Investment is a statistics game. You win sometimes and you lose most of time. To stay ahead, all you have to do is to make sure that your gains are more than your losses. More importantly, how to limit losses and reduce mistakes will be crucial in successful investing.

Take a typical fund manager. Out of ten positions, fund manager may only win 40% of time. Say, this manager makes an average return of 20% for each position. The rest are mistakes, but this manager capped losses at 10% each. Do simple math, and lo and behold, this manager is ahead with gains. This is a simple example – professional fund managers use complex variations of this simple theme.

Another example is venture capitalist. Say, out of ten ventures, only one succeeded. The successful venture could yield returns of 2000%, perhaps more. The other nine ventures failed miserably and these investments are written off. Using this model, venture capitalist is still ahead.

Headlines, media, advertising hype.

Most of us are familiar with this typical headline: “Whiz kid makes stock picks that outperform market than most fund managers”. When such stories becomes headline news on popular media, it is likely that they appear towards end of a great bull market. Stories like these typify misconception that anyone can pick stocks at random and win all time.

Perhaps, a more tantalizing advertisement with “How I make 2600% (annualized) on a winning trade” may make us interested. Any seasoned investor will be able to provide a handful of trades that has spectacular performance like 50% in a week. Annualize this and it works out to be 2600% a year. However such trades are few. There is no one in world that has such a method or strategy that is consistent and sustainable.

Fundamentals analysis says best way to predict future trends of a stock is to understand financial figures of underlying company. The fundamental analyst would calculate a theoretical value of company using cash flow analysis, recent dividends and earnings, future dividends and earnings projections plus a host of other economic numbers. If current stock price is lower than calculated value, a trader who uses fundamental analysis would buy this stock.

This writer has opinion that fundamental analysis is difficult to master for it to be useful as a forecasting tool. Understanding and analyzing balance sheets and profit and loss accounts is not enough. You will need to analyze micro and macroeconomic picture as well. Often you will need to be have same knowledge equivalent to senior-management of a company you want to analyze – minus leadership and management skills.

Take example of Google’s free 2 GB e-mail service. How much does it cost them? Probably about $2 yearly for each customer. Assuming 100 million internet users sign up, advertising revenues from this segment alone would provide a tidy profit. It is analyst job to provide a good educated-guess of this number. More importantly, this new signings will provide a customer base to challenge Yahoo and Microsoft. With Google’s dominance in search engine market, data mining of such a huge pool of internet users will provide them with an edge in deciding future strategies over its two nearest rivals. Try translating this to what can Google earn in next two quarters.

One of better tools is Z-Score, developed by Edward Altman, a financial economist and professor at New York University's Stern School of Business, in 1968 to predict corporate bankruptcies within a two-year period. This formula has a 70-plus percent accuracy rate

Technical analysis. The “price action discounts everything” premise is central to charting, also known as technical analysis. Technical analysis uses graphic representations for prices and makes uses of various quantitative techniques to forecast price trends.

A technician makes profits in any market by having positions in line with price trend. When trend is up, then buy. Conversely, when trend is down, then look to sell. Technical analysis is not an exact science, but it is easy to learn and effective.

Technical analysis is a good starting point for beginners. The foundation should include classical technical analysis, Japanese candlesticks, trendlines, RSI, MACD, ADX, stochastics and moving averages. Learners can complete these core topics within three to six months. With constant practice, you should be able to independently analyze and identify current trends in stock market.