How to Make Money in Stocks Success Stories

Key Takeaways

1. Respect the Market's Trend: Timing is Key

Contrary to popular belief, you can time the stock market.

Market Direction Matters. The single most important factor in successful investing is aligning your actions with the overall market trend. Trying to fight the market is like swimming upstream; it's exhausting and rarely profitable. Instead, respect the market's direction, and let it guide your decisions.

Uptrends and Downtrends. An uptrend is when the market is generally rising, and it's the best time to buy stocks. A downtrend is when the market is generally falling, and it's a time to be cautious and avoid new purchases. The book emphasizes the importance of recognizing these trends through indicators like follow-through days (signaling a new uptrend) and distribution days (signaling a potential downtrend).

• Follow-through day: A major index closes up 1.5% or more on higher volume, signaling professional money entering the market.
• Distribution day: A major index closes down 0.2% or more on higher volume, signaling professional money exiting the market.

Market Pulse. Investor's Business Daily (IBD) provides a "Market Pulse" section that categorizes the market into three stages: confirmed uptrend, uptrend under pressure, and market in correction. This tool helps investors quickly assess the current market environment and adjust their strategies accordingly.

2. CAN SLIM: The Blueprint for Finding Winning Stocks

The biggest winners will have the seven CAN SLIM traits.

Seven Traits of Winners. The CAN SLIM system is a framework for identifying stocks with the potential for significant growth. Each letter represents a key characteristic that winning stocks have in common before making big moves.

• C urrent Quarterly Earnings: Look for a minimum of 25% increase in the most recent quarter.
• A nnual Earnings: Look for a rate of increase of at least 25%, the higher the better.
• N ew: Look for innovative companies with new products, services, management, or price highs.
• S upply and Demand: Look for products or services that are in high demand.
• L eadership: Look for stocks at the top of their industry group with strong fundamentals.
• I nstitutional Support: Look for stocks that are being bought by mutual funds, hedge funds, and other large investors.
• M arket Direction: Buy leading stocks in an uptrending market and sell when the market corrects.

Beyond the Hype. The CAN SLIM system is not about chasing hot tips or buying stocks based on personal preference. It's about identifying companies with strong fundamentals and institutional support that are poised for growth. It's a systematic approach that removes emotion from the equation.

Historical Research. The CAN SLIM system is based on decades of research into the market's biggest winners. It's not a theoretical concept but a proven method for finding stocks that have the potential to outperform the market.

3. Base Patterns: Where to Buy, When to Fly

Buying stocks just as they come out of bases or areas of consolidation increases your odds of success.

Chart Bases. Stocks form chart bases, or areas of price consolidation, before making significant moves. These bases represent periods where the stock is digesting previous gains and preparing for its next advance. Buying a stock as it breaks out of a base pattern increases your odds of success.

Three Main Base Patterns:

• Cup-with-handle: Looks like a teacup with a handle.
• Double bottom: Looks like a "W," but the right side undercuts the left.
• Flat base: Moves sideways in a tight range.

Breakouts and Volume. A breakout occurs when a stock moves out of its base pattern on volume that is 40% higher than average. This signals that institutional investors are buying the stock and that it is likely to move higher. Buying on the breakout is a key strategy in the CAN SLIM system.

Base Stages. Stocks form a series of bases as they move higher. Earlier stage bases (first and second stage) tend to be more successful than later stage bases. By the time a stock is in a third or fourth stage base, it may be too obvious, and institutions may be ready to sell.

4. Cut Losses Short: The Cardinal Rule of Investing

The cardinal rule in CAN SLIM Investing is to cut all losses at no more than 7 to 8% below the price you paid for a stock.

Preservation of Capital. The most critical aspect of investing is preserving your capital. The CAN SLIM system emphasizes cutting losses quickly to avoid significant drawdowns. The rule is to sell a stock if it drops 7-8% below your purchase price.

Why Cut Losses? Steep losses require large gains just to break even. For example, a 50% loss requires a 100% gain to break even. By cutting losses at 7-8%, you can avoid these large drawdowns and keep your capital available for better opportunities.

• A 25% loss requires a 33% gain to break even.
• A 33% loss requires a 50% gain to break even.
• A 50% loss requires a 100% gain to break even.

Automatic Selling. Selling a losing position must become automatic. Don't hesitate or let emotions cloud your judgment. Consider using trade triggers through your brokerage account to automatically sell a stock if it reaches your predetermined loss level.

5. Control Your Emotions: The Inner Game of Trading

Learning to keep emotions under control is one of the most crucial elements to becoming a successful investor but one of the hardest things to achieve.

Hope, Fear, and Greed. Emotions like hope, fear, and greed can lead to poor investment decisions. Hope can cause you to hold onto losing stocks, fear can cause you to sell too early, and greed can cause you to overstay your welcome in a winning stock.

Never Fall in Love. Don't become emotionally attached to a stock. Remember that stocks are just vehicles for making money. If a stock is not performing well, sell it and move on.

Bad Habits. Bad habits, such as ignoring sell rules or chasing hot tips, can lead to significant losses. Develop a disciplined approach to investing and stick to your rules.

Ego and the Market. The market doesn't care about your ego or your past successes. It's important to stay humble and flexible and to be willing to admit when you're wrong.

6. Small Wins Add Up: Consistent Gains Over Time

To steadily make money in the market, you must stay focused on preserving capital and minimizing risk.

Singles and Doubles. Don't try to hit home runs all the time. Focus on making consistent gains of 20-25%. These small wins add up over time and can lead to significant returns.

Take Most Profits. The book recommends taking most profits at 20-25%, unless a stock runs up 20% in 2-3 weeks, in which case it should be held for at least 8 weeks. This is because many stocks will slow down, consolidate their gains, and build another base at that point.

Avoid Overtrading. Don't feel the need to be in the market all the time. There are times to be aggressive and times to be cautious. Focus on quality over quantity and wait for the right opportunities.

Money Management. Start your positions small and add to them as they move higher. Never average down and add to stocks that are going against you.

7. Study the Past: Learn from Market History

Study the past if you would define the future.

Historical Charts. Study historical charts of past market winners to identify common patterns and behaviors. The patterns of big winners repeat themselves over and over.

Market Cycles. Understand that the market moves in cycles. There are times to be aggressive and times to be cautious. Learn to recognize the signs of a new bull market and the signs of a market top.

Back Testing. Use back testing to compare how well you actually did in a particular time period with what you might have been able to achieve. This helps you identify areas where you can improve your trading.

Daily Journal. Keep a daily journal to track your trades and your thoughts about the market. This will help you learn from your mistakes and improve your decision-making.

8. Continuous Learning: The Path to Mastery

The continual process of learning that is so beneficial.

Never Stop Learning. The stock market is constantly evolving, so it's important to be a lifelong learner. Attend workshops, read books, and stay up-to-date on the latest market trends.

IBD Resources. Take advantage of the many resources that IBD offers, including the newspaper, Investors.com, videos, radio shows, and Meetup groups. These resources can help you improve your skills and stay informed about the market.

Post Analysis. Do a post analysis of all your trades to identify your strengths and weaknesses. This will help you refine your strategy and improve your performance.

Community. Join an IBD Meetup group to connect with other investors and share ideas. Learning from others can help you improve your skills and stay motivated.

9. Have a Plan: Treat Investing Like a Business

Treat investing like a business.

Written Trading Plan. Develop a written trading plan that outlines your goals, strategies, and rules. This will help you stay disciplined and avoid making emotional decisions.

Regular Routine. Establish a regular routine for analyzing the market and finding stocks. This will help you stay organized and focused.

Monthly Review. Review your trades on a monthly basis to assess your performance and identify areas for improvement.

Stay Focused. Don't get distracted by the news or the opinions of others. Focus on your own plan and stick to your rules.

10. Patience and Discipline: The Keys to Long-Term Success

Patience and discipline are, in my opinion, key characteristics of successful speculators.

Patience is a Virtue. The stock market is not a get-rich-quick scheme. It takes time and patience to build wealth. Don't get discouraged by short-term setbacks.

Discipline is Essential. Discipline is the key to success in the stock market. You must be willing to follow your rules, even when it's difficult.

Long-Term Perspective. Focus on the long-term and don't get caught up in the day-to-day fluctuations of the market. The goal is to build wealth over time, not to make a quick buck.

Stay Positive. Maintain a positive attitude and believe in your ability to succeed. The stock market can be challenging, but with hard work and dedication, you can achieve your financial goals.

Last updated: March 11, 2025

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