Brad’s Note: Making money in the markets isn’t about jumping in and out of the latest trends. Most of the time, all you need to do is have patience.
Through my years of investing experience, I’ve learned that scoring only one or two big wins generally won’t change your life – even if you manage to get everything right. But small gains can be powerful, as long as you can repeat them.
In today’s guest essay from our colleague Larry Benedict, he’ll share how this philosophy serves him well even when it comes to trading.
By Larry Benedict, Editor, Trading With Larry Benedict
Most of us have seen interviews where an eager host peppers a hedge fund manager or analyst with questions.
Is the market too expensive and headed for a fall?
When will this sector or stock rally?
How will the market react to the next big event?
The hosts know their viewers eagerly want to know (and trade) the hottest stock or sector that could pull in massive profits.
However, by focusing on the next big move, viewers often miss out on a lot of market action… and potentially lots of profits.
Just Find the Next Trade
While some markets run hot, others do very little at all… Often they’ll trade sideways in a range between price levels.
But don’t be fooled – a sideways market can provide lots of trades, too.
In fact, rather than going for big swings like other traders do, my focus is on the sideways markets.
My goal is simply to generate lots of tiny profits. By doing this regularly, these smaller profits can add up to something much bigger.
It’s actually how I built myself up as a trader.
Instead of forming a view about a sector or the broader market, I simply focused on finding the next trade.
In other words, my only “view” was about the potential success of that next trade.
If you want to make it as a trader, I can’t emphasize enough how important this distinction is.
For example, even if a share price is trending down, I look to trade any short-term bounce that goes against the overall downtrend. And vice versa.
By doing so, you can use your capital much more efficiently to generate healthy returns.
So, instead of going for one trade and hoping for a 100% return – which will have less chance of paying off – I focus on trying to generate multiple 10% returns.
While that might seem like “chump change” compared to a multidigit return, there’s a much higher chance of achieving it.
Do that a handful of times in one market over a year, and each 10% return soon jumps up to something much more exciting…
Do that across multiple stocks or sectors, and those returns grow even more. It’s this simple approach you need to consider when trading.
Substantial Profits Over Time
When starting out, so many traders keep looking for the next big thing.
I know that’s what I did… and it cost me my trading account several times over.
However, once I figured out how to trade by aiming for lots of little profits, I was able to swing things around.
Not only did my account grow, but it also launched my career as a professional trader.
For those who like to hold “views” on a stock or sector, what they are really talking about is capturing long-term trends.
And for traders with lots of time and capital, it might be the right way to go.
But by scoping out lots of little trades every week (or every day), you’ll build up substantial profits over time.
More importantly, you’ll develop the habits that’ll truly enable you to make it as a trader.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict