If You’re Trading, Buy What’s Going Up

Key Concepts

• Momentum Trading: A trading strategy focused on capitalizing on the continuation of existing price trends.
• Long Side: Taking a position expecting the price of an asset to increase.
• Chasing: The act of buying assets that have already experienced significant price increases, often viewed negatively.
• Risk Management: Implicitly addressed through the emphasis on avoiding "losers" and focusing on "winners."

The Core Principle: Following Momentum in Stock Trading

The central argument presented is that successful trading, defined as consistently making money, necessitates focusing on stocks already exhibiting upward price movement. This is rooted in the physics principle of inertia – “an object in motion stays in motion” – applied to the stock market. The speaker directly challenges the common criticism that this approach is simply “chasing” or indicative of unskilled trading (“donkeys”). He refutes this, stating that if the goal is profit, then prioritizing winning stocks is logical and effective.

Trading as a Targeted Activity: Choosing the Right "Pond"

The analogy of fishing is used to illustrate this point. The speaker asks, “Which pond are you going to fish in? The pond with the fish or the pond with the floating boot on the surface?” This highlights the importance of selecting markets or stocks with demonstrated positive momentum. The “pond with the fish” represents stocks already increasing in value, offering a higher probability of continued gains. The “floating boot” symbolizes unproductive or declining stocks. The core question posed is: if the objective is to achieve trading gains on the “long side” (buying with the expectation of price increases), why wouldn’t one focus on assets already demonstrating that behavior?

Rejection of Negative Connotations: "Chasing" Reconsidered

The speaker anticipates and directly addresses the negative perception of “chasing” stocks. He explicitly rejects the idea that buying stocks already going up is inherently a poor strategy. He states, “I’m sorry. If you’re trading, you should be in the winners and that’s what they’re doing.” This challenges the conventional wisdom that suggests waiting for pullbacks or identifying undervalued assets, arguing that a focus on momentum is a valid and potentially profitable approach for traders.

Implicit Risk Management & Focus on Gains

While not explicitly detailed, the emphasis on entering “winners” implies a form of risk management. Avoiding stocks that are not performing well (“losers”) is presented as a crucial component of successful trading. The entire discussion is framed around maximizing gains, with the assumption that minimizing losses is a natural consequence of focusing on positive momentum.

The Underlying Frustration: A Basic Principle Often Overlooked

The speaker expresses disbelief that this concept even needs to be explained, stating, “I can’t believe I still have to explain that.” This suggests a frustration with the prevalence of more complex or contrarian trading strategies that may not align with the fundamental goal of generating profits.

Synthesis

The core takeaway is a straightforward, momentum-based approach to trading. The speaker advocates for prioritizing stocks already demonstrating upward price movement, rejecting the criticism that this is simply “chasing” and framing it as a logical strategy for maximizing trading gains. The analogy of fishing effectively illustrates the importance of selecting markets with existing opportunities, and the entire argument centers on the idea that, for traders, focusing on “winners” is a rational and potentially profitable approach.