Principles of Buying Stocks

How to Buy Stocks

Many investors buy stocks carelessly—simply because an analyst recommends them or due to market rumors. For these investors, buying stocks is even more casual than grocery shopping (where people at least compare options). The result is predictable: most end up trapped in losing positions, waiting indefinitely for a rebound.

By following proven buying principles, investors can significantly reduce mistakes and improve profitability. Below are key principles for effective stock purchases.

1. Trend Principle

Before buying, assess the overall market trend. Most stocks follow the broader market:

• Uptrends offer higher profit potential.

• Buying at peaks is like "grabbing a tiger’s teeth"—extremely risky.

• Downtrends rarely provide survival chances.

• Sideways markets offer limited opportunities.
  Align your strategy (long-term vs. short-term) with capital strength, and focus on stocks in upward trends.

2. Scaling-In Principle

Without absolute certainty, use phased buying and diversification to mitigate risk. However:

• Limit holdings to 5 stocks max to avoid over-diversification.

• Plan entry points based on strategy and capital.

3. Bottom Principle

• Long-term investors: Buy near bottom zones or early breakout phases (lowest risk).

• Short-term traders: Focus on short-term bottoms and trends, trade quickly, and avoid overexposure.

4. Risk Principle

The stock market is high-risk/high-reward. Risks are omnipresent, but you can minimize them by:

• Evaluating upside vs. downside potential.

• Identifying support/resistance levels.

• Defining entry logic and exit plans (e.g., "What if it falls?").

5. Strength Principle

"Strong stocks stay strong; weak stocks stay weak." Prioritize:

• Strong markets over weak ones.

• Leading stocks over laggards or "cheap" rebound candidates.

6. Narrative Principle

Short-term gains often hinge on market narratives (themes). Though narratives shift rapidly, they follow patterns. When selecting stocks:

• Choose those with clear catalysts (mainstream or short-term).

• Avoid fleeting trends with no lasting appeal.

7. Stop-Loss Principle

Not every trade goes up. Instead of waiting passively:

• Cut losses early—stop-losses are vital, especially for short-term trades.

• Set stop-loss levels:

  • 5% for short-term trades.

  • 10% for long-term holds.
    Only disciplined investors who master止损 (stop-losses) become consistent winners.