By Sam Evans, Co-Founder & Lead Coach
The world has changed in many ways over the last 50 years. Yet, in the world of retail trading and investing it seems like the messages today remain the same. A few weeks ago, in my last article, I discussed the misconceptions that amateur investors (and seasoned investors) have regarding a rising stock market. That being the increasing risk and decreasing rate of return that comes with it. For a recap on that, please check here. Many of the problems we discussed in that newsletter stem from the traditional concepts of “Buy and Hold” style investing. A process drilled into the minds of speculators, starting from the post-great-depression era through to this very day.
Again, I will stress that I am not here to dismiss and completely write-off the buy and hold approach. For some, it offers a hands-off and passive methodology that typically suits the well-funded and higher net worth individuals. However, the market has changed a lot since even the baby boomer generation. For most, the old ways are not enough to hit the financial goals for safety, security, and solid lifetime wealth. There are plenty of obstacles to overcome for anyone starting out on their investing journey. In fact, too many to list in just one article, but there are common pitfalls that I see time and time again, including:
- Finding a “quality” stock to invest in or trade
- Not having enough capital to utilize in the market
- Ignoring the importance of timing their entry into a position
Let us take deeper dive into each individually. I think you will find the way we can overcome them is simpler than you may initially think.
Finding a “quality” stock to invest in or trade
One of the most common questions I am asked is, “how do you find what stocks to trade?”. Each time I have answered the question with the same answer. It simply depends on my goals and style of speculation. The choice of potential trading opportunities in the world of stocks is overwhelming for even the most seasoned investors. Finding the “right” stock becomes almost a fool’s errand, considering just how much choice there is.
The S&P Index alone has 500 individual companies to choose from, let alone the 2000 companies which makes up the Russell Index. Take this wide degree of choice and then accompanying fundamental research on each company that we are encouraged to do, and the task of finding that next great opportunity is harder still. You will likely spend more time trying to find a stock than trading it.
I have always found it easier to focus on a shorter watchlist of stocks and look at those alone. This offers us a way to get to know the characteristics of individual assets. We can understand their specific data, and recognize the forces which drive them. Then we can become laser-guided in our focus by adopting a less is more attitude. As a short-term trader, I will trade no more than two vehicles, and for longer-term, up to maybe a dozen. With volatility on the rise, there is more than enough movement in each market to warrant this approach.
Having enough capital to utilize in the market
The low capital dilemma is an issue not helped with the constant rise in stock prices over the last decade. As popular stocks like the FAANG group (Facebook, Amazon, Apple, Netflix, and Google) continue their rise with stock prices into the high three and four digit ranges, most amateur investors are priced out of the market before they even begin. Even the more affordable and reliable stocks like Disney are trading around $130 per share. To invest in a significant position size of 500 shares would require a cash outlay of $65,000. Most people do not have this amount of spare cash lying around. Plus, as we discussed in the last article, as the cost of the assets go up, our risk also goes up, and the potential return starts to diminish over time.
The key is to explore leveraged tools like Futures, Forex, and Options. They give you a greater level of buying power, potentially reduced risk, and require far less capital to start with. Some accounts can be funded with as little as $2000. Leverage can be high risk if you don’t know what you are doing. However, if you learn how to protect yourself the right way, it can offer lower risk than using a cash account.
We hold regular one-day market immersion classes, which teach you how to use leverage responsibly. For my shorter duration trading, I like to make use of the Futures markets to get the best use of my cash. I primarily focus on markets like the Dow Jones and Russell 2000 Indexes. Using Futures, they can be traded just like a stock and give us a piece of every stock as a whole product. This offers simplicity in our selection process as we can trade the whole market as a single vehicle.
The importance of timing your entry into a position
Finally, there is the question of timing. As is often the case, amateur investors are told by the media and most advisors to buy based on news and data, understand the economic picture, and go with market strength. Overall, this usually leads to most speculators buying high as the price goes up, reacting emotionally to news they read, and then bailing on the positions when they are not working, typically just before the turn in their favor without them.
Timing is critical, and if you fail to learn a solid buy low, sell high methodology, you are likely to increase risk and decrease your chances of success in your positions. Patience to wait for an entry and discipline to follow rules are two of the most vital components to market speculation, hands down.
A great example of waiting for the right entry
Take this recent setup from one of our many Guided Trade Sessions (GTS), where we were looking to buy the Down Jones futures (YM) at a pre-determined price, with a pre-determined risk:
In this live session, I explained to the students how we wanted the YM to clear through the upper area before coming lower to a price of 27,366. This is where we would be buyers. If wrong and the YM went lower, we would exit for a small loss around 27,312. Our targets were the upper level and beyond, as we were expecting the trend to go higher. Later that day, the trade triggered and played out accordingly:
After hitting the upper zone, we saw price come down for a better, lower entry with reduced risk where we could buy low, allowing a better potential reward and low risk if it had failed to work out. The risk was around 60 points for a reward, at the time of writing, of around 600. An ideal risk to reward profile.
In this example, from our live GTS, we managed to overcome all the obstacles we highlighted at the start of this article. We used the Dow Jones to trade, rather than search for a stock. We used leverage, which allowed us to trade the Dow with less than $1000 per contract. Finally, we used real timing and rules to maximize our potential gains, while at the same time reducing our potential risk. There is always another way to approach your investing. It just takes another way of thinking to embrace it. As always, I hope this was helpful to you.
Be well and take care,