Amateurs, called retail by the professionals to not give the game away, tend to buy stocks at a high price only to see these stocks fall almost the second they bought the stocks. Then the stock tends to fall for longer than the amateur can deal with the pain and the stress of the financial loss. Then the amateur sells the stock at what turns out to be the bottom after which the price quickly recovers and goes on to make new highs. This scenario is even worse if the stock first goes up a bit before dropping as lost paper profits hurt much more than a straight loss.
How is that possible? Well, for one the professional can actually see all the moves that the amateur makes. Second, because the amateur acts either too rational or too stupid per command $9. Third, because the amateur lacked scenario planning (command $4), fails to calculate probabilities (command $5) and follows the wrong trading strategy.
In general there are only two successful trading strategies:
- Be exposed to risk as little as possible. This enables you to take profit as fast as possible without running too much risk. This is basically day trading. Our day trading strategy makes twice as much profit if it makes a profit than that it loses if it makes a loss. And 2 out of 3 trades are winners. This is possible because by day trading you expose yourself as little as possible to risks.
- Be exposed to risk as long as possible. While using this strategy you have to suffer through all the downturns, but because you also reap all the opportunities the market has, in the end you make a good size profit. This is basically a buy and hold strategy. This has been successful in the last 120 years. Yet, buy and hold strategies do suffer from some issues. One: 120 years looks like a lot of data, but really isn’t. Two: buy & hold tend to do well for a decade only to do badly the next decade. The previous decade has been wonderful to buy & hold, so the risk is that the coming decade will be less good. Three: circumstances change. While the indices did well in the past 120 years only 2 companies of the original Dow 30 remain in the Dow. For that reason we have developed a buy & hold strategy that also uses puts & calls to profit in times that the market does badly.