There’s no escaping it.You’ve dabbled in the Internet, made a few trades and earned a few bucks. You think you’re pretty good. You’re not alone.
The ease and low cost of trading over the Internet coupled with the boom in major stock markets have convinced many people that they’re the greatest traders of all time and the masters of the market.
Get a grip, people! For all you budding George Soros’s out there here’s a helpful truism: it’s easy to make money when the market is going up, but only smart traders can keep their money and their nerve when the market hits the skids.
The greatest pitfall that has humbled many a market player is the belief that they are invincible. It is sheer folly for anybody to think they can outsmart the market. Because of the ease of the Net many people think that if misfortune comes knocking they’ll be able to duck and dive and trade their way out of disaster with a few clicks of the mouse.
Believe this and you will die, and die poor. An example of such naivete is a young woman in Texas who thought she could outsmart the market and traded herself into a hole so big she wound up losing all her money and her parents’ house to boot. (She was the co-owner and offered it as collateral on over ambitious trade on the Net. You can imagine her parents’ surprise.)
As one of the millions trading on the Net you must realise you are not alone. What catches your eye also tempts others. That’s what drives markets. And when you want out you can bet millions of others are also heading for the exit.
There are some simple rules and a few guidelines that may make you a better trader online, as well as off.
First, ask yourself why you’re investing. How much money do you have and how much do you need? It helps if investors have a goal such as education costs, a holiday or new home.
Use the abundance of information available. Visit websites that offer tutorials. They will help you make sense of trading strategies and assist you in calculating the returns you need to reach your goals.
Try to invest for growth and income. You can invest domestically and globally and in different sectors. The Internet can help you find different kinds of investments and allow you to see what professional investors recommend.
Research your investment choices. Do your homework and don’t be swayed by well-meaning advice from friends and family. Stick to your own desires.
When you start trading remember the Nasdaq or over-the-counter market in the United States is the wildest place to trade in. If you want to take a stab at trading here be careful. If you’re not careful you could lose your shirt. You should only place a market order (an order to buy or sell at the going market price) when you absolutely, positively must get out. Do not use market orders to buy! Nasdaq stocks fluctuate too dramatically, too fast.
It is much safer to use what are called limit orders, which are orders to buy or sell shares of a stock at a specified price. It’s like bidding at an auction. You choose the price you are prepared to pay. If you get it, it’s great. If you don’t, you either offer a new bid or move on.
Cut your losses and let your profits run. Most online traders will testify it’s very easy to trade in and out of shares often when it’s cheap and you have an itchy trigger finger.
However, rare is the trader who was successful over a long period of time who didn’t sell out his losing positions quickly. Large losses are just too difficult to recover from.
Remember this simple maths: a 50% loss requires a 100% gain to break even. A loss of 15% to 20% is tolerable; anything more is not.
At the end of the day, the most successful traders’ accounts include a number of “small losers”, a number of “small winners” and a few “big winners”. On the other hand, the less successful traders’ statements usually includes lots of “small winners” and several “big losers” that they refuse to sell because, in their minds, to do so would mean admitting to a mistake.
Buy on expectation and sell when the news comes out. Investors often wonder why stocks frequently decline on the day good news is announced. The reason is simple – professional investors anticipate good news and buy the stock prior to the news release. In many instances, stocks move up several days preceding the announcement. If you believe a company is about to announce good news, buy it before the news comes out and sell it after the news breaks.
Ride through the big sell-off. There’s an old trading maxim – “don’t try to catch a falling knife” -meaning don’t think you are smart enough to know when a stock has hit “bottom”. Many traders have gone to the poorhouse trying to figure out how low a stock will go when the bottom falls out.
Most falling stocks usually follow a pattern before they touch rock bottom. First they fall and then stop. Then they rally a little before making a final big plunge. Sometimes there are a few small rallies before the dive. If the stock price does not dip below that first low point prior to the beginning of a rally, then and only then should you consider buying the stock.
Read the news. Strong stocks do not decline much on bad news and usually begin to rally quickly on good news. Weak stocks do not rally much on good news and drop sharply on the slightest disappointment.
Avoid stocks that are hyped and everyone else is playing. These stocks don’t always make for the best trading opportunity. If it’s a company you really like buy it. But a better strategy is to look for a stock that has been quiet for a while, which might be an indication that something is changing. If you assume a position before the crowd arrives, you should have a better feel and a leg-up on the late arrivals.
Have fun and relax. No one does well under pressure. If you figure you will be wrong on 30% to 40% of your trading, cut your losses quickly and trading will become more fun and profitable.