Common Sense: Most Money Is Made By Waiting, Not Trading

Most Money Is Made By Waiting, Not Trading

A common mistake for stock market investors is overtrading. Learning to sit and wait is one of the biggest challenges for many.
Jesse Livermore, one of the world's greatest investors, said: "It is never your thinking that makes big money. It's the sitting."

Stocks stair-step their way higher by breaking out of basing patterns, running up and then forming new bases from which they break out. Savvy investors learn how to hang on to leading stocks that go through normal pullbacks rather than sell them.

Beginning investors are often shaken out of winning stocks because they buy incorrectly. You can avoid that by buying a stock within 5% of its buy point in a sound base. Studies of past winners show that stocks breaking out of sound bases on heavy volume rarely retreat more than 8% from the proper buy point.

So buying right will let you sit longer with winners.

They don't all work, of course. So you should always sell if a stock falls 8% below your buy point. That saves your capital for stocks that do work.

After a substantial run-up, a correction of 8% to 12% from a peak is considered normal. If you buy a stock on a breakout and it goes up 20%, don't sell just because it pulls back from its high. Watch to see if it can resume its run or carve out a new base.

Just be careful not to let such gains turn into losses by holding on as a stock falls back below the original buy point.

And keep an eye out for stocks with extra oomph. One that shoots up 20% or more in only one to four weeks should be held for at least eight weeks unless it falls all the way back near your buy point.

Stocks that show this kind of strength often double or triple in short order. But they often correct sharply, shaking out those who don't follow the eight-week rule.