How To Develop Your Trading Brain

How To Beat The Stock Market: Try These Seven Mental Trading Tips By Investors Business Daily

Investors appear to have a tough time outperforming the stock market indexes in 2021.

A July 22 poll held on that day’s IBD Live show suggests this. Just 17% of respondents said they’ve logged a 15% gain or more since Jan. 1. Pros are lagging. The IBD Mutual Fund Index, up 12.3% year to date on Wednesday, trails the S&P 500 by almost 5 percentage points.

Through Friday, the IBD Mutual Fund Index stretched its gain since Jan. 1 to 17.1%. Not shabby at all.

Yet that still chases the tail of the 500, now up 20.7%, excluding dividends.

Indeed, numerous companies with real CAN SLIM chops have flourished so far this year. Yet it’s easy to get knocked around by market volatility. Sector rotation in 2021? Fast and furious. Plus, hey we’re human. It’s difficult to follow every key rule all the time.

Yet the golden rule applies in any kind of market. If you don’t cut losses short, you decide to forgo any portfolio insurance. A string of winners can get wiped out by a few losses in the 20%-to-40% range or more. How can you make better, more consistent gains? How do champion investors deliver outstanding returns?

Seven Stock Market Tips To Consider

Tip 1: Be brutally honest with your trades. David Ryan, IBD Live panelist and three-time winner of the U.S. Investing Championships in stocks, learned greatly from the mistakes made early in his investing career, right after posting a 100%-plus gain over a one-year period in 1982 to 1983. “From 1983 to 1984, I lost it all back and more. I sat down one weekend and I found what I was doing was buying too many extended stocks. I was getting chopped up,” he noted.

Tip 2: Be choosy with each stock. Ryan spent more than two decades as a professional money manager at William O’Neil + Co. and his former hedge fund Rustic Canyon Partners. After studying his losing trades, “I came to this decision, I’m just going to do one thing, and one thing correctly. I’m only going to buy breakouts that are absolutely perfect,” he said on the show in June. “Anything else that is extended, or not a perfect setup, I’m going to avoid. And that’s when I really started turning around my performance.”

Focus, Focus, Focus

Tip 3: Don’t be a jack of all trades. Mark Minervini, also a U.S. Investing Championships winner and author of “Trade Like A Stock Market Wizard,” noted on the July 14 IBD Live show how it can be tempting to switch gears when the market doesn’t favor your core strategy. Don’t do it. “You must learn to sacrifice in order to specialize. Do not change your philosophy,” Minervini said. He emphasizes staying in cash when the likelihood of making good trades is low. “There are two types of markets: an easy dollar or a hard penny.”

Tip 4: Understand how raw emotions affect your decisions, such as the urge to grab small, short-term profits. “When a stock falls 8% below your cost and you’re losing money, you hope it’ll go back up. But you really should be fearing that you might lose more money,” William O’Neil, founder of IBD, noted in “24 Essential Lessons for Investment Success.” “When a stock goes up in price and you’re making money, you fear you might lose your profit. So you sell too soon. But the fact that the stock is going up is actually a sign of strength and an indication that you may be right.”

Fewer Opinions, More Facts

Tip 5: Invest with an open mind. Sir John Templeton, the legendary global investor, is quoted in Don Hodges’ “Horse Sense, Street Smarts” book of quotes as saying, “A lifetime of investment research has taught me to become more and more humble about making predictions.”

Tip 6: Study the best winners. Make history your investing edge. “You wouldn’t go and study the losers in the Olympics, all the people who lost, and say, ‘What should I not do?’,” Minervini said. “You’d study the guy who won gold. I want to see the gold, silver and bronze medalists to see what they did, and get very specific on those few things that are really important to master. There’s only a few things to do correctly and a million ways to do it wrong.”

Tip 7: Don’t let ego or pride stop you from buying back a great stock, even if it shook you out. The biggest stock market winners give multiple entry points. The stock market will never know if you buy it a second time or third. Nor will it care.