Beginner's Must-Read: Veteran Traders Share Five Key Trading "Methods"

Author: Lin, Trader

Compiled by: Felix, PANews

Trader Lin recently shared his trading insights, including technical analysis, risk management, psychological factors, and more, suitable for beginner traders or those who often experience losses. Below are the details.

Follow the Trend

A strong upward trend can often bring substantial profits. You should always trade in the direction of the trend. As the old saying goes: “The trend is your friend.” This is absolutely true. Investing is a game of probabilities. Therefore, you need to maximize your chances of winning.

Buying stocks in an uptrend is like sailing with the wind—everything feels easier. The market moves faster, lasts longer, and progress becomes more effortless. When sailing with the wind, even small pushes can lead to huge gains. That’s why everyone feels like a genius during a bull market.

So, how do you identify a trend?

Identifying the direction of a trend generally only takes a few seconds. A trend is simply the overall direction of data points in a time series. Let’s look at an uptrend:

• First, the chart extends from the lower left to the upper right.
• Second, there is a series of higher highs and higher lows.

Of course, the same applies to downtrends.

To identify these trends, you can also use simple tools like trend lines or moving averages to help determine the overall direction.

It’s important to note that the market operates across different timeframes.

The market may decline in the short term but remain in an overall uptrend over the long term. Conversely, the market might perform strongly in the short term but be weak in the long term. You need to choose a timeframe that suits your strategy.

Day traders focus on hours and days, swing traders on weeks, and long-term investors on years. When all timeframes (short, medium, and long-term) align, your profit opportunities are maximized.

Most of the time, the market has no clear trend. Only a small portion of the time will there be clear, strong trends. The rest of the time, the market moves sideways.

For active investors, sideways markets are the most dangerous because there is no clear direction, high volatility, failed breakouts, and failed pullbacks. You will be repeatedly tossed around. Whenever you think the market is about to move in your favor, it hits a wall and reverses.

Of course, if your trading cycle is short, you can also profit from these fluctuations. But for most people, doing nothing in such conditions is often the best choice.

Overall, big money is made during strong upward trends. There are mainly two reasons:

• First, stocks in an uptrend tend to continue rising: when a stock is already going up, it’s more likely to keep rising than to suddenly stop. Market sentiment is optimistic. Everyone is focused on the upside.
• Second, there is usually little or no overhead selling pressure: this means most holders are already in profit. They are not eager to sell. With fewer sellers, prices tend to rise more easily.

However, not all trends are the same. Some are slow and steady, others are rapid and steep. The steeper the trend, the stronger it appears. But everything has pros and cons.

Stocks that rise rapidly are more vulnerable. When prices increase too quickly, overbought conditions can occur. This makes them more prone to sharp pullbacks or sudden reversals. So, strong trends are powerful but should be approached with caution.

The goal is to follow the trend as long as it lasts, but nothing lasts forever.

Focus on Leading Sectors

After determining the overall market trend, it’s important to identify leading sectors. The importance of this is obvious.

Investing is a game of probabilities; you want as many factors as possible to favor you.

Ask yourself: Would you buy stock in a newspaper company today? Probably not. Few people read physical newspapers anymore. Everything is online. The market isn’t expanding; it’s shrinking. Demand naturally declines. Finding and retaining customers becomes harder. Retaining top employees is also more difficult. Employees are less willing to join an outdated, stagnant industry. These are natural adverse factors.

Now, look at the opposite scenario.

Artificial intelligence is currently one of the strongest industries. Everyone wants to work in AI. It has natural appeal. Talent, capital, and attention are flowing in the same direction. Development becomes much easier.

A leading industry is like the rising tide that lifts all ships. Not everyone benefits equally, but the overall trend is crucial.

Ideally, the entire industry should develop well. If all companies perform poorly except for one, it often indicates the industry has peaked or is about to decline.

Of course, no trend lasts forever. Some industry trends can last decades, others only a few days. The key is to grasp the big trend.

• Major trends are long-term transformations that reshape industries, such as railroads, the internet, mobile technology, and now artificial intelligence.
• Booms and busts refer to short-term peaks followed by sharp declines, like SPACs (Special Purpose Acquisition Companies) and meme stocks.
• Cyclical trends fluctuate with economic cycles. Oil and natural gas are good examples, with prices rising and falling based on demand and economic growth.

Buy at the Market Bottoms of Leading Stocks

Once you’ve identified the overall trend and leading sectors, you can buy the leading companies. The reason is simple. Most people want the best, which is human nature.

Just look at sports. Everyone talks about World Cup champions or Olympic gold medalists. Headlines, interviews, sponsors, and history books focus on the first place. Few remember second place. The winner gets all the attention, money, and status.

A simple example:

Who is the fastest person on Earth? Usain Bolt. Who is second? Most people don’t know. In fact, Bolt is only slightly faster than the second fastest. But no one really cares about second place. It’s all about the best, the fastest, the winner.

The same applies in business and investing. Winners get the most attention. They attract more customers, talent, and capital. Success reinforces itself, making it easier to stay in first place.

For companies, this means your product will be compared to others. Employees want to work for the best companies. Investors want to invest in the best companies, not second best. This advantage may seem minor at first glance, but over time, these small advantages accumulate and can lead to huge differences. That’s why winners keep winning.

Every industry has a market leader:

• In smartphones, it’s Apple
• In search engines, it’s Google
• In large language models, it’s OpenAI
• In graphics processors, it’s NVIDIA

These industry leaders are far ahead of competitors.

What makes a market leader? A large and growing market share, rapid revenue and profit growth, strong branding, continuous innovation, and top-tier founders (teams).

When should you buy leading stock? When the market is in an uptrend and the stock breaks above its bottom. The reason is simple. Investing involves risk, and many things can go wrong. You cannot eliminate risk, but you can reduce it.

Several methods help do this: thorough research, riding the upward trend, focusing on strong companies, and buying at the right time.

Timing is more important than most realize. Buying at the right moment reduces entry risk and helps you recognize problems early. If the stock falls below your buy price or a key support level, it’s a signal to exit or cut losses. A good entry price helps clarify your exit point. Having a clear exit is crucial for risk management.

Buying when the stock breaks out of a bottom pattern usually involves less risk. Bottom patterns are periods of sideways movement and consolidation, gathering energy. When the stock breaks out, the trend favors you. Momentum increases. Selling pressure above is smaller, making it easier for the stock to rise.

You are not guessing; you are reacting to market strength. That’s how you improve your chances.

Bottom patterns come in various types. Some common ones include:

• Cup and handle
• Flat bottom
• Double bottom
• Inverse head and shoulders

These patterns often appear at the early stages of a new rally or trend.

When the stock rises and then stalls, these are called continuation patterns. The most common continuation patterns are flags and triangles.

Additionally, you can control risk. When the stock breaks out, three scenarios may occur:

• The stock continues higher
• The stock pulls back and retests the breakout area
• The breakout fails, trapping early buyers

Breakouts are not always successful. Failure rates can be high. You need to be mentally prepared for frequent mistakes.

Most failed breakouts happen due to market weakness, the stock not being a true leader, or large institutions selling. That’s why risk management is so important.

You must always prepare for the worst. Limit downside risk and set a clear stop-loss point.

Accepting losses is difficult. No one likes to admit they are wrong. But refusing to cut small losses often turns small problems into big ones. Most big losses start from small losses. They grow because people hesitate, hoping to break even before exiting.

Remember: if the stock rebounds, you can always buy back.

Protect your downside risk to stay in the game. That’s why controlling your win rate is so important.

Another tip: watch trading volume.

Breakouts on high volume are stronger and less likely to fail. High volume indicates that big investors are buying. Large players leave traces.

It’s hard for big players to hide their actions. They can’t buy all their positions at once. They need to accumulate gradually.

Let Your Winning Stocks Keep Rising

Fundamentally, investing is about making more profits than losses. Everything else is secondary. Many investors overlook this.

They think success comes from finding cheap stocks or chasing the hottest stocks. P/E ratios, moving averages, moats, and business models are just parts of the puzzle. All help, but none guarantee success on their own.

What truly matters is:

• How much can you earn when your judgment is correct?
• How much will you lose when you’re wrong?

This applies to both day traders and long-term investors. The only real difference is the time horizon. The principle remains the same.

The most important lesson here is: you will make mistakes, and many of them.

Investing is a game of probabilities. Even if you think it can’t go lower because it’s cheap, or it will go up because fundamentals are strong, you will still err.

A good rule of thumb is to assume you have at most a 50% accuracy rate.

Think of Michael Jordan, who missed about half of his shots. Yet he’s considered one of the greatest players of all time. You don’t need to be right every time to earn substantial returns.

This can happen even in good markets.

In bad markets, it’s worse. Sometimes your accuracy drops to 30%. That’s normal.

Mistakes are not failures. They are part of the process. Once you accept this, everything changes. Your focus shifts from being right to managing results.

This simple chart illustrates this clearly.

It shows the relationship between win rate and risk-reward ratio. Suppose your win rate is only 30%. To break even, your profits need to be more than twice your losses. To be truly profitable, profits should be about three times larger than losses. At that point, your strategy starts to work.

The goal is to incorporate losses into your strategy.

A 50% win rate sounds good but is unrealistic in the long run. Markets change, conditions worsen. That’s why your strategy must work even in adverse environments.

Starting with a 30% win rate and a 3:1 risk-reward ratio is a good initial point. You can adjust later. But if you don’t know where to start, begin here.

What does this mean in practice?

Many investors believe buy-and-hold means never selling. That’s only half true. You should buy and hold profitable stocks, not losing ones.

You can never predict how much a profitable stock will rise. Sometimes 10%, sometimes 20%, rarely 100% or more. Of course, if your investment thesis fails or fundamentals/technicals deteriorate, you should cut losses promptly. But aim to hold profitable stocks as long as possible.

To know when to cut losses, you need to calculate average gains. Suppose your average gain is about 30%. To maintain a 3:1 risk-reward ratio, your average loss should be around 10%.

There are many ways to do this. You can adjust position sizes or sell in stages, e.g., at -5%, -10%, and -15%. On average, selling one-third each time, your losses will stay around 10%.

The specific method isn’t crucial; principles are. Big profits come at the cost of many small losses. Small losses protect you from disasters.

Quick Stop-Loss

After buying a stock, the only thing you can truly control is when to exit.

You cannot control how much it will rise, when it will rise, or even if it will rise. The only real choice is how much loss you are willing to accept.

Sometimes bad things happen: the company reports poor earnings, bad news hits, and the stock gaps down overnight. Even if you did everything right, you might still suffer heavy losses. That’s part of the game. You cannot avoid it entirely.

But holding onto losing stocks is dangerous. The longer you hold, the greater the potential damage. The goal is to exit early while allowing enough room for normal volatility. Stocks go up and down daily. You can’t sell just because of small dips.

Yes, sometimes the stock gaps down, triggering your stop-loss order, then rebounds. That can happen. But the worst-case scenario is: the stock drops, you wait for a rebound, but it keeps falling.

Every big loss starts with a small loss. And the bigger the loss, the harder it is to recover.

• A 10% loss requires an 11% gain to break even.
• A 20% loss requires a 25% gain.
• A 50% loss requires a 100% gain.

That’s why protecting downside risk is so critical.

Stop-loss is hard. As long as you hold a position, there’s hope. Hope it will rebound. Hope you’re right in the end. Hope you don’t look foolish.

Enduring losses is painful. Admitting mistakes is painful.

Studies show people need twice the gains to offset losses. In other words, the pain of loss is twice that of the pleasure of gain.

Because as long as the position isn’t closed, the loss isn’t final. There’s still a chance for a rebound. A chance to prove you’re right. But once you sell, the loss becomes real, and the mistake becomes permanent. You must accept losses; it’s part of the process.

No one can be right all the time. Investing is always uncertain. It’s not about perfection but about earning more over time than you lose.

The earlier you cut losses, the better. Holding losing positions usually indicates a problem—perhaps poor timing, wrong stock selection, or unfavorable market conditions.

There’s also opportunity cost. When funds are tied up in losses, they can’t be used elsewhere. Those funds could be more effectively deployed. Learning to cut losses quickly is one of the most important skills in investing.

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