It’s very difficult to buy stocks these days and lose money. But, this short guide will show you how to trade stocks in a bull market and still lose money. Hopefully, you heed the advice and go against it so that you can make money in the stock market.
With the Dow now hovering above 23,000 and the S&P above 2,500 at all time highs, it’s very easy to get caught up in the frenzy and simply buy everything. You can disregard technical and fundamental analysis altogether and come out at profit (eventually). You don’t even have to look at the news to see where the hype is gathering, all you have to do is buy.
That kind of thinking creates a trap.
This market appears to relentlessly push higher and higher leaving everyone who didn’t get in a month ago with limited choice and a lot of questions. Should I buy Netflix ($NFLX) now at $200 per share? How about Amazon ($AMZN) at $1,010 per share? Just a little over two years ago Amazon was trading at around $550 per share. Many speculators think these are undervalued stocks.
With the pace of the market pushing prices at all-time highs, traditional measurements to rate of return like the Rule of 72 almost becomes obsolete. The rule of 72 is basically a shortcut to determine the number of years a stock (or financial instrument) would take to double your money. The calculation is simple, you take 72 and divide it by the annual rate of return. For example, 72/10% = 7.2 years.
With an annual rate of return in the stock market of 10% it would take 7.2 years for you to double your money. That’s a much better return than what the bank can offer you (albeit, there is no risk of loss).
What you simply lose when saving money in a bank is TIME. It would take you much much more time to earn a meaningful rate of return from you bank than it would in the stock market. This is why you should ALWAYS invest in the stock market.
The mistakes I’m making in the stock market recently are fueled by one or two things.
The first is that the market indices show a never-ending upside to price so the general sentiment is bullish. This affects my psychology when entering a trade believing that prices will continue going up regardless of what is happening. The other is historic prices are influencing my current decisions thinking that buying on a dip ensures you get in at a lower price.
Take a look at Sorrento Therapeutics ($SRNE).
I placed a long buy trade on this stock on October 11th at $3.50 per share after two days of very strong momentum. Unfortunately, the price hasn’t touched above $3.50 other than after-hours.
This shows a great example of shortsighted thinking and how you shouldn’t risk more than 10% of your total portfolio on chasing momentum stocks. In two years, who knows where Sorrento Therapeutics will be, perhaps they’ll be acquired. No one knows, but for now, I’ll be holding on to this stock and maybe I can sell it at a profit in two or three years down the road.
$ARDM was bought after it broke out of its trading range of around $1.50 – $2.00 per share. In a little under a month it’s now trading above $5.00 representing a 400% return on investment.
Aradigm Corp could be headed back to its previous trading range of around $7.5 per share three years ago. But, what is driving the price higher these days? Nothing but speculation. It’s a purely technical trade.
By the way, If you’re interested in learning how to trade profitably on just candlestick patterns (like shown above), take a look at Stephen W. Bigalow’s Profitable Candlestick Trading book here. It’s a book filled with examples and it will show you how to spot patterns like the one used to find trading opportunities in $ARDM.
In the examples above, I’ve shown you how to lose money by chasing potential momentum plays, I have also shown you how spot profitable momentum stocks. In a sideways moving market, you would want to add 3x ETFs to your portfolio to balance things out. In addition to momentum trading (using technical analysis studies like SMA) and 3x ETF, you would want to add another component to your portfolio.
It’s often overlooked, but the importance of generating cash flow through dividend stocks is paramount to your overall portfolio profitability.