The Little Black Book of Stock Market Secrets

1. Master the Two Types of Markets: Trending and Sideways

The trend is your friend. Always trade in the direction of the trend, whether you are trading a 30-minute chart, a daily chart, or a weekly chart.

Trending markets move consistently in one direction for an extended period. In uptrends, buy high and sell higher, using Bollinger Bands as entry and exit signals. For downtrends, sell short when a stock closes below the lower Bollinger Band and cover when it closes above the middle band.

Sideways markets fluctuate within a range. In these markets:

• Buy low and sell high
• Use oscillators like RSI or Stochastics to identify oversold and overbought conditions
• Buy when a stock closes below the lower Bollinger Band and sell when it closes above the middle or upper band

Remember, the trend can end abruptly. Be cautious when a trend has been ongoing for a long time and is widely covered in the media.

2. Develop a Winning Trader's Mindset

90% of trading is learning to master your own psychology. You can lie to your boss, you can lie to your wife, but you can never lie to the market. It will always call you out.

Emotional resilience is crucial for successful trading. To achieve this:

• Sleep at least 8 hours every night
• Exercise daily
• Eat healthy foods
• Begin each day with prayer, meditation, or light exercise

Key mindset principles:

• Trade like a sniper, not a machine gunner
• Focus on improving your character, not just making money
• Take responsibility for your losses
• Don't trade when your head is not in the game
• Keep your ego out of trading decisions

Remember, trading success begins with acquiring the right mindset. Learn to observe your own reactions objectively and be willing to make mistakes without becoming discouraged.

3. Find the Perfect Stock for Maximum Profits

Don't be afraid of high P/E stocks that are hitting new highs. Investors with a bias against high P/E stocks have missed out on many of the greatest winners of all time.

Perfect stock characteristics:

• General market in an uptrend
• Stock in a clear uptrend, constantly hitting new highs
• Strong fundamentals (high revenue or earnings growth, positive earnings surprises)
• Trading above its 50-day moving average
• 50-day moving average above its 200-day moving average

Additional factors to consider:

• Stocks trending on platforms like StockTwits.com
• Small cap stocks (under $200 million market cap) or stocks with a small float
• Stocks up 100% in the last few months
• Recent IPOs (within the last 6 months)

Remember, volume never lies. A stock hitting new 52-week or all-time highs on higher than average volume is often a high probability bet, especially in a bull market.

4. Insider Secrets: React to News, Not the News Itself

Reaction to the news is always more important than the news itself.

Key insights:

• If a stock falls on good news, it may signal the end of an uptrend
• If a stock rallies on bad news, the negative information is likely already priced in

Market behavior:

• Markets tend to over-discount identified risks and under-discount unidentified risks
• If everyone is talking about something, it's already priced into the market
• The stock market is rarely rational; pay attention to when sentiment flips

Driving factors:

• Short-term price trends: Momentum and short-term supply/demand of shares
• Medium-term price trends: Earnings growth
• Long-term price trends: Business, social, and economic trends

Remember, to make money in trading, you need to skate to where the puck is going to be, not where it has been.

5. Navigate Bear Markets with Caution and Opportunity

A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful.

Bear market indicators:

• Many stocks' 50-day moving averages crossing below their 200-day moving averages
• Major stock indices (SPY, QQQ, DIA, and IWM) seeing their 50-day moving averages cross below their 200-day moving averages

Strategies for bear markets:

• Exit long positions when a stock's 50-day moving average crosses below its 200-day moving average
• Consider shorting stocks with slowing revenue growth and high P/E ratios
• Switch from trading to value investing, looking for undervalued stocks

Remember, the easiest time to buy a great business at a great price is during a bear market. Look for blue-chip stocks with P/E ratios of 15 or less and dividend yields approaching or exceeding 4%.

6. Run Your Trading Like a Business

To be successful, you need to learn how to run your trading like a business.

Essential components:

1. Proper equipment: Good computer, fast internet, comfortable workspace
2. Trader education: Invest in books, courses, and continuous learning
3. Trading edge: Develop a unique approach that gives you an advantage
4. Trading plan: Define entry signals, exit signals, stop losses, and position sizing

Key business practices:

• Keep a trading journal
• Review past trades to learn from mistakes
• Reduce position size when losing, increase when winning (within limits)
• Focus on playing great defense rather than great offense

Remember, good trading should consist of more watching than trading. When there are no attractive set-ups, do nothing. But when opportunities arise, channel all your time and energy towards trading.

7. Use Stop Losses and Profit Targets Effectively

Never let a losing trade get out of hand. Nip it in the bud while it is still a small loss. A large loss may put you out of the game for good.

Types of stop losses:

1. Initial stop loss: Set before entering a trade
2. Trailing stop: Moves up as the stock price increases
3. Time stop loss: Exits trade if stock doesn't move within a specified timeframe

Profit targets:

• For trend following: Wait until the trend reverses
• For parabolic moves: Consider scaling out gradually
• For mean reversion trades: Set target at the middle Bollinger Band

Key principles:

• Never risk more than 1% to 2% of your capital on a single trade
• Honor your stop losses religiously
• Don't enter stop orders directly into the market; use mental stops instead

Remember, 90% of your profits will come from 10% of your trades. Focus on controlling losses and letting your winners run.

8. Start Small, Learn Continuously, and Build Wealth Gradually

Learning to trade is a marathon, not a sprint. Be patient with yourself, and give yourself the time to master one set-up or strategy before you move on to the next one. Slow and steady wins this race.

Path to success:

1. Start with very small positions
2. Increase position size gradually as capital and confidence grow
3. Focus on mastering one strategy at a time
4. Invest in continuous education

Key principles:

• Trading is a skill that can be learned through practice and study
• The biggest hurdle is the failure to start; the second is the failure to continue
• Real-world experience is crucial, but should be combined with ongoing education

Remember, the best investment you can make is in your own trader education. To become an earning machine, you must first become a learning machine.

Last updated: November 19, 2024