Steal Warren Buffet’s Stock Market Lesson Plans?

Why would you want to steal someone else’s stock market lesson plans? A trading plan is only effective if you follow it. Following your plan can lead to success, yet many traders neglect their carefully crafted plans. They get emotionally involved in their trades and ignore warning signs. Remember, the market will always correct itself—no position is immune, regardless of how strongly your ego is tied to it.

Many investors see their portfolio values get cut in half or more, but they still hold onto their positions. They may fear missing out on a big gain or feel too deep in loss to sell. However, even if you believe every position will eventually recover, the truth is that not all of them will. This approach ties up too much capital and severely impacts your rate of return. Avoid getting too attached to specific strategies or trends, especially after they’ve stopped working. You need strategies and plans, but you must also stay alert to market shifts and trend reversals.

When forming your plan for a trade, consider the price or range you believe the stock will reach, often called a target price. A target price should not be treated as a goal that the stock must reach; instead, use it as a guideline. It helps you calculate your risk-to-reward ratio and determine an exit point for the trade. If the stock doesn’t reach your target price, consider selling half your position at a more conservative target. Taking regular profits will help you in the long term.

Various factors can interfere with a stock’s movement, and you may need to close a position sooner than expected. Your stock market lesson plans should account for these scenarios. Here are some reasons to exit a position:

1. The trend has ended—trends don’t last forever.
2. The stock’s upward movement has slowed or reversed, indicating a loss of momentum.
3. The stock is nearing a major psychological level, such as $100 or $200 a share.
4. The stock is approaching a resistance level that it previously couldn’t break through.
5. A sudden market decline, uncertainty, or unsafe market conditions arise.

Ending a position, regardless of whether it hits the target price, is good trading practice. Top traders would rather take a small profit than risk unnecessary losses. You don’t need to win every trade—nobody does, and trying to do so can be dangerous. By limiting losses, a successful trader can remain profitable, even with a win rate of just 40%. Know when to cut your losses and move on. You’ll be happier and more profitable in the long run.