I love watching baseball—America’s favorite pastime. Success in baseball also swirls around the statistics, as it does in trading stocks, but there are major differences. In fact, achieving stock market success is more like pitching than batting.
Let me explain why. In baseball, the ultimate utopia for every batter would likely be to hit over .300—that is three hits for every 10 at bat for you baseball neophytes. Of course, there are exceptions for the home-run hitters unless you were Willie Mays—one of the top five baseball players in history. In trading, stock market success doesn’t equate to winning in only 30% of your trades and will likely send you to the sidelines or poor house quickly.
Achieving stock market success is more like pitching. A pitcher who can win 65% of his starts would win about 21 games based on 32 starts. Winning at a 70% win rate would equate to 22 games and a possible Cy Young award (top pitcher) for the mantelpiece. If you can win at around 65% to 70% and cut your losers, you would achieve stock market success.
The key in stock picking and stock market success is simple—make sure you make more money than you lose. To do this, you need to make sure you cut your losses and at the same time ride the winners.
Many traders, including some of the more experienced traders, sometimes can get caught up in the emotional roller coaster by taking profits on the top stocks, while keeping the poor performers and refusing to admit a mistake was made. Sounds familiar?
At this time, stocks are facing chart resistance. The bullish investor sentiment in the stock market continues to drive the positive bias in stocks, but I’m seeing some stalling on the charts. The bias is for gains, but the lack of strong volume is somewhat of a red flag.
You need to understand that being prudent is important for stock market success, just like it is in baseball. Say bases are loaded. A smart player doesn’t necessarily try to hit for the fences, but aims for a hit to drive in some runners. The same goes for trading. Aiming for a home run with each trade is fruitless and doesn’t mean stock market success. I would rather play small ball and drive in runs, albeit hitting that occasional long ball over the fences would be a bonus.
Risk management drives stock market success as it does in baseball. A pitcher would unlikely throw a fastball down the middle of the plate on a 0-2 count—instead maybe throw a curve ball, splitter, or change up.
The key is monitoring your pitches and situation just like when trading stocks.
When the price of a stock trends higher, you should always think about a potential exit strategy for the overall stock market success. This does not mean liquidating profitable trades, but more like protecting your unrealized gains. Use the current stock market rally as an opportunity to take some profits.
Another stock market strategy that needs to be considered is the use of mental or physical stop-loss limits. But you need to be careful when the volatility increases and wild swings in the stock market materialize that could take you out of your position prematurely.
And for those of you familiar with options, you can employ put options to help minimize the downside loss in the stock market.
Babe Ruth was arguably the best baseball player in history, while Warren Buffett is widely viewed as the top investor. As both of these men know, the key to success in both baseball and stocks is to know the risk and situation, and to have an exit strategy.