Sometimes, pulling the trigger on a new stock for your portfolio can be tough because there's an emotional component to trading and investing that can be difficult to master.
This article was originally published by Zacks.com.
Sometimes, pulling the trigger on a new stock for your portfolio can be tough.
I'm not necessarily talking about the process of picking a stock (not yet at least). What I'm talking about is the actual decision to place the trade.
As many know all too well, there's an emotional component to trading and investing that can be just as tough to master as the process of picking the stock itself.
In fact, for some, their emotions are their biggest obstacle to trading success.
And the schizophrenic political atmosphere is certainly not helping.
Self-doubt and uncertainty
After you find a stock you like, but before you place the trade, doubt can creep into your decision. And you begin to second guess yourself.
What most people do then is research the stock some more in an effort to find additional reasons to buy that stock. Invariably, they will come across something that causes them to feel even more hesitant about their decision. (Let's face it, no stock is perfect. There's bound to be something about the stock that makes you a little unsure or gives you pause.)
Before too long, you talk yourself out of the trade altogether, only to find, eventually, the stock run up as you had expected. And you've missed the whole thing.
You vow to not let that happen on your next pick. So the next time, after you've found your newest stock, you decide to plunge right in. (You don't want to talk yourself out if it like the last time.) So you place the trade, even though you have the same unease as before. This time, however, the stock drops after you get in, and you immediately regret your decision. And you wonder how you could have missed the warning signs.
So the next time you tell yourself you'll be more diligent, and turn over every stone before your next trade. But, of course, you find yourself back in the same position as the first time, with information overload and self-doubt, which eventually slows down your decision making and makes the whole process an emotional rollercoaster.
All of these debilitating emotions, which can make people hate investing, can be directly tied back to the lack of confidence in your stock-picking methodology.
In other words, if you knew beyond a shadow of a doubt that your stock had a high probability of winning, you would not hesitate to place your trade. The unease would disappear. The self-doubt would be replaced with excitement. And the decisions that would previously drag on would now be made quickly and easily.
And with such a high probability of stock picking success, your confidence would soar.
Fortunately, that kind of confidence and stock picking prowess can be obtained by anyone. Years and years of trial and error are not necessary. Nor is a degree in the school of hard knocks.
You simply need to know what works.
Easier than you think
Of course, as the saying goes, nothing is certain in life except death and taxes.
But that doesn't mean you can't increase your odds of success. You can. And you can do it with a few small things.
As mentioned earlier, you need to know what works. How does one do that? By backtesting your stock picking strategy to see how successful it has been in the past.
In other words, does your strategy generally pick stocks that go up once they've been identified? Or does it generally pick stocks that go down once they've been identified?
This is good stuff to know.
With backtesting, you can see how your strategy has performed in the past so you'll have a better idea as to what your probability of success will be now and in the future. Of course, past performance is no guarantee of future results. But what else do you have to go by?
Think about it. If you saw that a stock-picking strategy did nothing but lose money, year after year, stock after stock, over and over again, there's no way you'd want to use that screen to pick stocks.
Why? Because it has proven to pick bad stocks. Sure, it may turn around and start picking winners. But it may also continue to pick losing stocks.
On the other hand, what if you had a strategy that did great year after year, trade after trade, over and over again? You'd of course want to use that screen to pick stocks. Why? Because it has proven to pick winning stocks.
And while it may start picking losers all of a sudden (now that you're using it, right?), it may also continue to pick winning stocks, just like it had being doing over and over before.
Don't get me wrong; just because you have a great strategy for picking winning stocks, it isn't going to preclude you from ever having another losing trade. On the contrary, even the best strategies “only” have win ratios of 60%, 70% or even 80% (not 100%).
But if your strategy picks winners far more often than losers, you can feel confident that the next stock it picks will have a high probability of making money.
Pick and choose
Being able to see how profitable your personal stock picking ideas have been in the past is great.
But not everybody wants to create and test out their own strategies.
Instead, you can pick and choose from proven, profitable strategies that have already been created. From growth stocks, to value stocks, to momentum stocks, to growth and income stocks, and more. That could also include technical analysis stocks, special situation trades industry-specific trades, etc.
The key is to know how successful it has performed in the past. That means knowing things like the:
• Average annual return
• Win ratio
• Average number of stocks
• Holding period
• Average turnover
• Maximum drawdown
• Average winning stretch
• Average losing stretch
• And more
Once you know all of the ins and outs of your strategy, you never have to second guess it.
Because the 50 to 100 hours of testing that went into creating that strategy in the first place (a strategy that picks stocks you like, with a 70% chance of success, that was backtested over both bull markets, bear markets, and everything in between) is unlikely to be outdone by reading one extra news story or stressing over something in the market.
And that's the point. Imagine devoting 100 hours of your best thinking to EVERY stock you thought about buying. You'd feel pretty confident about that pick. And that's what a thoroughly tested strategy can provide — the best time-tested analysis applied to every stock that comes thru, each and every time.
Peace of mind. And a more profitable portfolio.
Zacks VP Kevin Matras is the stock screening expert for Zacks.com.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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