It’s a numbers game: your system should be good enough to have room for big wins, and cut many smaller losers/stop many break evens/ stop many small winners. The hardest part of professional speculation is waiting around for the big trends to develop that make the most money over time. This is the part that takes up the most work- planning, preparation, analyzing, and sitting around and waiting. These trends are usually sectors where all the stocks trend higher with several leaders that go up more with less severe pullbacks.

Figuring out your system is a personal process of trial and error. It’s the most confusing part of speculation. Everyone trades differently, and all beginners/ hobbyist traders fall into the trap of the “guru.” Eliminating news letters and alert services after a year is the best way to get into your own system.

My system consists of either a technical scan or a fundamental scan and working the other way. So if I start with a technical screen, then I move on to the fundamentals- usually growth if I start with technicals. So I am just looking for stocks in a wedge break out or a touchdown at support in an uptrend. It’s best if all moving averages are stacked one on top of the other, but sometimes a stock from a base where the 50dma crosses above the 200dma, then the stock stays above the 200dma while the 50dma trends higher is a good start of a long term trend higher. If fundamentals is the starting point, it will either be a value or growth screen. Value stocks will likely be in a down trend, so I wait for a technical signal that the stock is moving higher before buying. This takes longer because you get lots of clues/ false signals that don’t work right away. There is lots of buying and stopping out for these stocks. The ones that don’t get stopped out right away are the good trades. It is tough to hold on to these long enough to get all the move. I never get all the snap back move from a value stock. I get into a lot of snap back moves on these but I haven’t quite gotten a consistent process for getting more 50% of the move. On growth screen, the stock has to be in an uptrend or base. Bill O’Neil has the best criteria for bases and growth screen so I just approximately use his criteria for both the growth and basing patterns. Then once I have found my candidates from the screen, I plan out what I need to see in order to buy: either a touchdown at support, or break out from a wedge and these two patterns are really the only things my system consistently gets right (other patterns like H&S or flag break outs or volatility squeezes just don’t seem to be consistent for me because placing relevant stops on these patters is harder for me). Stops are crucial after I identify my pattern because I am really just speculating that the pattern I know will play out. If it starts to not work, I have to just let it go. Being automatic about trading takes out the emotion and makes losing and winning easier.

I find that basically every time I arbitrarily move my stop up or decide to sell based on something other than price action (usually narrative surrounding a stock or sector) I will sell what could have been a good, quick win that puts thousands of points on my P&L. So in other words, not being automatic costs me lots of points. And on the few times selling prematurely because I don’t like the way a stock is acting prevents me from taking a little more of a loss, the amount saved is not worth the amount on which is missed to justify using gut feel as a strategy for stops. I am convinced that a good, relevant stop would be far better.