What I’ve learned, what has worked, what hasn’t worked, and what may help you after $845,203.28 worth of trades in 4 years.
Buying the Bottom Does NOT Equal Best Return
Catching bottoms is a loser’s game:
- It’s extremely difficult
- Opportunity cost
Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen.
Scenario:
The amateur trader buys the bottom of Stock A shown below for $10,000:
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The professional trader trader buys the retrace of Stock B shown below for $10,000:
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The professional trader sells 2 days later for +20% for a $2,000 profit and enters another breakout trade with original position plus profits of $12,000. 6 days later he sells for 30% for a $3,600 profit. His account is now worth $15,600.
Meanwhile, the amateur trader’s trade has been consolidating for 17 days and going nowhere, bouncing between +3-10%:
 |
The professional trader has his eyes set on a new breakout and enters the retrace with a $15,600 position:
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Both trader’s are now in the same trade and both sell the top as shown above. The amateur bought the exact bottom and returned 40% for $4,000, a great trade. The professional trader bought the retrace from the breakout above and only returned 30% for $4,680 since his cost basis was higher.
Overall both trader’s made profits, but the professional trader significantly outperformed the amateur trader with both starting with $10,000:
The Professional Trader’s account now sits at $20,280 while the Amateur Trader’s account sits at $14,000.
Over long periods of time, the professional trader’s account is going to pull away significantly.
Lessons learned:
- When price is in a downtrend, it takes time for price to reverse.
- Money is made in the trends.
- Be patient and try to enter at the start of new trends aka breakouts.
Got 15 seconds? Reply and let me know your thoughts!
Talk soon.
Stockonomy
What I’ve learned, what has worked, what hasn’t worked, and what may help you after $845,203.28 worth of trades in 4 years.
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