Like anything in life, to be successful you need a good strategy.
Something as simple as traveling somewhere you’ve never been before requires a strategy (a map on how to get to where you want to go). If you want to lose weight, you need to follow a sound food plan to do so. And if you want to make more money in the market, you should follow a proven, profitable method for picking winning stocks.
Following a proven strategy that works can help you achieve your goals. You’re also more likely to stick with it.
As the saying goes, ‘a good strategy works best when you use it.’ And the more you use it, the more confident you’ll become, making you that much more likely to keep using it. And that is the recipe for success, especially in trading.
A good strategy can also help you overcome the biggest obstacle in anything you do – your emotions.
Over-Confidence and Under-Confidence
In trading, being over-confident can be just as destructive as being under-confident. Both can lead to poor decision making.
• Over-confidence: Did you know the average investor thinks they’re smarter than the average investor? They tend to attribute their stock gains to smart decisions, while attributing their losses to bad luck.
Unfortunately, the opposite is probably true. The majority of their gains could most likely be attributed to luck, while their losses are more often the result of poor decisions.
It’s also easy to confuse skill with a bull market. A lot of bad decisions can get rewarded when the market is going straight up. But, when the cake-walk stops, those bad decisions can ruin your portfolio.
• Under-confidence: Constantly second-guessing yourself is no better. Too many investors, after finding a good stock, will try to overcome their feelings of self-doubt by over-researching a stock to find additional reasons to buy. Invariably, they will come across something that causes them to feel even more uncertain, and they’ll talk themselves out of the trade altogether, only to eventually find that the stock had run up as expected, and you’ve missed the whole thing.
Vowing to not let that happen on your next pick, you decide to plunge right in after you've found your newest stock. (You don't want to talk yourself out of it like the last time.) This time, however, the stock drops after you get in, and you immediately regret your decision.
So the next time, you tell yourself you'll be more diligent, and turn over every stone before your next trade. But, of course, you find yourself back in the same position as the first time, with information overload, and self-doubt, which eventually leads to the same poor result as before.
Being sufficiently confident (not too much and not too little) all boils down to knowing what works, and then doing what works.
More . . .
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The Science of Making Money in Stocks
Making money in the market is easier than you think.
It all boils down two things:
1) Knowing what works, and...
2) Doing what works
While the stock market isn't a perfect science, the fact remains that if you concentrate on what works and stop doing what doesn't, you will most surely succeed in the market.
For example, since 1988, the Zacks Rank #1 Strong Buy stocks have beaten the S&P 500 in 26 of the last 32 years, with an average annual return of 24.7% a year. That’s nearly 2.5 x the market’s returns with an 81% annual win ratio. And consistently beating the market year after year can quickly add up.
And stick with the top industries too. Since roughly half of a stock’s price movement can be attributed to the group that it’s in, you’ll significantly increase your odds of success by focusing on the best groups. By how much? Our tests have shown that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of 2 to 1. And the top 10% of industries outperform the most.
Focusing on proven methods that work is how you become a more confident trader, and a more profitable trader. Because when you’re able to see how your strategies would have performed in the past, you’ll have a better idea as to what your probability of success will be now and in the future.
Past performance is no guarantee of future results. But what else do you have to go by?
Think about it. If you saw that a stock picking strategy did nothing but lose money, year after year, stock after stock, over and over again, there's no way you'd want to use that strategy to pick stocks with. Why? Because it has proven to pick bad stocks.
On the other hand, if you had a strategy that did great year after year, trade after trade, over and over again, you'd of course want to use that strategy to pick stocks with. Why? Because it has proven to pick winning stocks. And while it could start picking losers all of a sudden (now that you’re using it, right?), it may also continue to pick winning stocks, just like it had been doing over and over before.
Of course, a winning strategy won’t preclude you from ever having another losing trade. On the contrary, even the best strategies 'only' have win ratios of 60%, 70% or even 80% (not 100%).
But if your strategy picks winners far more often than losers, you can feel confident that the next stock it picks will have a high probability of making money. And you’ll have the confidence to take it.
He Who Hesitates Is Lost
Once you have the confidence of trading a winning strategy, you never have to second-guess yourself.
And why would you? If you have a proven strategy that has outperformed in both bull markets, bear markets, and everything in between, you can feel confident that the best research has already been done to put those stocks on your buy list (or sell list) in the first place.
One of the best ways to begin picking better stocks is to see what the pros who use these methods are doing.
Whether you’re a growth investor, or a value investor, prefer fast-paced momentum stocks, or mature dividend-paying income stocks, there are certain rules the experts follow to maximize their gains.
This applies to large-caps and small-caps, biotech and high-tech, ETF’s, stocks under $10, stocks about to surprise, even options, and everything in between.
Regardless of which one fits your personal style of trade, just be sure you’re following proven profitable methods that work, from experts who have demonstrated their ability to beat the market.
The best part about these strategies is that all of the hard work is done for you. There’s no guesswork involved. Just follow the experts and start confidently getting into better stocks on your very next trade.
How To Get Started
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Thanks and good trading,
Kevin Matras serves as Executive Vice President of Zacks.com and is responsible for all of its leading products for individual investors. He invites you to download Zacks’ newly released Ultimate Four Special Report.
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