How to Make Money in Stocks

1. Master the CAN SLIM Investing System for Market Success

"You have to realize when you may be wrong and sell a stock without hesitation. How do you know if you're wrong? The price of the stock will drop below what you paid for it!"

CAN SLIM Basics: The CAN SLIM Investing System, developed by William J. O'Neil, is a proven strategy for identifying potential market winners. Each letter represents a key trait:

• C: Current quarterly earnings (at least 25% increase)
• A: Annual earnings growth (minimum 25%)
• N: New products, management, or price highs
• S: Supply and demand (products in high demand)
• L: Leader in its industry
• I: Institutional sponsorship
• M: Market direction

By focusing on these characteristics, investors can significantly improve their chances of selecting stocks with the potential for substantial growth. The system emphasizes the importance of combining fundamental analysis with technical chart reading to make informed investment decisions.

2. Understand Market Trends and Timing for Optimal Investing

"Investing in an uptrending market is the safest, easiest way to make money."

Market Direction Matters: Understanding the overall market trend is crucial for successful investing. Key points to remember:

• Follow-through days signal potential market uptrends
• Distribution days indicate possible market corrections
• Use IBD's Market Pulse to stay informed about current market conditions

Investors should aim to buy stocks during confirmed uptrends and move to cash during corrections. This approach helps minimize losses and maximize gains by aligning investments with favorable market conditions. Timing is essential – being prepared to act when a new uptrend begins can lead to significant profits.

3. Develop a Disciplined Routine to Find Winning Stocks

"The key is creating a routine that works for you, something you will continue to do on a consistent basis, every day."

Daily and Weekly Habits: Successful investors establish and maintain consistent routines for market analysis and stock selection. A typical routine might include:

Daily:

• Check market direction in The Big Picture column
• Review Stocks on the Move for potential breakouts
• Analyze charts of stocks on your watch list

Weekly:

• Study the IBD 50 for top-performing stocks
• Read The New America articles for emerging leaders
• Conduct a post-analysis of recent trades

Developing these habits helps investors stay focused, informed, and prepared to capitalize on market opportunities. Consistency in following a proven routine is often the difference between success and failure in the stock market.

4. Learn to Manage Emotions and Control Ego in Trading

"Emotions can get the best of you, and bad decisions often lead to more bad decisions if you don't have your rules in place."

Psychological Discipline: Successful investing requires mastering one's emotions and maintaining discipline. Key strategies include:

• Develop and strictly adhere to a set of written trading rules
• Avoid falling in love with stocks or becoming overconfident
• Learn from mistakes through post-trade analysis
• Stay focused on the system, not personal opinions or emotions

Emotional control is often the most challenging aspect of investing. By recognizing and managing psychological biases, investors can make more rational decisions and avoid costly mistakes. Implementing a systematic approach helps remove emotion from the equation and leads to more consistent results.

5. Implement Strict Buying and Selling Rules for Consistent Profits

"The cardinal rule in CAN SLIM Investing is to cut all losses at no more than 7 to 8% below the price you paid for a stock."

Risk Management: Establishing and following clear buying and selling rules is crucial for long-term success. Key rules include:

Buying:

• Purchase stocks breaking out of sound base patterns
• Look for volume at least 40% above average on breakouts
• Consider buying on pullbacks to the 10-week moving average

Selling:

• Cut all losses at 7-8% below purchase price
• Take most profits at 20-25% gains
• Hold stocks that rise 20% in 2-3 weeks for at least 8 weeks

These rules help investors minimize losses, lock in profits, and capitalize on potential big winners. Consistently applying these guidelines across all trades removes emotional decision-making and improves overall portfolio performance.

6. Study Historical Patterns to Recognize Future Market Leaders

"The patterns of big winners from the past repeat themselves over and over."

Pattern Recognition: Studying historical charts of past market leaders helps investors identify potential future winners. Key aspects to focus on:

• Base patterns (cup-with-handle, double bottom, flat base)
• Volume characteristics during breakouts
• Price and volume action in early stages of big moves

By familiarizing themselves with these patterns, investors can more easily spot similar setups in current market conditions. This knowledge allows for earlier entry into potential big winners and helps build conviction in holding positions through normal corrections.

7. Continuously Educate Yourself and Adapt to Market Changes

"It is the continual process of learning that is so beneficial."

Lifelong Learning: The stock market is constantly evolving, requiring investors to continuously educate themselves and adapt their strategies. Ways to stay informed and improve skills:

• Attend IBD workshops and seminars
• Participate in local IBD Meetup groups
• Study past trades through post-analysis
• Read books by successful investors and traders
• Stay updated on market trends and new products/services

Successful investors never stop learning. By consistently seeking new knowledge and refining their skills, they can adapt to changing market conditions and maintain a competitive edge. The ability to evolve one's approach based on new information and experiences is a hallmark of long-term success in the stock market.

Last updated: October 10, 2024