Profits are everyone's objective investing in the stock market. However, we often chase after our goal but neglect the method to help us achieve our goals. For example : Most investors in the market want to make 30% return per annum, common ways for investors to plan their investments from Top-down method by dividing 30% into 12 months, which means every month we have to achieve 2.5%. Then you start to plan how many ticks of profit from each trade you need to make in order to achieve your monthly “target”. 

Everything sounds so perfect until we have losses in our portfolio, while you want to hit your target/ “KPI”, you choose not to cut losses because you are hoping the price will rebound and let the losses go all the way down. If there’s 1 month that you didn’t achieve our target return, you will feel stress and look forward to more returns in the next month. 

You’ll slowly realise that the profit you expect is not achievable. Even though you have followed all the analysis entry signals, cut loss point, & profit target, you are still not able to achieve the profit that you want. Then you will start to feel lost in the stock market. 

The roots of above problems can be categorised into 2 :

• Analysis
• Emotion

Emotion

Emotion is the biggest challenge for traders & investors to overcome. Whenever our portfolio shows losses, we will begin to have a brawl between what we want & the reality. We want to make profit so bad until a point all losses have a possible chance of rebound back to profits. We always implement more hope into a losing position, but are afraid of hoping for more profits when we are making profits. 

We always like to ask the below questions to let more people to realise their inner fear, you can try this out for yourself & we will explain it below :

1)

1. You instantly profit RM 900 now.

2. You have a 10% chance to get RM 1,000.

2) 

1. You will lose RM 900 now. 

2. You have a 90% chance to lose RM 1,000.

Most people will choose A for 1) & choose B for 2). The reason is because they find that only 10% to make an additional RM 100 is not worth the chance. On the other hand when the situation changes to losing money, we will bet the 10% chance to breakeven. This is because you find that you are losing RM 900 now, there’s no difference losing additional RM 100. So you will bet on the 10% chance, hope for a breakeven. 

You might not find the problem of this behaviour, let us explain to you the importance of changing this habits in the stock market. 

Case #1

Deep down if you want to reduce the losses, by taking a RM900 now & bet on the 10% chance not breakeven will cost you to lose more in the long run. You might be losing RM 100 only in this case, RM 900 - RM 1,000. But if you keep this habit for a long run, your losses will grow from RM 100 to RM 1,000, RM 10,000, or even RM 100,000 when you don’t take the most out of your profit stocks. In other words, making this decision will maximise our losses but limit our profits. 

Case #2, Not betting on any chance, Take a RM 900 profit now & lose RM 900 now. 

In this case, your P/L will be RM 0. You will be safe and no losses are made, you will also feel better not worrying about the possibility of losing more. You will just need to improve your stock selection, increase your winning rate by just 1 time & you will make profit in the long run. At the same time, you need to make sure you can limit the losses. 

Case #3, Take the chance of profiting RM 1,000 & stop loss at RM 900. 

If out of 10 trades, you lose 5 trades with each trade stop at RM 900. You will be losing RM 4,500. On the other hand, you maximise 2 trades to RM 1,000 & 3 trades with RM 900 in total you will have a return of RM 4,700, net profit of RM 200. 

Your losses are constantly capped at RM 900 per trade, while your profit can be maximised. That’s why you will have the chance of making profits, comparing to case #1, your profit is capped & losses are maximised. This is 1 of the reasons why many traders & investors suffer losses in the stock market. Because we unintentionally or intentionally make ourselves feel better by telling ourselves there is still a chance to win, without realising this action is maximising our losses. 

What Do we do in the actual market?

The best case for the above case is to have the combination of Case#2 & #3. Both have a capped in their losses, which is the most important action we need in trading or investment. It is not just losing less with limited losses, if you can limit the losses, you are also protecting your profit you made previously in the bull market. Most don’t realise how important it is to protect our profit, because we are always being so aggressive, we want more profit to cover the losses. But the “hole” of losses is always bigger than the “water”/ profit we fill in, because we always hope to cover the losses by exposing ourselves with unlimited losses. 

That’s why many retail investors are not able to make profit consistently, the returns are always going on a roller coaster ride. Make some profit in the bull market, get overconfident and lose in the bear market by not cutting losses. 

The first thing all investors needs to do

If you don’t know how to select the right stocks, then you will need to limit your losses & profits. Play the probability game and hope that the stock you invest or tips you received has a winning rate of 6:4.

You might question us : “Are you asking us to gamble in the stock market?”. We never ask people to gamble in the stock market, but if you are a person who doesn't know how to select the right stock & rely on “tips” given by others to invest in the stock market, you are basically gambling! To be more specific, you are “betting” on the person or the sources that you received the tips from. 

Since this type of investors or traders are gambling in the stock market already and you still don’t want to learn how to select the right stocks. The best thing you can do to not lose in the stock market is to limit your losses and profits. Then you will still have the chance to make profit from the stock market. 

Be your own fund manager

The common characteristic of case#2 & #3 is to limit losses, this is the first lesson you need to learn. Then increase your winning rate by knowing what kind of price movement will move higher the next day. Typically, a probability of 65% is considered outstanding, you don’t have to aim higher than this, because at the end it is not about probability, it is about profitability. You can have low probability but high profitability by limiting your losses and maximising the profits. 

Investment is never about probability, probability is for gambling & academics research. Probability leads us to nowhere, just like the probability of flipping a coin. Many will say it is 50:50, but in reality it is not (try to flip the coin 10 times with 2 sets, you will see the difference.). [sidestory : we find probability is the biggest conspiracy to control our thoughts.]

Profitability is the report card of our trades & investments. The question is how we can achieve good results, what are the tools & methods we apply to score the “A’s”. Study traditional analysis in the “textbook” where everyone is having the same book? You won’t outperform the rest in the market if you are looking at the same thing like everyone else does. Like we have mentioned in the problem with technique above, it is not working in the real market.

Solution

Although the techniques & analysis we use in the stock market is a way for us to understand how to make profit from the stock market. But the very first thing we need to overcome is our trading psychology. This is the biggest challenge for every investor & trader, whether you are a long term investor or a short term trader.

Although emotions are the most difficult obstacle to overcome, we can make it easier by controlling our initial capital. By limiting losses through initial capital to avoid losing more than we can handle. 

Most investors & traders always want to start with huge capital for more profits, we didn’t expect there will be losses & the losses per trade is too huge for you to take it. For example, you decide to start with RM 100,000. Common position sizing practice by many investors is dividing the RM 100,000 into 4 or maybe 5 stocks (we don’t recommend this way of position sizing.), so each stock value is RM 20,000. If 1 of the stock price per share is RM 0.20, you will be buying 1000 x 100 units of shares. Each 0.01 drop in price you will be losing RM 1,000. Try to imagine, if the stock price went down RM 0.05, you will be losing RM 5,000 which is equal to 5% of your total capital. If 2 stocks are going down RM 0.05, you will be losing RM 10,000. Can you handle this amount of losses? 

If you can’t handle these losses, then you need to reduce your initial capital. Or else you will make many mistakes in trade, by holding on the RM 10,000 losses and secure a small profit of RM 2,000 for the other 2 trades. 

Instead of losing RM 5,000 per trade, reduce the losses to RM 500. Will it be much easier for you to cut losses? If yes, then you have found the right amount that your emotion can handle. If not, continue to reduce your position in each stock. 

We need to trade/invest in a stress free environment to make rational decisions for every trade. Not knowing how much you can afford to lose will put yourself in lots of stress & have a negative effect on your investment returns. 

Analysis

The analysis that we use, not just able to identify the best timing for entry and exit. It must be able to help us to identify whether the current entry signal is a false signal or a true signal. In other words, whether this technical signal is triggered to attract us, retail investors in for the big boys profit taking. A good analysis is able to help the traders or investors to know whether the market is going into reversal. The current traditional analysis is not able to help us in interpreting the market data of the big boys/ market intention. It is always a few steps late until we notice it, for example, MA golden cross/ dead cross or support/resistance breakout. When the above signals show up, we always end up at the high or low side. 

That is why many investors make profits when the market is good, but lose more when the market is bad. Because they failed to identify the market reversal and were trapped in a losing trade. By the time investors find out the technical signals showing the market is going to reverse, our portfolio is already in red. It is much harder for investors to cut losses now, because losses are huge and painful to cut. We can’t protect our profit. It is not because the market is bad, it is because we can’t identify if the market is going to reverse and stay out of it before it happens. 

What we need is not a way to identify what is happening right now, what we really need is an analysis to tell us what is going to happen. This can be done in a more realistic way than praying or hoping, by identifying the big boys transaction data and the price & volume action, through our trading platforms available to everyone of us. 

Every intention whether the big boys are going to push the price up higher or lower are shown in their transaction data. We just need to know how to interpret this data and trade accordingly. 

By knowing the big boy's intention, you will be able to know when the market is going to reverse (bullish or bearish) when you see most of the big boys are aggressively attracting buyers in the market to sell, so you can stay out of the market and protect your profits. You can also have a better entry and know whether it is still ok to enter into stocks by knowing the big boys accumulation and knowing whether they still have huge share holdings to distribute or they have little shares left to distribute. They could throw the price down anytime by distributing their remaining shares if they are holding very little shares in hand. If they still hold many shares in hand, they will need to mark up the price higher to distribute slowly on the way up.

“Can the indicators or the analysis we are using be able to tell us about the price up because big boys mark up price to attract buyers for final distribution OR they still have intention to mark up the price higher?”

If the traditional analysis is not able to answer the above question, it is telling us that the analysis that we are using is not helpful in interpreting the market conditions. 

You can find out more about how to read the big boys intention in our upcoming livestream on 18th March 2022, 8:30PM : https://fb.me/e/1ePqP0siC

Live Stream Trailer :

Find out more how to interpret the transaction data & price & volume movement at the link below :

Conclusion : 

1. Ask yourself how you feel when you lose half of your capital. 

2. Ask yourself whether you can handle this level of losses.

3. Find your comfortable risk level for each trade.

4. Learn the right way to interpret the stock price movement.

5. Find out the price & volume transaction pattern before the price rockets up.

6. Knowing when & what kind of price & volume transaction pattern before the price falls.

7. Lastly, repeat your trading plan until it builds in your consciousness like driving a car.

If you want to improve your current portfolio returns & creates a portfolio that can defy the bear market, join our upcoming FB livestream on 18th Mar 8:30PM to find out more about how you can read the big boys transaction data like you know them at the link below : https://fb.me/e/1ePqP0siC

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