NO ONE TRULY KNOWS EXACTLY HOW A STOCK IS GOING TO PERFORM
There are several forces that effect stock performance but in the end, stock prices are the product of human reaction to real or perceived changes in the marketplace. “Experts” continuously analyze the market and attempt to predict the direction of a stock, even though much of what affects stock movement can be irrational or unpredictable. It’s why these “experts” consistently disagree on the direction of specific stocks on the market as a whole, virtually every day.
STOCKS TEND TO MOVE IN REPEATING PATTERNS
While stock performance is not always rational and can appear to be chaotic at times, many stocks tend to perform in identifiable patterns. These patterns provide great opportunity. However, if historical performance tells us anything, while patterns repeat frequently, they won’t repeat 100% of the time. As a result, losses can and will occur, but there are 2 steps that can be critical to reducing this risk and protecting returns.
REDUCE RISK OF LOSS
While instituting an investment system that takes advantage of identifiable stock patterns increases the probability of success, acknowledging the presence of risk is the first step in avoiding it. By maintaining a portfolio of several stocks across multiple market sectors, the investor reduces the potential negative effect a single stock can have, or a single industry can have.
To further reduce the negative effects of a stock performing contrary to expected, stop loss orders can be strategically placed to eliminate exposure to large losses.
These principles are the bedrock of the Stock Trend Spotter investment system.