Editor’s note: Today, we’d like to share an insight from Market Wizard and colleague Larry Benedict.
It’s a tip he learned in the early days of his career trading on the floor of the Chicago Board Options Exchange in the 1980s.
And it’s helped make him one of the world’s most prolific moneymakers today…
When you’re starting out in the markets, there’s no doubt it can all be a bit intimidating. You might wonder what your place is and where you fit in.
There are just so many different markets to trade, and so much information to process. If you’re not careful, you could easily get lost.
And, if a couple of trades go against you, you might even wish you had never started trading at all…
However, just remember this: You can’t know everything about every market… it’s impossible.
Believe me, it’s hard enough trying to know all you can about just a couple of them!
So, you need to find just one or two things and stick to them. That means studying everything you can about them… from the price chart to every piece of information you can gather.
It might be a single stock, like Apple (AAPL) or Microsoft (MSFT). Or maybe an index like the S&P 500 or Nasdaq. You need to see how they react to important market news and different events.
Here’s why it’s so important…
If someone spends all week trading a single stock or index, how are you going to match them when you’re trying to trade a dozen other things as well?
Sure, you might get lucky once or twice. But forget about relying on luck over the long-term.
That’s why when I started out on the trading floor, I traded just one product. Then, when I joined a trading firm, I stuck to just one sector.
There’s just no way I could do my own job and know as much about another market sector as well.
The question is, though, where do you start? And how do you know which suits you best?
Well, some recommend you start with an area that you already know. For example, if you work in health care, then you could start with health-related stocks.
And that works for some people…
But, for me, the most important thing is to find something that you’re interested in. After all, if you work in an industry all week, the last thing you might feel like doing is reading all about it in your spare time.
So, if your passion is technology – no matter what you do for your day job – then tech stocks might be the best place to start.
Likewise, if you have an interest in energy, there are plenty of stocks to pick from that sector too. The next step is to narrow the list down to just one or two stocks that you’ll trade.
The challenge, though, can be the sheer number of stocks to work through. You might simply not have the time.
That’s why for some traders starting out, sometimes the best option is to stick to a sector exchange-traded fund (ETF). It enables you to trade a sector that you’re interested in without having to pick the best performing stocks as well.
For example, if you’re interested in oil and gas stocks, you can trade a single ETF like the Energy Select Sector SPDR Fund (XLE) that gives exposure to all the biggest stocks in that sector.
Or, if you’re interested in gold, an ETF like the VanEck Gold Miners ETF (GDX) will allow you to trade the biggest gold mining stocks in one holding.
That way, instead of trying to analyze hundreds of stocks, you can focus your attention on just the sector itself. And that could give you a big advantage.
By narrowing your focus to just a couple of stocks, it will vastly increase your chances of becoming a profitable trader.
And it’ll save you a ton of headaches from always trying to work out what to trade next.
Good trading,
Larry Benedict
Editor, Trading With Larry Benedict