Part 1: Ride the Market Trend
The big money is made during strong uptrends.
You always want to trade in the direction of the trend. As the old adage goes “The trend is your friend.” And it’s true. Why?
Investing is a game of probability.
Hence, you want to stack the odds in your favor.
Buying stocks during an uptrend is like sailing with the wind at your back. Everything feels easier. Moves happen faster and last longer. Progress comes with less effort. Everyone is focused on the upside.
When the wind is behind your back, even small pushes go a long way.
That's why everyone is a genius in a bull market.
It’s as simple as that.
So, how do you identify a trend?
It shouldn’t take you more than a few seconds to identify the direction of a trend.
A trend is simply the overall direction of data points in a time series.
Let’s look at an uptrend.
First, the chart goes from bottom left to top right.
Second, there is a series of higher highs and higher lows.
Of course, the reverse works too for downtrends.
To spot these trends, you can also use simple tools like trendlines or moving averages to help you identify the overall direction.
What’s important is that there are different timeframes.
The market can be going down in the short term but still be in a long term uptrend. Or it can look strong short term while the long term trend is weak.
You need to choose the timeframe that fits your strategy.
A day trader cares about hours and days. A swing trader looks at weeks. A long term investor focuses on years.
And your odds are best when all timeframes line up: Short-term, mid-term, and long-term.
Most of the time, the market is not trending. Only a small part of the time do we get clean, strong trends. The rest of the time, the market moves sideways.
Sideways markets are the most dangerous for active investors.
Because there is no clear direction. Tons of volatility. Breakouts fail. Pullbacks fail. You get chopped up. Whenever you think the market is about to go into your favor, it hits a wall and turns around.
Of course, these moves can be exploited as well, if your timeframes are shorter.
But for most doing nothing is often the best move here.
But generally, the big money is made during strong uptrends.
Why?
There are 2 main reasons for this:
First, objects in motion tend to stay in motion: When a stock is already moving up, it is more likely to keep moving up than to suddenly stop. Sentiment is positive. Everyone is only focused on the up
Second, there is typically little or no overhead supply: That means most people who own the stock are already sitting on a profit. They are not in a rush to sell. With fewer sellers, prices can move higher more easily.
However, not all trends are created equal.
Some trends are slow and steady. Others are fast and steep.
The steeper the trend, the stronger it looks. But there is a tradeoff.
Fast moves are more fragile. When price runs up too quickly, it can get stretched. That makes it more vulnerable to sharp pullbacks or sudden reversals.
So strong trends are powerful, but they also need respect.
The goal is to ride them while they last. Nothing lasts forever.
Part 2: Focus on Leading Sectors
After identifying the general market trend, you want to look for the leading sectors.
Why this matters is easy to understand.
Investing is a game of odds. You want as many things working for you as possible.
Ask yourself this. Would you buy shares of a newspaper company today? Probably not. Very few people read physical newspapers anymore. Everything is online.
Instead of a growing market, you have a shrinking one. Naturally, demand goes down. It becomes harder to find and keep customers. Keeping good employees gets harder too. Employees are less likely to join an old, stagnant industry.
Those are natural headwinds.
Now look at the opposite.
AI is one of the strongest sectors right now.
Everyone wants to work in AI. It has a natural pull. Talent, capital, and attention all flow in the same direction. It becomes much easier to grow.
A leading industry is like a rising tide that lifts all boats. Not everyone benefits equally, but the overall direction matters.
Ideally, you want the entire industry to do well. If all companies are down except for one, it’s often a sign that the industry has peaked or is about to decline.
Of course, no trend lasts forever.
Some industry trends last decades, some only days. The key is to be positioned in the mega trend.
Mega trends are long-term shifts that reshape industries. Think railroads, the internet, mobile, and now AI.
Boom and bust trends are short-lived spikes followed by sharp declines. Examples include SPACs and meme stocks.
Cyclical trends move in waves tied to the economy. Oil and gas are a good example, rising and falling with demand and economic growth.
Part 3: Buy the Leader Out of a Base
Once you’ve identified the overall trend and the leading sector, you want to buy the leading company.
The reason is simple.
Most people want the best. That is just human nature.
Look at sports. Everyone talks about the World Cup winner or the Olympic gold medalist. News headlines, interviews, sponsors, and history books all focus on 1st place. Very few people remember who finished 2nd. The winners get all of the attention, money, and status.
Quick example: Who’s the fastest man on earth? Usain Bolt. Who is the second fastest? Most people have no idea (me included).
And the fact is, Usain isn’t that much faster than second place. But nobody really cares about second place either. It’s all about the best, the fastest, the winner.
The same thing happens in business and investing.
Winners get most of the attention. They attract more customers, more talent, and more capital. Success feeds on itself. Being number 1 makes it easier to stay number 1.
For companies, that means your products are compared to the rest. Employees want to work for the best. Investors want to invest in the best, not the second best. This advantage may look small at first. But small advantages add up and compound over time.
That’s why winners keep winning.
Every industry has a market leader:
Apple for smartphones. Google for search. OpenAI for LLMs. TSMC for fabs. Nvidia for GPUs, and so on.
The leader has a huge lead over the rest of the industry.
What makes a market leader?
Large and growing market share
Fast revenue and earnings growth
Strong brand
Constant innovation
Top tier founder (team)
When do you buy the leader?
You want to buy when the market is in an uptrend and the stock is breaking out of a base.
The reason is simple. Investing is risky. A lot can go wrong. You cannot remove risk, but you can reduce it.
There are a few ways to do that:
Do your research
Be in a market uptrend
Focus on strong companies
Buy at the right time
Timing matters more than most people think.
Buying at the right time lowers your risk when you enter. It also gives you a clear line for when things go wrong. If the stock falls well below your entry or key support, that is your signal to step back or cut the loss.
A good entry helps define your exit. And having a clear exit is critical for managing risk.
Buying a stock as it comes out of a base is usually less risky. A base is just a period where the stock moves sideways and rests. It builds energy. When it breaks out, the trend is on your side. Momentum turns up. There is less selling pressure above. That makes it easier for the stock to move higher.
You are not guessing. You are reacting to strength. And that is how you stack the odds in your favor.
Now, there are several different types of bases. Some of the most common ones are:
Cup & Handle
Flat Bases
Double Bottoms
Inverse Head & Shoulders.
These patterns usually show up at the early stages of a new move or trend.
When a stock has already moved up and then pauses, those bases are called continuation patterns. They are just short breaks before the trend continues.
The most common ones are flags and triangles.
On top of that, you can control how much risk you take.
When a stock breaks out, 3 things can happen:
It keeps trending higher
It pulls back and retests the breakout area
It fails and traps early buyers
Breakouts do not always work. The failure rate can be high.
You need to get comfortable being wrong. A lot.
Most failures happen because the market is weak, the stock was not a true leader, or big institutions are selling.
That is why risk management matters so much.
You always have to plan for the worst case. You must limit the downside. There needs to be a clear cutoff point. Period.
Taking losses is hard. Nobody likes to admit they are wrong. But refusing to take small losses is exactly how small problems turn into big ones.
Most big losses start small. They get big because people wait, hoping to get out at break even.
Remember this.
You can always buy the stock back if it turns around.
Protecting your downside is what keeps you in the game.
That’s why it’s so important to stack the odds in your favor.
One more tip. Watch volume.
Breakouts with high volume are stronger. They are less prone to failure. High volume means large investors are buying. And large investors leave footprints.
It's hard for the big players to hide their steps. They can't buy their entire position all at once. They need to accumulate over time.
Bonus Tip: You can check the leading stocks
Part 4: Let Your Winners Run
Fundamentally, investing is all about making more than you lose.
Nothing else matters.
This is what so many investors get wrong. They think success comes from finding cheap stocks or chasing the hottest names. P/E ratios, moving averages, moats, and business models are only a piece of the puzzle. All of that can help. But none of it guarantees success by itself.
What really matters is this.
How much do you make when you are right? How much do you lose when you are wrong?
This applies to day traders and long term investors alike. The only real difference between them is the timeframe. The principle stays the same.
The important lesson here is that you will be wrong. A lot.
Investing is a game of probabilities.
Even if you think it can’t go lower because it’s so cheap, or it has to go higher because all the fundamentals are going up speak for it, you will still be wrong.
A good rule of thumb is to assume you are right at best 50% of the time.
Think about sports. Michael Jordan missed about half of his shots. And he is still considered the greatest ever. You do not need to be right all the time to win big.
Even in great markets, this happens.
In tougher markets, it gets worse. Sometimes you are right only 30% of the time.
That is normal.
Mistakes are not failure. They are part of the process.
Once you accept that, everything changes. Your focus shifts from being right to managing outcomes.
This simple table makes it very clear.
This shows the link between win rate and the risk reward ratio.
Let us assume you are right only 30% of the time.
In that case, your winners need to be more than 2 times bigger than your losses just to break even. To actually make money, they should be about 3 times bigger. That is when the math starts working in your favor.
The goal is to build failure into your strategy.
A 50% win rate sounds nice, but it is not realistic over long periods. Markets change. Conditions get worse. That is why your strategy should work even in a bad environment.
Starting with a 30% win rate and a 3 to 1 risk reward is a good starting point. You can adjust later. But if you do not know where to start, start here.
So what does this mean in practice?
Many investors think buy and hold means never selling. That is only half right.
You want to buy and hold winners, not losses.
You never know how far a winner will go. Sometimes it is 10%. Sometimes 20%. In rare cases, it can be 100% or more. Of course, you want to get out, if your thesis breaks or it the fundamentals or technicals deteriorate. But let your winners run as long as possible.
In order to know when to cut your losses you need to calculate your average gain. Let's say your average gain is around 30%, then to keep a 3 to 1 risk reward, your average loss should be around 10%.
There are many ways to do this. You can adjust position size. Or you can sell in steps, for example at -5%, -10%, and -15%. On average, that still keeps your loss near 10% if you sell one third each time.
The exact method does not matter as much as the principle.
Big winners pay for many small losses. Small losses protect you from disaster.
Chapter 5: Cut Your Losses Quickly
After you buy a stock, there is only 1 thing you truly control.
When you get out.
You do not control how much it goes up. You do not control when it goes up. You do not control if it goes up at all.
The only real choice you have is how much you are willing to lose.
Sometimes bad things happen. A company reports bad earnings. Bad news hits. The stock gaps down overnight. You could do everything right and still take a big hit. That is part of the game. You cannot avoid it completely.
But holding onto losses is dangerous. The longer you hold, the more damage can happen. The goal is to get out as early as possible, while still giving the stock enough room to move normally. Stocks go up and down every day. You do not want to sell just because of a tiny dip.
And yes, sometimes it gaps down, takes your stops, and then reverses higher. That happens. However, you don’t want to be in a situation where it gaps down, you wait until it recovers before getting out, but it keeps falling.
Every big loss starts as a small loss.
And the bigger the loss, the harder it is to recover.
A 10% loss needs an 11% gain just to get back to even. A 20% loss needs a 25% gain. A 50% loss needs a 100% gain.
That is precisely why protecting your downside is so important.
Cutting losses is hard.
As long as you are still holding the position, there is hope. Hope that it goes back up. Hope that you were right after all. Hope that you do not look stupid.
Taking losses hurts. Admitting mistakes hurts.
Studies have shown that people need twice the gain to offset a loss. In other words, losses hurt twice as much wins.
Because as long as the position is open, the loss is not final. There is still a chance it recovers. A chance you end up being right. But once you sell, the loss becomes real. The mistake becomes permanent.
But you need to accept losses as part of the process.
Nobody is right all the time. Not even close. There's always uncertainty. Investing is not about being perfect. It is about making more than you lose over time.
The sooner you cut a loss, the better.
Sitting on a losing position usually means something went wrong. Your timing was off. Your stock choice was wrong. Or the market environment is not favorable right now.
There is also opportunity cost.
Money stuck in a losing position cannot be used elsewhere. That capital could be working more effectively elsewhere.
Learning to cut losses fast is one of the most important skills in investing.
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