Profit making is the single most important motive of business. So one must not put money on a stock that is unmoving. The ratio of profit and loss in stock trading business is generally calculated at 3:1.losses are inevitable but they must be minimized.
The TAKE THE MONEY AND RUN strategy is best achieved by buying stocks that are breaking out of tight consolidations on an expansion in volume. This movement in a stock reveals that volume expansion of stock is taking place. But one must guard against breakout as they are prone to failure.
A lot of speculation is the key to success. An account grows when one puts his money in winners. The most important decision to take is the time frame for trading. This not only determines position sizing but also where to get out of trade.
Stock picks are generally selected because they are set up for initial moves which are ideal for day trading. Longer term moves are on the other hand ideal for swing trading. The risk profile must be kept in check. In stock trading there is no right winning percentage. The total return on the portfolio of the investor is important. Great investors usually cut their losses early.
So if their average loss is only 10%, and their average winner is over 30%, then even if they have two losing trades for every winner, then they’re still up by 10% across those three trades.
The investment portfolio must grow in the long run. One must not put too much faith in trading strategies and track records that boast of 90% winning stock trades. They may only result in a paltry amount of money per each stock trade. The end result is of utmost importance. History reveals that great investors are right only 30% or 40% of the times.
It is confusing to note that even trading strategies that promise an average of 900% can still cause the investor to go broke.
Portfolio managers who follow a ‘top down’ stock strategy where they seek to achieve a balance in the weightings of various sectors in their portfolios will analyze different market trends before making a trading decision. Those who follow a ‘bottom up’ strategy pick specific stocks focusing on financial analysis. Technical traders try to predict future stock prices on the basis of movement of stock prices. They pay attention to recurring patterns of stock price movements and trends. Sales traders on the other hand manage equity orders for their clients and aim to achieve the best prices. At the end of the day, risk minimization is the driving as well as defining motive.
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