Trader Lin Shares Trading Insights: Trend Following, Sector Leadership, and Risk Management

Author: Lin, Trader

Compiled by: Felix, PANews

Trader Lin recently shared trading insights covering technical analysis, risk management, and psychological factors—useful references for novice traders or those frequently experiencing losses. Here are the details.

Follow the Trend

Strong uptrends often generate substantial profits. You should always trade with the trend. As the old saying goes: “The trend is your friend.” This couldn’t be more accurate. Investing is a probability game. Therefore, you need to maximize your odds as much as possible.

Buying stocks in an uptrend is like sailing with the wind—everything feels easier. Prices rise faster, last longer, and progress becomes smoother. When moving with the wind, even small pushes can generate tremendous returns. This is why everyone feels like a genius during bull markets.

So, how do you identify trends?

Recognizing trend direction typically takes only seconds. A trend is simply the overall direction of data points in a time series. Here’s what an uptrend looks like:

First, the chart extends upward from the lower left.

Second, there’s a series of higher highs and higher lows.

The same applies to downtrends, of course.

To identify these trends, you can also use simple tools like trendlines or moving averages to help determine the overall direction.

Importantly, markets exist on different timeframes.

The market may decline short-term but remain in an uptrend long-term. Conversely, the market might perform strongly short-term while showing weak long-term trends. You need to select timeframes suited to your strategy.

Day traders focus on hours and days, swing traders look at weeks, and long-term investors focus on years. Your profit opportunities maximize when all timeframes (short, medium, and long-term) align.

Most of the time, markets lack clear trends. Distinct, strong trends occur only a small fraction of the time. The rest of the time, markets move sideways.

For active investors, sideways markets are most dangerous. Without clear direction, extreme volatility, failed breakouts, and failed pullbacks occur. You’ll be whipsawed repeatedly. Just when you think the market will move in your favor, it hits a wall and reverses.

Of course, if your trading cycle is shorter, you can profit from these fluctuations. But for most people, doing nothing is often the best choice in such situations.

Overall, big money is made during strong uptrends. There are two main reasons:

First, stocks in uptrends tend to continue rising: When a stock is already rising, it’s more likely to continue than suddenly stop. Market sentiment is optimistic. Everyone focuses only on the upside.

Second, typically there’s little or no selling pressure above: This means most stockholders are already profitable. They’re not rushing to sell. With fewer sellers, prices rise more easily.

However, not all trends are equal. Some trends are slow and steady. Others are fast and steep. The steeper the trend, the stronger it appears. But everything has pros and cons.

Rapidly rising stocks are more fragile. When prices rise too quickly, overbought conditions emerge. This makes large pullbacks or sudden reversals more likely. So strong trends are powerful but require caution.

The goal is to follow the trend while it lasts, but nothing lasts forever.

Focus on Leading Sectors

After determining the overall market trend, seek leading sectors. Their importance is obvious.

Investing is a probability game—you want as many factors as possible working in your favor.

Ask yourself: would you buy a newspaper company’s stock today? Probably not. Few people read physical newspapers anymore. Everything’s online. The market isn’t expanding; it’s shrinking. Demand naturally falls. Finding and retaining customers becomes harder. Retaining talented employees also becomes harder. Employees are less willing to join an old, stagnant industry. These are natural headwinds.

Now consider the opposite.

Artificial intelligence is currently one of the strongest industries. Everyone wants to work in AI. It has natural appeal. Talent, capital, and attention all flow in the same direction. Development becomes much easier.

A leading industry is like rising tides that lift all boats. Not everyone benefits equally, but overall trends matter.

Ideally, the entire industry should perform well. If all companies except one underperform, it often means the industry has peaked or is about to decline.

Of course, no trend lasts forever. Some industry trends last decades; others last only days. The key is capturing the major trend.

Major trends reshape industries over the long term. Examples include railroads, the internet, mobile technology, and today’s artificial intelligence.

Boom-and-bust trends are brief peaks followed by sharp declines. Examples include SPACs (Special Purpose Acquisition Companies) and meme stocks.

Cyclical trends fluctuate with economic cycles. Oil and natural gas are good examples, with prices rising and falling with demand and economic growth.

Buy Market Leaders at Market Bottoms

Once you’ve identified the overall trend and leading sectors, you can buy leading companies. The reason is simple: most people want the best, and that’s human nature.

Look at sports. Everyone talks about World Cup champions or Olympic gold medalists. News headlines, interviews, sponsorships, and history books focus on first place. Few remember who finished second. Winners receive all the attention, money, and prestige.

A simple example:

Who is the fastest runner on Earth? Usain Bolt. Who is second-fastest? Most people don’t know. In fact, Bolt isn’t dramatically faster than second place. But nobody really cares about second. It’s all about best, fastest, winners.

The same applies to business and investing. Winners receive the most attention. They attract more customers, talent, and capital. Success is self-reinforcing, making maintaining first place easier.

For companies, this means your product gets compared to others. Employees want to work for the best company. Investors want to invest in the best company, not second-best. These advantages might seem insignificant at first, but accumulate over time into massive effects. This is why winners keep winning.

Every industry has a market leader:

Smartphones: Apple

Search engines: Google

Large language models: OpenAI

Graphics processors: NVIDIA

These industry leaders far outpace competitors.

What creates market leaders? Large and growing market share, rapid revenue and profit growth, strong brands, continuous innovation, and top-tier founders (teams).

When should you buy leader stocks? Buy when the market is in an uptrend and the stock breaks out from a bottom. The reason is simple: investing carries risk, and many things can go wrong. You can’t eliminate risk, but you can reduce it.

Several ways exist:

Do thorough research, capture uptrends, focus on strong companies, buy at the right time.

Timing matters more than most people think. Buying at the right time reduces entry risk. It also clarifies when problems emerge. If the stock price falls below your entry price or key support, that’s your signal to exit or stop loss. A good entry price helps define your exit price. Having a clear exit price is crucial for risk management.

Buying when stocks break out from base formations usually carries less risk. Base formations are periods when stocks move sideways and consolidate. They’re accumulating energy. When they break out, the trend favors you. Momentum increases. Selling pressure above is light, making stocks rise more easily.

You’re not guessing; you’re reacting to market strength. This is how you improve your odds.

Several types of base formations exist. Some most common include:

Cup and handle

Flat base

Double bottom

Inverse head and shoulders

These formations typically appear early in new advances or trends.

When stocks pause after rising, these base formations are called continuation formations. Most common continuation formations are flags and triangles.

Additionally, you can control risk. After stock breakouts, three scenarios can occur:

Stock continues rising

Stock pulls back and retests the breakout area

Breakout fails and early buyers get trapped

Breakouts don’t always work. Failure rates can be high. You must prepare mentally for frequent mistakes.

Most breakout failures result from weak markets, stocks not being true leaders, or large institutions selling. This is why risk management is so important.

You must always prepare for worst-case scenarios. You must limit downside risk and set a clear stop loss.

Accepting losses is hard—nobody likes admitting they’re wrong. But refusing to cut small losses turns small problems into big ones. Most large losses start small. They grow because people hesitate, hoping to exit at breakeven.

Remember: if the stock rebounds, you can buy back anytime.

Protect your downside to stay in the game. This is why controlling your odds is so important.

One small tip: pay attention to volume.

High-volume breakouts are stronger and less likely to fail. High volume means large investors are buying. And large investors leave traces.

Big players can’t hide their moves easily. They can’t accumulate all positions at once. They must build gradually.

Let Your Winning Stocks Continue Rising

Fundamentally, investing means profits exceed losses. Everything else doesn’t matter. Many investors overlook this.

They believe success comes from finding cheap stocks or chasing hot ones. P/E ratios, moving averages, moats, and business models are just puzzle pieces. They all help. But none guarantee success alone.

What truly matters:

How much can you make when you’re right?

How much do you lose when you’re wrong?

This applies equally to day traders and long-term investors. Their only real difference is timespan. The principles are identical.

The most important lesson here: you will make mistakes, and lots of them.

Investing is a probability game. Even if you think it can’t fall further because it’s cheap, or think it must rise because all fundamentals are strong, you’ll still make mistakes.

A good rule of thumb: assume you’re right at most 50% of the time.

Think about Michael Jordan—roughly half his shots missed. But he’s considered the greatest player ever. You don’t need to be right every time for substantial returns.

This happens even in good markets.

In poor markets, it’s worse. Sometimes you’re right only 30% of the time. This is normal.

Mistakes aren’t failures. They’re part of the process. Once you accept this, everything changes. Your focus shifts from pursuing correctness to managing outcomes.

This simple table clearly illustrates this.

It shows the relationship between win rate and risk-reward ratio. Assume your win rate is only 30%. Then your profits must be more than double your losses to break even. To truly profit, profits should be roughly three times losses. Then your strategy starts working.

The goal is building failure into your strategy.

A 50% win rate sounds good but isn’t realistic long-term. Markets change, situations worsen. This is why your strategy must work even in unfavorable conditions.

Starting with 30% win rate and 3:1 risk-reward ratio is a good starting point. You can adjust afterward. But if you don’t know where to start, begin here.

What does this mean in practice?

Many investors think buy-and-hold means never selling. This is only half-right. You should hold winning stocks, not losing ones.

You can never predict how much a profitable stock will rise. Sometimes 10%, sometimes 20%, rarely 100% or more. Of course, if your investment thesis breaks, or fundamentals or technicals deteriorate, you definitely want to cut losses timely. But let winning stocks continue as long as possible.

To know when to cut losses, calculate average returns. If your average gain is about 30%, to maintain 3:1 risk-reward, your average loss should be around 10%.

Many ways exist to do this. You can adjust position size or sell in stages—at -5%, -10%, and -15% respectively. On average, selling one-third each time keeps losses around 10%.

The specific method doesn’t matter; the principle does. Big gains require paying for many small losses. Small losses protect you from disasters.

Cut Losses Quickly

After buying a stock, the only thing you truly control is when to exit.

You can’t control how much it rises, when it rises, or even if it rises. Your only real choice is how much loss you’ll tolerate.

Bad things happen sometimes—companies report poor earnings, bad news emerges, stocks gap down overnight. Even when you do everything right, you can still take a hit. This is part of the game. You can’t avoid it completely.

But holding losing stocks is dangerous. The longer you hold, the greater potential losses. The goal is exiting early while giving stocks normal fluctuation room. Stocks rise and fall daily. You can’t sell just for minor pullbacks.

Yes, sometimes stocks gap down, trigger your stop loss, then bounce. This does happen. But the last thing you want is the stock falling with you waiting for a bounce to exit—only to see it keep falling.

Every huge loss starts small. And bigger losses are harder to recover from.

A 10% loss needs 11% gains to break even.

A 20% loss needs 25% gains.

A 50% loss needs 100% gains.

This is why protecting downside matters so much.

Cutting losses is hard. As long as you hold, there’s hope—hope it rebounds, hope you’re ultimately right, hope you don’t look foolish.

Taking losses hurts. Admitting mistakes hurts.

Research shows people need double the gains to offset losses. In other words, pain from losses is twice the pleasure from gains.

Because as long as positions remain open, losses aren’t finalized. Recovery is still possible. Proving yourself right is still possible. But once you sell, losses become real and mistakes become permanent. But you must accept losses—they’re part of the process.

Nobody is always right. Investing always involves uncertainty. Investing isn’t about perfection but earning more over time than you lose.

The earlier you cut losses, the better. Holding losing positions usually means something went wrong—perhaps bad timing, poor stock selection, or unfavorable market conditions.

Additionally, opportunity cost exists. Capital trapped in losses cannot be used elsewhere. These funds could be deployed more effectively elsewhere. Learning to cut losses quickly is one of investing’s most important skills.

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