Page 849 - How to Make Money in Stocks Trilogy

Black Belt Testing: Life-Changing Moments in Investing 115

Over the years, Jerry had attended IBD workshops multiple times, so he
went back and studied the workshop books. The first egregious error was in
not cutting losses sooner. As Jerry examined his trading mistakes, he learned
that the emotions of euphoria when he was doing well in the market as well
as being too distraught when a trade went against him were damaging to his
trading. He studied and worked hard with a trading coach that specialized
in psychological barriers and learned to keep a more even keel and be
calmer in his everyday approach to the market.
He found out that the most dangerous time is when you’re doing really
well in the market, because you get sloppy: “The market will prove to you
that you’re getting cocky.”
Jerry has been very successful in the market since adjusting his trading.
He mentions with a chuckle, “If things are going well and I’m really excited,
it’s a good indication the market may be topping.”
Now when he is doing well, Jerry calmly takes some gains off the table
and takes his family on a vacation. He found that it is important to reward
yourself at least in some small way when you’ve had some success. This
keeps overconfidence in control.
One of the biggest lessons Jerry has learned is that you can make a lot of
money in a rally only to give it back in a correction. This can be extremely
frustrating. “One of the hardest things is to stay out of a correcting market,”
he says. “Although you can get some of the biggest up days in a bear market,
and this makes it tempting to go back in, you buy some stocks and take small
losses, then buy a few more stocks, and then take a few more losses. Pretty
soon, if you do that enough times, even if you are cutting your losses, you’ll
often lose a decent amount of money.”
To keep from giving back gains that he made during an uptrend, Jerry
refuses to buy stocks if there are only three or four stocks that are making
decent gains in the market. He is looking for true confirmation in the market,
and that means that 10 to 15 or more stocks must be setting up and looking
good. “If the market doesn’t look strong, you have no business getting in.”

The Leaders Index
To help him determine if the market was in a good phase or a so-so phase,
Jerry set up what he calls his “leaders index,” which is a mixture of 20 to 25
stocks from 15 different industry groups. Jerry does this early in every new
uptrend. He creates the list by searching for stocks that look strong as a new
uptrend is beginning.