Prices change before Fundamentals change
The stock market is a discounting mechanism that looks 3 to 6 months ahead into the future. This is why prices will often change before fundamentals change.
Prices don’t change when fundamentals change. Prices change when Expectations and Perceptions change and they could change for various reasons. From a trend follower’s perspective, the main indicator that signals change in expectations is price.
Cut out of Winners too soon
Anybody could buy a stock and identify a new trend. Most people’s investing problems come from not being able to sit on their hands when they are right. Very few hold their winners long enough to make a difference in their returns.
Being wrong is not a choice. Staying wrong is.
If you don’t know why you bought a stock, you won’t know when to exit. If price action was the main reason you bought a stock, price action should be the reason to sell it. It is good to have conviction in your picks, but discipline should always prevail.
I have accepted that I won’t be right every time and I have learned to live with it. Being wrong is not a choice. Staying wrong is.
There are 2 major ways to consistently make money in the market:
Hunt for several huge winners in a year. Build large positions in them and ride them for monstrous gains.
Hunt for hundreds of 5% to 30% short-term winners, where the goal is to compound capital quickly by actively moving in and out of them.
There are 4 different types of markets and each of them requires a different approach.
In rising markets, I buy breakouts and in anticipation of a breakout in stocks with hot price and industry momentum and recent IPOs.
During range-bound, choppy markets, I trade less and with smaller size, focusing on the industries that are showing clear relative strength or weakness. If there are no such industries, I stay in cash.
During corrections, I like to keep a large cash position (over 50%). If I trade, I focus on volatility and leveraged inverse ETFs. Correlations go to 1.00 during downtrends, therefore stock picking almost doesn’t matter and sticking to a few liquid ETFs makes sense.
When I see signs of bottoming (momentum divergences), then I look for mean-reversion trades, especially in severely beaten stocks with huge short interest – those could quickly go up 30% to 200% during market recoveries.