A common way of thinking about the stock market is to compare it to poker. When do you hold the cards and when do you fold? In poker, a serious number of variables are unknown, for starters what the other players have in their hands. With the stock market, this isn’t quite so true. In fact, given honest reporting and access to enough information sources, the stock market works more like chess. Everything that’s important is out there on the board. What comes next is strategy.

Strategic Market Thinking

Certainly market anomalies happen, such as panics and bubbles. Sometimes powerful players make moves that impact everyone else, and insider information has been a serious problem. Even computers can make senseless moves with big money due to some broker somewhere hitting the wrong key. This points to the first fundamental principle of strategic market thinking don’t ever get suckered into making bad moves. Ask the question, why is the market doing this? What happened? If this is an unknown, find out as soon as possible. This also points to the fact that information is not only power, it is money.

Stop-Loss Insurance

The automatic sell once a price hits a preselected low, the stop-loss, is the best way to make a reasonable profit while not getting caught in a panic or bursting bubble situation. This is the investor’s insurance against losing the whole bag of cash due to other people’s foolishness. On the other hand, an automatic sell once a certain high is reached ensures that a good return will be earned before the price peaks and falls off.

Practice, Practice, then Practice More

Setting stop-losses and automatic sells takes a huge amount of practice. One technique for learning how this works is to paper trade at first. Don’t put any money into the markets and just make believe the trades went through. Follow the prices and see what worked and what did not. Then try it with a small investment.