Three Steps to Outperform the Stock Market


Every year people come to the market thinking that they will strike it rich quick, yet statistics show that most new traders fail. The fortunate ones that do make it come from diverse backgrounds and seem to have nothing in common on the surface, so how do they outperform the stock market? People in general look to make things complicated, but the answer is usually rather simple. When it comes to beating the market, the key is following three simple steps: know yourself, cut losses and have a well-defined plan. 

Knowing your style and method of analyzing the market is critical to success. Will the focus be on short-term trading or long-term trading? When it comes to trade decisions, will fundamental analysis be used or technical analysis? How long will positions be open? What market best fits your personality and temperament? Most traders do not give a second thought to some of these basic questions, but the answer to each one will determine what style works best. A trader that basis trade decisions on fundamental analysis will not want to enter and exit trades based on the one-minute chart. 

                               Another reason most traders fail to make money is they stay in losing positions to long. If the idea is to beat the market, then cutting losses early is vital. Most new traders hold these losing positions in the hope that the market will turn around, yet most of the time the loss gets bigger. One simple strategy to reduce the threat of a catastrophic loss is to use a stop-loss order with every trade. This eliminates emotions from taking over and limits the risk. Using a stop-loss order on every trade is a simple strategy that will increase the odds of success in the long run. 

The third step to beating the market is to have a plan. This is the most crucial step that a trader must take. A trading plan will provide a concise road map to success. The trading plan includes the reason for taking the trade, how big of a position to take, when to execute the trade and when to exit the trade. A simple trading plan will help in staying disciplined and in limiting losses.

Outperforming the stock market is the goal of every trader, but few succeed. Most traders try to find some holy grail that does not exist or make things more complicated than it needs to be. The key to success is to keep it simple. Stay true to who you are, cut losses quickly, keep emotions out of the decision-making, and write a simple trading plan. If a trader implements these three simple steps, then it will greatly increase the odds of success.