Stock Trends and Control – a winning combination

The first message I want to reveal to you in this article is that you don’t need to know what’s going to happen next to make money. In fact, of course you can’t it’s a fundamental truth of trading and investing. The clarity and awareness this point offers makes it far easier to then go about preparing a simple investing strategy that makes money.

We all need a market ‘edge’

Firstly, we need to decide what market ‘edge’ we are going to capitalise on. One thing I know is that trends occur repetitively across all markets all of the time and they can provide us with a clear ‘edge’. Identifying a trend when it begins to develop, following it, and then profiting from it would seem a relatively easy task and it is when you have the right controls in place.

What do we do and when?

However, you may be frustrated sometimes watching hard-earned profits disappear. We have seen some super trending stocks recently like TWE CSL and ALL that should have generated huge profits for you. The question is did they? When you hold and when you fold is key. When markets correct suddenly, as they have recently, it suddenly focuses our minds on this topic. No longer are we quite as comfortable as previously steady trends and the profits that have built up start to erode. We should know what to do and when to do it. History tells us when prices correct back investors inevitably hold on and let these profits disappear and in fact do the wrong things at the wrong times. This graphic courtesy of Behaviour Gap comes to mind.

We are in this business of making money pure and simple so what we need to do is learn how to retain these profits we are gifted with and not let them evaporate.

Trends occur with uncanny repetitiveness

When stock trends occur, and they do with uncanny repetitiveness, it puts an exceptionally powerful tool in our hands. Maximising the opportunity they offer can make the difference between an average portfolio and a steadily growing portfolio. But to do this we have to put a plan in place that ensures we take advantage of this repetitive price behaviour. The plan requires emotional discipline and trade control coupled with a simple understanding that you won’t get the ‘top of the market’ and you will leave ‘something on the table for the other guy’.

When we see beautiful stock trends that occur with uncanny repetitiveness it puts an exceptionally powerful tool in your hands, and it gives you a great ‘edge’.

Trends take the form of different shapes, sizes and periods over which they occur, so a trading or investment position needs to be managed appropriately and this can be done effectively using money management techniques that ensure a positive result. It is invariably an issue of discipline and control and not knowing what to do at any point in time that causes failure, and this is important point to address as ‘decisions on the run’ are often bad decisions. Decisions that are predetermined and tell us what to when ‘x’ occurs are invariably the right decisions because they ensure consistency of actions. Consistency and control are great partners when trading for profit.

Control and discipline

Controlled techniques provide solid a framework on which to base trading and investment decisions on. It makes life easier for us and it guides us. It tells us when we should lock in profits. Not worrying about subsequent price action is important. That emotion can be distressing if not managed properly and that doesn’t make for a happy trading experience. It’s a matter of controlling your expectations to the extent you are happy and relaxed with your outcome, and you’re profitable. If you lock in profits that can’t be taken away, you feel good and move on to the next opportunity, because there always is another opportunity.

Catching trends is like surfing. Catch the wave, enjoy the ride and jump off before it subsides.

We need a plan

The type of strategy I am talking about ensures we profit from ‘big’ trends and maximises the opportunities they provide. This is what good investing is – growing your equity consistently and at every opportunity. ‘Big’ trend moves happen over and over again in the markets. Trends are trends and they don’t change just as human behaviour doesn’t. Growth versus income phases come and go, cycles come and go, fads come and go, Internet, miners, or lithium stocks, there are always hot stocks on the move but it is the market trends that are always with us. That doesn’t change.

I liken it to surfing, one of my favourite pastimes. Catch the wave as it develops, enjoy the ride and jump off before it subsides. That’s the simple message. We sometimes find this trading action hard because of lack of control of many of the inbuilt biases, egos and expectation inhibitors we have. That’s natural human behaviour that distracts us from implementing a winning attitude and that is your challenge if you want to succeed. If we want to make money we must learn how to take our profits.

Richard Lie owns and manages the website
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