Ariy Borovykh - S&P 500 Playbook: The only trends you need to know to make serious money on the stock market

Become a Statistic

Historical analysis indicates the following observation that there are people who constantly generate income from the stock market. However, there is another popular observation that there is a majority of players who also lose their money on the stock market.

The famous Pareto Principle can truly be applied to the trading world. An often quoted statistic holds that only 20 percent of professional fund managers outperform the market, while 80 percent end up underperforming. It might be discouraging to hear that only one out of five professionals beats the stock market. But lets look at the problem through the lens of a half-full glass. This statistic is an indication that some people are capable of playing the stock market successfully. This statistic implies that it is not always a coincidence that some investors are able to increase their net wealth on a consistent basis. This statistic is an evidence that the house does not always win.

Lets take a look at the basic principles that should increase the chance of becoming a part of the 20 percent stock market outperformers.

Diligence vs. Negligence

Investing can be a part-time or full-time job, but it is a job just the same. The same rules of a regular job apply to the stock market investing as well. Positive year-end feedback from a boss is equivalent to positive returns generated from the stock market. Job promotion is analogous to the accumulation of more trading capital that can be reinvested again.

Only diligent, disciplined, and hard-working individuals succeed at their jobs, and the same principle applies to successful money managers. Individual investors are responsible for their own success in the stock market. They must perform such activities like watching the electronic ticker tape which displays company stock quotes, shares being traded, the price of those shares, as well as whether a stock is trading high, or low, and following investment related news, and uncovering hidden trends. Even with a part-time involvement, individual investors must treat the stock market very responsibly.

Winners vs. Losers

Axiom 1: Nobody makes money from every single trade in the long run.

Axiom 2: Everybody loses on some of the trades in the long run.

Both winners and losers lose sometimes. It is just that winners learn from their mistakes before moving on, while losers keep making the same mistakes over and over again. Mistakes must be learned by analyzing historical patterns of the stock market and mapping personal emotional states of greed and panic with prior trading decisions. In order to make the right adjustments resulting from various stock market scenarios, individual investors must review the data they obtained while researching and recording past mistakes.

It is clear that in order finish in the green, aggregate profit from the good trades must exceed aggregate loss from the bad trades. However, if everybody has to take losses, how do winners end up with surplus? There are a couple of approaches applied by successful investors:

• Jackpot- Potential profit of every trade exceeds its potential loss, while the probability of a good trade is below the probability of a bad trade.

For example, if the potential profit on a given trade is 10.0 percent and the potential loss is 1.0 percent, successful investors must make at least one profitable trade out of every 10 trades to end up in the green.

• Consistency- Potential profit of every trade is almost identical to its potential loss, while the probability of a good trade is above the probability of a bad trade.

For example, if the potential profit and loss on a given trade is equal to 2.0 percent, successful investors must make at least six profitable trades out of every 10 trades to end up in the green.