years of trading experience, and are enumerated below.
1. The market is always right and price is the only reality in trading. If you want to make money in any market, you need to mirror what the market is doing. If the market is going down and you are long, the market is right and you are wrong. If the market is going up and you are short, the market is right and you are wrong. Other things being equal, the longer you stay right with the market, the more money you will make. The longer you stay wrong with the market, the more money you will lose.
2. The trend is your friend. Since the trend is the basis of all profit, we need long term trends to make sizable money. The key is to know when to get aboard a trend and stick with it for a long period of time to maximize profits. Contrary to the short term perspective of most traders today, all the big money is made by catching large market moves-not by day trading or short term trading.
3. If you are looking for "reasons" that stocks or markets make large directional moves, I can tell you that you will probably never know for certain. Large institutional investors and well capitalized players move markets for reasons known only to them. Since we are dealing with perception of markets-not necessarily reality, you are wasting your time looking for the many reasons markets move. A huge mistake most investors make is assuming that markets are rational or that they are capable of ascertaining why markets do anything. To make a profit trading, it is only necessary to know that markets are moving-not why they are moving. The most profitable traders only care about direction and duration, while market losers are obsessed with the whys.
4. Markets generally move in advance of news or supportive fundamentals-sometimes months in advance. If you wait to invest until it is totally clear to you why a stock or a market is moving, you have to assume that others have done the same thing and you may be too late. The market reaction to good or bad news in a bull market will be positive more often than not. The market reaction to good or bad news in a bear market will be negative more often than not.
5. You must let your profits run and cut your losses quickly if you are to have any chance of being successful. Everyone will be wrong a lot when they trade- and that is to be expected. But staying wrong (holding losing trades against the trend) is not acceptable and a clear sign of losing market behavior. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If you do not practice highly disciplined trading, you will not make money over the long term. In my long market experience, at least 90% of investors lack the necessary discipline to be successful. Emotion will replace discipline for most investors at the most critical of times. This is the real reason most people cannot beat the market- the market simply beats them psychologically.
6. The Efficient Market Hypothesis (EMH) is fallacious and is metaphysically a derivative of the perfect competition model of capitalism. The EMH at root shares many of the same false premises as the perfect competition paradigm as best described by economist George Reisman in his work Platonic Competition. The EMH was created by University of Chicago academician Eugene Fama, who borrowed many of the same concepts from another University of Chicago professor- Frank H. Knight. Knight inRisk, Profit, and Uncertainty (1921) provided the intellectual basis for the EMH forty years earlier by describing perfect competition. The perfect competition model of capitalism and markets (and the EMH) is not based on anything that exists on this earth. Inefficient markets can last for long periods of time. You see, there is no valid reason to think that investors are rational. That is, the EMH is based on a false premise that investors are rational. It is precisely because investors are irrational that trends last for much longer than any rational person could reasonably expect. You cannot explain away bubble periods in markets as just an aberration. "Irrational exuberance" is hardly a rare phenomenon. The presence of large emotionally driven swings in markets gives trend followers an opportunity for large profits.
7. You should make your own trading decisions. Never trust the advice and/or ideas of trading software vendors, system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc., unless they trade their own money and have traded successfully for years. You should note that those that have traded successfully over very long periods of time are very few in number. I know some very rich traders, but no rich analysts.
8. There are no market gurus. Good traders take advantage of high probability trades and capitalize on direction and duration. Beware of all self-proclaimed or self-anointed gurus.Most of them are net losers in the overall scheme of things.