Author: Lin, Trader

Compiled by: Felix, PANews

Trader Lin recently shared his trading insights, including technical analysis, risk management, psychological factors, etc., suitable for novice traders or those who often incur losses. Below are the details.

Follow the Trend

A strong upward trend often brings substantial profits. You should always trade with the trend. As the old saying goes, "The trend is your friend." This is absolutely true. Investing is a game of probabilities. Therefore, you need to increase your odds of winning as much as possible.

Buying stocks in an upward trend is like sailing with the wind; everything feels easier. The market rises faster, lasts longer, and progress becomes smoother. When sailing with the wind, even a slight push can yield significant returns. This is why everyone feels like a genius in a bull market.

So, how do you identify a trend?

Identifying the direction of a trend generally takes only a few seconds. A trend is simply the overall direction of data points in a time series. Let's look at an upward trend:

• First, the chart extends from the lower left corner upwards.
• Second, there is a series of higher highs and higher lows.

Of course, the same applies to downward trends.

To identify these trends, you can also use simple tools like trend lines or moving averages to help you determine the overall direction.

Importantly, the market exists in different time frames.

The market may decline in the short term but still be in an upward trend in the long term. Alternatively, the market may perform strongly in the short term, but the long-term trend may be weak. You need to choose a time frame that suits your strategy.

Day traders focus on hours and days, swing traders look at weeks, while long-term investors focus on years. When all time frames (short-term, medium-term, and long-term) align, your chances of profit are maximized.

Most of the time, the market does not have a clear trend. Only a small portion of the time will there be a clear, strong trend. The rest of the time, the market fluctuates sideways.

For active investors, a sideways market is the most dangerous. Because there is no clear direction, volatility is high, breakouts fail, and pullbacks fail. You will be tossed around repeatedly. Whenever you think the market is about to move in your favor, it hits a wall and turns back.

Of course, if your trading cycle is short, you can also profit from these fluctuations. But for most people, doing nothing in such situations is often the best choice.

But overall, big money is made in strong upward trends. There are two main reasons:

• First, stocks in an upward trend tend to continue rising: when a stock is already going up, the likelihood of it continuing to rise is greater than the likelihood of it suddenly stopping. Market sentiment is optimistic. Everyone is focused on the rise.
• Second, there is usually little to no selling pressure above: this means that most holders of the stock are already in profit. They are not in a hurry to sell. With fewer sellers, prices are more likely to rise.

However, not all trends are the same. Some trends are slow and steady. Others are fast and steep. The steeper the trend, the stronger it appears. But everything has its pros and cons.

Stocks that rise quickly are more fragile. When prices rise too fast, overbought conditions can occur. This makes it easier for significant pullbacks or sudden reversals to happen. So while strong trends are powerful, they also need to be approached with caution.

The goal is to trade with the trend while it lasts, but nothing is eternal.

Focus on Leading Sectors

After determining the overall market trend, you need to look for leading sectors. Its importance is evident.

Investing is a game of probabilities, and you want as many factors as possible to work in your favor.

Ask yourself, would you buy a newspaper company's stock today? Probably not. Few people read physical newspapers anymore. Everything is online. The market is not expanding; it is shrinking. Demand naturally declines. Finding and retaining customers becomes more difficult. Retaining talented employees is also harder. Employees are less willing to join an outdated, stagnant industry. These are all natural disadvantages.

Now, look at the opposite situation.

Artificial intelligence is currently one of the strongest industries. Everyone wants to work in AI. It has a natural appeal. Talent, capital, and attention flow in the same direction. It becomes much easier to develop.

A leading industry is like rising tide water that lifts all boats. Not everyone benefits equally, but the overall trend is important.

Ideally, the entire industry should perform well. If all companies except one are underperforming, it often means that the industry has peaked or is about to decline.

Of course, no trend lasts forever. Some industry trends can last for decades, while others last only a few days. The key is to grasp the big trend.

• Big trends are long-term changes that reshape industries, such as railroads, the internet, mobile technology, and now artificial intelligence.
• Boom and bust trends refer to a brief peak followed by a sharp decline, such as SPACs (Special Purpose Acquisition Companies) and meme stocks.
• Cyclical trends fluctuate with economic cycles. Oil and gas are a good example, with prices rising and falling with demand and economic growth.

Buy "Leaders" at Market Bottoms

Once you identify the overall trend and leading sectors, you can buy leading companies. The reason is simple. Most people want the best; it's human nature.

Just look at the sports world. Everyone talks about the World Cup champion or Olympic gold medalist. News headlines, interviews, sponsors, and history books focus on the first place. Few remember who came in second. Winners get all the attention, money, and status.

A simple example:

Who is the fastest person on Earth? Usain Bolt. Who is second fastest? Most people don’t know. In fact, Bolt is not much faster than second place. But no one really cares about second place. It’s all about being the best, the fastest, the winner.

The same goes for business and investing. Winners get the most attention. They attract more customers, talent, and capital. Success reinforces itself, making it easier to stay on top.

For companies, this means your product will be compared to others. Employees want to work for the best companies. Investors want to invest in the best companies, not the second best. This advantage may seem trivial at first glance, but over time, these small advantages accumulate and ultimately have a huge impact. That’s why winners keep winning.

Every industry has a market leader:

• In smartphones, it’s Apple.
• In search engines, it’s Google.
• In large language models, it’s OpenAI.
• In graphics processors, it’s Nvidia.

These industry leaders are far ahead of other companies in competition.

What makes a market leader? A large and growing market share, rapid revenue and profit growth, a strong brand, continuous innovation, and top-notch founders (teams).

When to buy leading stocks? Buy when the market is in an upward trend and the stock breaks out from the bottom. The reason is simple. Investing is risky, and many things can go wrong. You cannot eliminate risk, but you can reduce it.

There are several ways to do this: do thorough research, grasp the market's upward trend, focus on strong companies, and buy at the right time.

Timing is more important than most people think. Buying at the right time can reduce the risk of entry. It also allows you to clearly know when problems may arise. If the stock price falls below your entry price or key support level, that’s a signal for you to retreat or cut losses. A good entry price helps clarify your exit price. And having a clear exit price is crucial for managing risk.

Buying when a stock breaks out from a bottom pattern usually carries less risk. A bottom pattern is simply a period of sideways movement and consolidation for a stock. It is building energy. When it breaks out, the trend is in your favor. Momentum increases. The selling pressure above is lower, making it easier for the stock to rise.

You are not guessing; you are responding to market strength. This is how you improve your odds.

There are several different types of bottom patterns. Some of the most common patterns include:

• Cup and handle pattern
• Flat bottom pattern
• Double bottom pattern
• Inverse head and shoulders pattern

These patterns typically appear at the beginning of a new wave of market movement or trend.

When the stock price rises and then stagnates, these bottom patterns are referred to as continuation patterns. The most common continuation patterns are flags and triangles.

Additionally, you can control risk. When the stock price breaks out, there are three possible scenarios:

• The stock price continues to rise.
• The stock price pulls back and retests the breakout area.
• The stock price fails to break out, trapping early buyers.

Breakouts are not always effective. The failure rate can be high. You need to be mentally prepared for frequent mistakes.

Most breakout failures occur due to a weak market, the stock not being a true leader, or large institutions selling off. This is why risk management is so important.

You must always be prepared for the worst-case scenario. You must limit downside risk and set a clear stop-loss point.

Accepting losses is difficult; no one likes to admit they were wrong. But refusing to cut small losses will only turn small problems into big ones. Most large losses start from small losses. They grow because people are always hesitant, hoping to exit at breakeven.

Remember this: if the stock price rebounds, you can always buy back in.

Protecting your downside risk allows you to stay in the game. That’s why it’s so important to keep your odds in your own hands.

Another little tip is to pay attention to trading volume.

Breakouts with high volume are stronger and less likely to fail. High volume means that large investors are buying in. And large investors leave traces.

Big players find it hard to hide their actions. They cannot buy all positions at once. They need to accumulate gradually.

Let Your Winning Stocks Keep Rising

Fundamentally, the essence of investing is that profits must exceed losses. Everything else is secondary. This is something many investors overlook.

They believe success comes from finding cheap stocks or chasing the hottest stocks. Price-to-earnings ratios, moving averages, moats, and business models are just pieces of the puzzle. All of these help, but none of them guarantee success on their own.

What truly matters is:

• How much can you make when you are right?
• How much will you lose when you are wrong?

This applies equally to day traders and long-term investors. The only real difference between them is the time span. The principles are the same.

The most important lesson here is: you will make mistakes, and you will make many of them.

Investing is a game of probabilities. Even if you think it can't drop any further because it's cheap; or you believe it must go up because all the fundamentals are improving, you will still make mistakes.

A good rule of thumb is to assume you have at most a 50% accuracy rate.

Think about Michael Jordan, who missed about half of his shots. Yet he is still considered the greatest player of all time. You don’t need to be right every time to achieve substantial returns.

This can happen even in a good market.

In a bad market, the situation can be worse. Sometimes your accuracy rate is only 30%. This is normal.

Mistakes are not failures. They are part of the process. Once you accept this, everything changes. Your focus will shift from pursuing correctness to managing outcomes.

This simple chart illustrates this clearly.

It shows the relationship between win rate and risk-reward ratio. Assume your win rate is only 30%. In this case, your profits must be more than twice your losses to break even. To truly profit, your gains should be about three times your losses. At this point, your strategy starts to work.

The goal is to incorporate failures into your strategy.

A 50% win rate sounds good, but it is not realistic in the long run. Markets change, and situations worsen. That’s why your strategy must work even in adverse conditions.

Starting with a 30% win rate and a 3:1 risk-reward ratio is a good starting point. After that, you can make adjustments. But if you don’t know where to start, begin here.

So, what does this mean in practice?

Many investors think that buying and holding means never selling. This statement is only half true. You should buy and hold winning stocks, not losing ones.

You can never predict how much a winning stock can rise. Sometimes it’s 10%, sometimes 20%, and in rare cases, it may even reach 100% or more. Of course, if your investment logic fails, or if the fundamentals or technicals deteriorate, you will definitely want to cut your losses in time. But let your winning stocks continue to hold on as much as possible.

To know when to cut losses, you need to calculate your average gain. Assume your average gain is about 30%, then to maintain a 3:1 risk-reward ratio, your average loss should be around 10%.

There are many ways to achieve this. You can adjust your position size or sell in stages, for example, selling at -5%, -10%, and -15%. On average, if you sell one-third each time, your losses will still remain around 10%.

The specific method is not important; the principle is. Big profits require many small losses. Small losses can protect you from disaster.

Quick Loss Cutting

After buying a stock, the only thing you can truly control is when to exit.

You cannot control how much it can rise, when it will rise, or even whether it will rise at all. The only real choice you have is how much loss you are willing to bear.

Sometimes bad things happen: a company announces poor earnings, bad news comes in, and the stock price gaps down overnight. Even if you did everything right, you can still suffer significant losses. This is part of the game. You cannot completely avoid it.

But holding onto losing stocks is dangerous. The longer you hold, the greater the potential loss. The goal is to exit early while still giving the stock enough room for normal fluctuations. Stocks rise and fall every day. You cannot just sell because of a small dip.

Yes, sometimes the stock price will gap down, triggering your stop-loss order, and then rebound. This does happen. However, the situation you least want to encounter is: the stock price drops, you wait for it to rebound before exiting, but it continues to fall.

Every significant loss starts with a small loss. And the larger the loss, the harder it is to recover.

• A 10% loss requires an 11% gain to break even.
• A 20% loss requires a 25% gain.
• A 50% loss requires a 100% gain.

This is why protecting downside risk is so important.

Cutting losses is hard. As long as you still hold a position, there is hope. Hope that it will recover. Hope that you will ultimately be right. Hope that you won’t look foolish.

Bearing losses is painful. Admitting mistakes is also painful.

Research shows that people need double the gains to make up for losses. In other words, the pain of a loss is twice that of a gain.

As long as the position is not closed, the loss is not considered final. There is still a chance for a rebound. There is still a chance to prove you were right. But once you sell, the loss becomes real, and the mistake becomes permanent. But you need to accept losses; it is part of the process.

No one can be right all the time. Investing is always filled with uncertainty. Investing is not about seeking perfection; it is about earning more than losing over a period of time.

The sooner you cut losses, the better. Holding onto losing positions usually means something went wrong, whether it’s your timing, stock selection, or the current market environment.

Additionally, there is the opportunity cost. If your capital is tied up in losses, it cannot be used for other investments. That capital could have been more effectively used elsewhere. Learning to cut losses quickly is one of the most important skills in investing.

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