If you want to make money investing in stocks, you need to be good at money management, not lucky. A lucky streak is always well received, but the moment you require luck to succeed you'll not make the grade. They key to consistently making money by trading and investing in the stock market is dependent on your knowledge of how to lose money correctly via strict money management techniques.

Although this seems opposite to our usual way of thinking, it actually makes a lot of sense. If you expect to trade and not be willing to accept losses from time to time, it should be understood that this is not a realistic approach. The truth is many of the most successful traders lose money more often than the unsuccessful ones. However, they are still able to achieve success in the long run. There are two reasons for this:

1. Successful traders never lose a large outlay of cash on a solitary transaction.

Trades have five possible outcomes:

• Lose a large amount of money
  
• Lose a small amount of money
  
• Lose no money and make no money
  
• Make a small amount of money
  
• Make a large amount of money

Here's the secret: Find ways to diminish or eliminate the first possibility!

2. Successful traders refrain from investing too much money into a "favorite" position.

If you invest too much money into your "pet stock of the moment", you are setting yourself up for disaster. Successful traders, not unlike successful casino gamblers, establish a maximum value that can be risked in a single trade (or bet). And when even a small loss from that investment results in a large dent in your account, you are not trading optimally. 

If your accounts total $1000, and you never want to risk over 5% of that on a single trade, does that imply that you can only purchase a $50 position? Absolutely not, you couldn't make money that way. In the scenario where the most you're willing to lose on any one trade is $50, you could set up a $500 trade in a way where you are guaranteed not to lose over $50. This can be done with a pre-set "stop-loss" where you instruct your broker (or program it into your stock market online investing system), to get you out of that position if that limitation is ever reached. This technique gives you the ability to know your maximum risk before making the trade.

Although not absolute, stop losses work as intended most of the time. Occasionally, various market conditions cause your broker to miss your stop-loss price. Smart traders establish stop losses while keeping this possibility in mind as part of their overall stock trading plan.

Money management is the single most overlooked aspect of trading. It's far more important to manage your account's value correctly than it is to locate the exact bottom or top of the market. Money management can make the difference between success and failure. If you're considering stock trading and investing, or if your stock market investing strategy isn't as successful as you'd like it to be, you owe it yourself to become an expert at this technique. Money management in your stock investing is crucial to your success. It cannot be overlooked.

Market Direction: The Japanese Rice traders say to let the market tell you what the market is doing. Candlestick signals illustrate what direction investor sentiment is moving. But the analysis of what that sentiment is doing at highly observed technical levels is important for analyzing what the index trends are doing. The DOW closed today right at the 50 day MA. This, after a very strong up-day. This level becomes important for two reasons. Logically there could be some profit taking after a large up-day. And if the markets do sell off from this level, the 50 day MA might be a resistance level. Note that it has been acting as resistance for the past two months.

This becomes an obvious factor in the DOW's trend. Will the 50 day MA act once again as resistance? That is what needs to be confirmed in tomorrow's trading. A break through of the 50 day MA could change the resistance of the 50 MA. This would confirm the current bullish signals that have formed in the DOW for the past six trading days. Additional confirmation would be seeing the Nasdaq continuing the uptrend after the formation of a kicker type signal on Monday. The Nasdaq is showing the potential of bottoming action with the strong bullish signal after the Nasdaq formed doji's that were confirmed a few days ago.

DOW

A failure of continued buying in the Nasdaq and the DOW at these levels would indicate the lack of conviction of a trend, producing more evidence that the choppy summertime trading is still the predominant trading scenario. If that becomes the case, trying to make money in these choppy conditions is usually not worthwhile. Take a break, go fishing, golfing, ice cream eating, get the mind rested. There are conditions in the market that do not make it worthwhile to spend the effort trying to squeak profits. A bullish day tomorrow, the DOW breaching the 50 day MA and the Nasdaq confirming the kicker signal in today's trading, will warrant adding good long chart positions.

NASDAQ

Being able to analyze what both indexes are doing can add the degree of accuracy to the evaluation. This added element continually increases the probabilities of being in the correct direction of the trend.

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Good Investing,

The Candlestick Forum Staff