The How to Make Money in Stocks Complete Investing System

1. Master the CAN SLIM system for selecting winning stocks

The stocks you select should show a major percentage increase in current quarterly earnings per share (the most recently reported quarter) when compared to the prior year's same quarter.

Current earnings growth is crucial. The CAN SLIM system emphasizes the importance of strong current quarterly earnings growth, ideally 25% or higher, compared to the same quarter last year. This indicates a company's momentum and potential for future growth.

Annual earnings matter too. Look for companies with consistent annual earnings growth of at least 25% over the past three years. This demonstrates sustained performance and management effectiveness.

Other key factors include:

• New products, management, or industry conditions (N)
• Supply and demand reflected in trading volume (S)
• Leader in its industry group (L)
• Institutional sponsorship (I)
• Market direction (M)

2. Use charts to time your buys and sells with precision

Proper chart reading will help you recognize the right time to buy and sell stocks.

Learn to read stock charts. Charts provide visual representations of a stock's price and volume history, helping you identify optimal entry and exit points. Key patterns to look for include cup-with-handle, double bottom, and flat base formations.

Identify proper buy points. The ideal time to buy is when a stock breaks out of a sound base pattern on heavy volume. This often occurs at or near new high prices, contrary to the common desire to "buy low."

Use charts for selling decisions. Charts can help you recognize when a stock is topping or showing signs of weakness, allowing you to sell before major declines occur.

3. Focus on companies with strong earnings and sales growth

The greater the percentage increase, the better.

Prioritize earnings growth. Look for companies with quarterly earnings growth of at least 25%, with higher percentages (40% to 500%) being even more desirable. This indicates a company's ability to grow profits rapidly.

Sales growth matters too. Seek companies with sales growth of at least 25% in the most recent quarter. Accelerating sales growth over the past few quarters is an even stronger indicator of potential success.

Additional financial metrics to consider:

• Return on equity (ROE) of 17% or higher
• Improving profit margins
• Strong cash flow relative to earnings per share

4. Identify new, innovative companies and products

It takes something new to produce a startling advance in the price of a stock.

Focus on innovation. Look for companies introducing revolutionary products or services that have the potential to create new markets or disrupt existing ones. These companies often experience rapid growth and stock price appreciation.

Consider company age. Many of the best-performing stocks are relatively young companies, often within 8-15 years of their initial public offering (IPO). These companies tend to be more agile and growth-oriented than older, established firms.

Watch for industry shifts. Pay attention to changes in industry conditions that could create opportunities for new leaders to emerge. This might include technological advancements, regulatory changes, or shifts in consumer behavior.

5. Understand market direction to sync your investing strategy

You positively must always act to preserve as much as possible of the profit you've built up during a bull market rather than ride your investments back down through difficult bear market periods.

Learn to read market trends. Study the major market indexes (S&P 500, Nasdaq Composite, Dow Jones Industrial Average) to understand overall market direction. This helps you align your investing strategy with broader trends.

Recognize market stages. Be aware of whether you're in a bull market, bear market, or transitional period. Your buying and selling strategies should adapt to these different market conditions.

Use IBD's "Big Picture" column. This daily analysis can help you interpret market conditions and make informed decisions about when to be aggressive or defensive in your investing approach.

6. Cut losses quickly and let winners run

The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you're wrong.

Implement a strict loss-cutting rule. Sell any stock that falls 7-8% below your purchase price, without exception. This prevents small losses from becoming large, devastating ones.

Let your winners run. Avoid the temptation to sell too quickly when a stock is performing well. Use trailing stops or other methods to protect profits while allowing for continued upside potential.

Develop a profit-taking strategy. Have a plan for when to take partial or full profits in your winning stocks. This might be based on specific price targets, time frames, or changes in the stock's fundamental or technical picture.

7. Develop discipline and emotional control in investing

Winners in the stock market need perspective, discipline, and self-control above all else.

Control your emotions. Successful investing requires overcoming natural human tendencies towards fear and greed. Develop the discipline to stick to your strategy and rules, even when it feels uncomfortable.

Avoid common psychological traps:

• Holding onto losing stocks hoping they'll "come back"
• Selling winners too soon out of fear
• Buying stocks simply because they've declined in price
• Ignoring your sell rules due to overconfidence

Practice patience. Great stock market gains often come from holding quality stocks for extended periods, sometimes years. Develop the patience to let your investment thesis play out.

8. Continuously educate yourself on investing principles

You can definitely learn to invest wisely. This book will provide you with the investment understanding, skills, and methods you need to become a more successful investor, if you're willing to work at it.

Commit to ongoing learning. The stock market is constantly evolving, and successful investors never stop educating themselves. Read books, attend seminars, and study the methods of successful investors.

Analyze your successes and failures. Regularly review your investment decisions, both good and bad. Learn from your mistakes and identify patterns in your successful trades to refine your strategy.

Stay informed, but filter information. While it's important to stay up-to-date on market news and company developments, be selective about the information you act upon. Focus on facts and data rather than opinions or predictions.

Last updated: November 26, 2024