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The poor become rich in the stock market

Famous investor Benjamin Graham once said that in the short run the stock market works like a voting machine and in the long run like a weighing machine.

Over a short period of time prices of a stock swing with the current mood of the market, which may be emotionally decoupled from the underlying company and its prospects. Ephemeral market fashions, which are usually autocatalytic, vote prices away from real values. The long term behavior of a stock is more bound to the company, its quality and its ability to produce earnings. The market weighs the company.

Benjamin Graham wanted of course to express with his metaphors that it is paying off to adhere to the longevity wisdom of an investor and not to the exaggerations of shortsighted traders. While his analogies are interesting and generally sound, they still lead the individual into the wrong direction.

For better guidance I suggest a mechanical analogy that compares the stock market with the surface of an ocean. All in all it is roughly a zero-sum game. Gains made by one have to paid by the other. Waves on the ocean are coming and going, averaging to level zero and peaks are made of the water that is missing in troughs. But occasionally some peaks are superposing while crossing each other, concentrating the water of the averages into gigantic outliers. While these monster waves are deathly at sea, they may be the lucky chance for the initiate in the stock market.

Let's just say for now that this something is paradoxically a well known secret, around which there have been built trading systems for the stock market. The basic method is to get on a strong trend and wait. Just ride the trend. However, this looks much easier than it is in reality. Trends tend to get wild and reverse temporarily or completely. Entering trends safely, which means by using the stop-loss method so that many smaller losses are still overcompensated by larger gains, requires a special sort of swing trading system. One of the first extreme systems for trend trading with tight stops was probably the one from Nicolas Darvas.

The other reason for selecting strong trends stems from the observation that prices often tend to overshoot hugely for many month during the course of mounting market optimism. It pays off to go for the voting and not the weighing, contrary to what Graham would have done. To cite another stock legend, namely Jesse Livermore, sitting -simply holding the position- is superior to real swing trading in such a situation.

Here are some approaches to ride the monster waves in the stock market by finding the safe trend entry with swing trading:

For investors: Earlier I called Graham's otherwise fine analogies misleading for the individual and said that the stock market is "roughly" a zero-sum game. Actually, I think it is at least for the investor more a negative-sum game.