Editor's note: This excerpt was taken from Hot Stock Market Strategies from Entrepreneur Press. Buy it herenow.
How did you learn to invest? Did you read a book, a few books, many books? Did you attend a seminar, a workshop, or a night-school course? Did you take a seminar online? Did you learn from a friend? Are you self-taught?
No matter how you learned or who taught you, the fact is that if you're not making money in the market, it's due to one of three causes: what you learned doesn't work and probably never did; you may be using the system incorrectly; or you may even have a psychological problem that prevents you from implementing a system effectively.
Play a Little Game
In order to become a successful investor you need to level with yourself and admit to your shortcomings. You also have to give yourself praise for your strong points. Let's cut through your defensive layers and be direct and honest for a change. You can tell your friends or lovers anything you want to about your prowess as an investor, but entre nous (between you and me), take a few minutes to strip away the years of BS and look in the mirror. If this exercise offends you then I respectfully submit that you are either so very successful that you don't need this book, or you're so defensive that you need to see a good shrink before you sink another penny into the sewer hole of your investing losses. If you don't want to fess up to your problems, I suggest that you return this book immediately.
I assume that because you've gotten this far you are willing to take the next step. Before you do, however, I ask you to be brutally honest in your replies. Remember that this little assessment is designed to help you. Frankly, it makes no difference to me if you're dishonest with yourself. If, however, you plan to be dishonest, don't even waste your time reading the items on my list. I'll be completely blunt with you: if you want to BS yourself then you'll get BS results; you'll have reached BS conclusions and you'll continue to be grist for the mill of professional investors and traders. I suppose that in a way that's good. You'll have fulfilled an economic purpose by contributing your money to the pool of available winnings. OK, I've "hammered" you enough. Let's get on with my list of questions. I suggest that you make a copy of these pages and underline or circle your replies.
Please answer these questions as TRUE or FALSE.
1. I make my investment and trading decisions based on a variety of factors. I evaluate these factors and then I make a "gut feeling" decision about buying, selling, or holding a stock. TRUE / FALSE
2. I have a very specific trading approach that uses totally objective rules for entry and exit, but I am still losing money in the market in spite of the fact that my system has been back tested with excellent results. TRUE / FALSE
3. I know the rules I need to follow but I consistently ignore them. TRUE / FALSE
4. I have never been able to follow a specific set of trading rules effectively. TRUE / FALSE
5. I tend to get out of my winning trades quickly, but I hold on to my losers until they grow hair on them. TRUE / FALSE
6. I am easily influenced by the news, by my broker, and by stock tips. When this happens I lose my discipline and make bad trading decisions. TRUE / FALSE
7. I get my best stock tips and advice by visiting internet chat rooms. TRUE / FALSE
8. I have been trading and investing for more than two years without profitable results. TRUE / FALSE
9. My losing trades are most often larger than my winning trades. TRUE / FALSE
10. I have been successful in my business or profession, but I can't seem to be successful as an investor no matter what I do. TRUE / FALSE
Evaluating the Results
Now that you've taken my little "quiz" (and I hope you've been honest), let's examine your replies in detail. This process will help you achieve the following results:
- You will get an idea of where you stand as an investor.
- You will know your weaknesses and strengths.
- You will know how much work you have ahead of you.
- You will get a clear idea of how to overcome your behavioral and/or psychological challenges.
While this is not a definitive test of your skills or readiness to trade, I believe it will give you a good idea of where you stand. While there are not purely right or wrong answers, there are answers that correlate highly with success and others that are heavily related to failure. Here is how to evaluate your results:
1. Answer: If you answered "true" then give yourself a -1 (minus 1). If you make any decision based on "gut feeling" then your odds of success are not good. All hope is not lost, though, because you have the potential to be successful. You simply need more education.
2. Answer: If you answered "true", then give yourself a -1. If you are following a good system and are still losing money, then you likely have discipline problems and must overcome them if you are to be a winner. The good news is that you have a method. All you need now is to learn how to use it consistently.
3. Answer: If you answered "true", then give yourself a -1. If you know the rules and don't follow them, you have a problem you need to overcome if you are to be successful. The good news, however, is that you know the rules. So there is hope for you!
4. Answer: If you answered "true", then give yourself a -1. The reason should be obvious.
5. Answer: If you answered "true", then give yourself a -1. The reason should be obvious.
6. Answer: If you answered "true", then give yourself a -1. If you lose your discipline, you lose everything. This one is a big "no-no." You have a long way to go before you allow yourself to put another penny into the market.
7. Answer: If you answered "true", then give yourself a -1. Most people who visit stock chat rooms are either insecure, uninformed, losers in the stock market, or promoters who seek to promote their stocks to an unsuspecting group of suckers. If you're an investment chat room addict, do yourself a favor and stay away!
8. Answer: If you answered "true", then give yourself a -1. If you have indeed been trading for more than two years with losing results, it means you've been doing something dreadfully wrong and you need to make some big changes before you invest another penny!
9. Answer: If you answered "true", then give yourself a -1. Your winning trades obviously need to be larger than your losing trades if you plan to make money at this game.
10. Answer: If you answered "true", then give yourself a -1. But all hope is not lost.
Since you have a record of success then there is a good chance that you will be successful as a trader but you're not ready to trade as yet. You need more education.
Now that you have your score, take a look at the cold hard facts.
- If you have no minus scores, you are ready to trade, or you're already making money.
- If you have two minus scores, then you have good odds for success by honing your skills using the methods in this book.
- If you scored four minuses or more, you need to take your time and learn the methods in this book. You must also learn to apply them with strict discipline if you plan to succeed.
Do yourself a favor and be honest in your self-evaluation. If you want to fritter your money away and be grist for the mill of professional traders, then keep doing what you're doing. But if you sincerely want to be successful, you'll take heed and learn your lessons well.
A Universal Eternal Truth
The bottom line to all the above verbiage is simple. What I am about to tell you is the universal truth of investing and trading. The ultimate and underlying reality of all that's contained in this book, and in the thousands of other books written about investing, is that no matter what strategy, method, system, computer program, technique or methodology you use in the markets, none of them will make you money consistently UNLESS YOU ARE ABLE to use them with discipline, objectivity and lack of emotion. That's it! That's the bottom line. That's the major defining factor.