Most of the stock go up and down with the general market direction. If you buy share when the general market direction is starting to bottom out, you can make a profit much easier. It is hard to make a profit if you buy share when the general market direction is going down, particularly at the first stage of the bear market. If you wait too long to enter when the bull market start to emerge, the amount of profit you can make will be reduced. If you are a speculator, it will be a different story.
Nobody can pick a profitable stock all the time. In fact, if you can get one profitable stock out of two picks you are a good share trader. There are risk involved in share trading. There are method you can minimize the risk. Timing of buying is the first and important step in controlling the risk. Diversification is another method to minimize the risk. You must be alert of any risk that can happen, particularly if you are a speculator.
The best time to buy share for longer-term profit is when the bull market start to emerge after the bear market hit the bottom. But it is not easy to detect when the bear market has hit the bottom. You might be wrong and enter too early. If you do not want to take the risk, wait until the second stage of the bull market. But the amount of profit you can make will be reduced. The second stage of a bull market can be evidenced when the index rise above the 250 days moving average and stay there for some time.
There are opportunities all the time for speculation. You do not have to wait for a bull market. To make a profit in speculation, the timing of buying and selling is more important. It is harder to determine the timing. Technical analysis may help. Remember one thing, don’t put too much capital in speculation because the risk in speculation is greater.
After you have identified the general market direction, the next thing you do is to select the sector that can benefit the most from the market direction. Look for growth sector if you like your capital to gain the most as quickly as possible. Consumer staple sector or utility sector usually do not grow much in bull market. Consumer discretionary, industrial, financial, material and energy sector may grow more. But this can change if the government introduce new policy. For example, if the government decide to have health insurance coverage for all, the healthcare sector may experience a bigger growth. Technology sector may have a big growth if some kind of technology become trendy. Personal computer and internet technology was a good example. Other sectors may experience big growth too. The financial and real estate sector has experienced big growth in the last bull market.
The next thing you do is to narrow down the sector to find out which industrial group you think will grow the most. For example, if there is a good chance that there will be rapid inflation, material sector is a good bet. From the material sector, you can pick a industrial group that you think can grow the most. You may pick mining for example. From the mining industrial group, you pick the industry that you like. You may pick the gold mining industry. To diversify, it is better to pick two or more industries. Sometimes, it is better to pick two or more industrial groups. For example, you may pick both chemical and mining industrial groups. Out of the mining industrial group, you may pick gold mining and copper mining industries to benefit the most from the trend of rising prices.
Now after you have decided which industry to pick, it is time to pick the companies that you like. Please refer to our another article “Picking A Profitable Company”. To spread the risk, it is better to pick two or more companies. To better managing you stocks, it is a good idea not picking more than five companies. It is also a good idea to buy your shares lot by lot, particularly if you are not sure you are buying at the right time. Since it is not easy to detect a bull market at its early stage, this lot by lot method is always necessary if you want to enter at the early stage of a bull market to maximize the profit. The lot by lot method strategy can vary from people to people. It can also vary from economy to economy. For example, if you have ten thousand dollars you want to invest and you want to invest in two companies and the current market share price is ten dollars, then you would buy 250 shares of each company in the first lot and another 250 shares in the second lot in a different time. But if the economy is recovering very slowly you might like to divide it into three or more lots. Or if you are a beginner, buy 100 shares first to see whether the stock move according to your expectation. If it does, buy 200 shares more and so no. If you favor one company or industry more than the other, you can distribute your capital differently. For example, you can put six thousand dollars in one company and four thousand dollars in the other company. The strategy you use is based on your judgment of the economy, the company and your own situation. You do not put all your money in one deal because you might make an error. If you make an error you will be out. Capital is your tool here.
Nobody can pick a profitable company all the time. In fact, if you can get one profitable stock out of two picks on the average you are a good share trader. There is a pretty good chance that your pick do not work out. It might be the economy, the company or your judgment. The economy is never wrong. It is your wrong judgment of the economy. The strategy to use is to sell it as soon as the share price drop below your stop-loss price. No maybe. The stop-loss strategy therefore will protect profits that have already been made or prevent further losses if the share price drop. It is a good strategy to control the risk and protect your capital. You may argue that you can wait until the share price to go up again so that you don’t have to lose any money or profit. But you never know how long it will tie up your capital. The Japanese market has never recovered since 1990. Imagine how much profit you may have foregone in other profitable opportunities since 1990. If you believe the share price will go up soon, you go ahead and wait. It is your money.
If you have picked a profitable company, let the profit fly and fly and fly to the fullest extent possible. The share price may experience occasional setback due to market correction. But don’t be afraid and try to sell it. A normal rising bull market and a profitable company seldom drop more than ten percent. The only time you want to sell the shares of a truly profitable company is when a bull market cycle end where the maximum profit mature. No, you don’t want to wait until the peak come because the market can return move quickly in a day. You can make more profit if you sell it at the peak, but it is almost impossible to tell when the peak come. You will know the bull market will end soon (1) if many blue-chip stocks have price earning ratio more than 20 (2) many people speculate many third-rate stocks (3) many amateur traders like to own stock rather than cash. It is time to sell to reap your profit. There is one more chance to sell if you miss the selling point. It is time to sell if the short-term moving average drop below the long-term moving average or a lower high of your stock appear (see the graph below). If you miss both selling points, your profit will be reduced. If you wait longer, all your profit may be gone or even incur a loss.
The above technique is for longer term profit only. It is not for speculative profit. It need a full term of a bull market which might take several years for the maximum profit to mature.
One more thing, making money in share trading is a matter of knowlege. The more you know, the better your chance to make more money. Share trading is not the same as gambling where your chance of winning is less than 50% which make you must lose in the long term.
