Trading Rules

Stock Trading is that simple...;-)

Right from the start we want to introduce three simple, but also important rules you should stick to when you finally decided to become an investor or a trader. Or let's better say we get to know some basic rules which an investor should have at least heard once.

Basic rule number 1: "Let your profits do the work & limit your losses!"
Basic rule number 2: "Never speculate against the current trend, but with it!"
Basic rule number 3: "Do the exact contrary to what the majority of people does!",...

...even though this rule just applies for turning points in the market, while it is more recommendable
to follow the trend inbetween such turning points.

"Bull markets are born of pessimism, grow on skepticism, mature on optimism and die on euphoria."
- Sir John Templeton -

But let us start at the very beginning...

The Stock exchange is a trading place where different goods get traded (e.g. stocks)
The broker acts as middleman of a transaction between buyer and seller.

To get a deal, at least two parties are neceassary - the one that buys and the one that sells.
If one partie is missing, no deal is accomplished.

To come to a conclusion one can say:

If there is a buyer, there must be a seller as well
If there is a seller, there must be a buyer.

Logically, a deal/trade is always a zero-sum equation
1 stock + (-1 stock)= 0
(to be able to put it in one portfolio,you have got to take it from another one)

One can describe the whole thing in a different way as well...
When it comes to a deal/trade there are always two different attitudes that hit upon each other:
-The buyer expects a future rise in the price of the stock
-The seller expects a future decline in the stock price

...or metaphorically speaking:
-The buyer hopes to find a dummie who's willing to give away his shares
-The seller hopes to find a dummie who's willing to assume his shares

Finding an answer to the question "who will eventually be the dumb dude..? is not easy, and in most cases we just get to know the answer long time later.

There's an old quote which was mainly known and used by horse dealers, saying..

"Everyday a dumb person gets up, one just gotta find him"

But who exactely are buyers and sellers now?
Broadly speaking, there are two groups of people which "meet" on the Stock Exchange. On the one hand it's private investors (like me and you) and on the other hand there's the so-called institutional investor (like insurance companies, investment companies, banks, retirement income insurances,a.s.o.).
A private investor speculates and acts on his own behalf.Contrary to him, institutions manage private investors' money (pensions,insurances and funds) or they do investments with the purpose to make their own company grow in value.

Somebody once said:
"The small shareholder is the canon fodder of stock trading"

We know from the previous paragraph that the stock exchange is a place where two groups of people meet, the buyers and the sellers, the losers and the winners. When somebody makes profits there's another one who makes losses. Naturally every investor wants to belong to the group of winners but theoretically everybody only has a fifty-fifty chance. In reality it lookes a bit different, because of the fact that the majority of private investors is on the wrong side (e.g. times of the new market, internet bubble). To maintain this ratio from "the others' perspective" and not to leave anything to chance, THEY necessarily have to produce something!
Which is...?

Right: LOSERS

How do you produce losers?
Late-breaking information and the appropriate method to deal with them are essential for successful trading and deciding on victory or defeat, profit or loss.
If every investor receives the same piece of information about a certain stock at the same time, everybody had the same intentions to purchase or sell. That would eventually mean that only buyers exist and no sellers (and vice versa) and consequentely no deal would be accomplished.
This indicates, true to the motto "Somebodys' loss is somebody' elses profit" that the ones which always belong to the group of winners are a bit more intelligent compared to the others, or at least able to set them on the wrong track.

"Stock Trading only depends on whether there exist more shares than idiots or more idiots than shares"
- Andre Kostolany -

The private investors' knowledge and information procurement

On the basis of our assumption shall be investigated which sources of information an investor can use "to invest" his money profitably.

It would therefore be advisable to consider the following possibilities:

-information in print media (journals & magazines)
-information from the media in general (Radio & TV)
-information from experts (banks advisors, analysts, gurus, insiders & market newsletters)
-information from the company itself (quarterly reports, ad-hoc messages)
-Miscellaneous information (personal research, internet, friends & relatives,chart analysis,...)

At first glance the investors can chose of multiple sources, get information and eventually make a decision. At second glance it gets a bit more difficult...

...the press

Journals or magazine-publishing houses mainly finance themselves with advertisment. And we are not talking about small ads, but of full-page ads and inserts.Specifically flicking through a magazine one will be surprised about how many of these inserts can be found.
On the one hand a publication must find a lot of buyers, to be in turn able to achieve big profits from ads. The quality or the sense of the content is just of secondary importance while it is much more necessary to sell a big number of copies. In this game there is a loser, which is the sober truth, and a winner, which is the factitious fool's paradise which everybody can take by assault.

Are you ready for a tiny example? Imagine a company wants to be listed on the stock exchange and a magazine reports on the company or the market segment in a negative way. Which investor would then be willing to buy shares of the company and which potential advertisers would like to place their ads?

An investor who has a negative attitude towards a company sells his shares or keeps them, at the best. When the stock price is declining and the book-losses or real losses appear, the disposition to invest money decreases. And it's not only the banks who make money out of charges, credit default swaps (CDS) and newly issued stocks (stocks, bonds), who take notice of this decreasing willingness to invest, but the retail sector, as well. You can tell that there is no investor who is inclined to consume much, when his bank account is deep in the red and his mood is at rock bottom.
The boomerang comes back, the ads in the magazines puff out and with them interest in the actual publication. Definitly a vicious circle!.

There's only one remedy: Pure optimism!

Because of this decisive reason we mainly get to read positive reports, buy recommendations and hardly any pessimistic or realistic opinions in market newsletters or stock trading magazines. An objective analysis of the market is almost impossible and very often not wanted on behalf of the journals commercial interest.

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