Wednesday, November 17, 2010

7 Things Every Novice Traders And Investors Should Know

Anytime that you make a trade in the stock market, you need to know what you’re up against. Knowing the following seven points will not only help you in your trades, it will put you in the right frame of mind in order to be successful trader for the long term, which is what we all desire, and what really counts.
1. Don’t Throw Good Money After Bad – If you’ve got a losing stock, don’t make excuses or say things like “now it’s really become a bargain” or “it can only go up from here.” Those are famous last words. If you own an underperforming stock, sell it – today! Don’t wait, and certainly do not add to your shares of that stock. That is a recipe for full-blown disaster. There’s a reason that the stock you own is underperforming. That reason may not be obvious to you now, but eventually the reasons will come out. Your money can be put to much better use buying a stock that is in an uptrend and can make you money right now.
2. Don’t Buy Low and Sell High – We’ve heard this phrase all of our lives: “buy low and sell high.” You can’t go wrong with that advice, right? Actually, that’s wrong, because buying low implies buying a stock that has been on a losing streak, or one that is underperforming. Those are usually the worst kind of stocks to buy. The best stocks to buy are those that have firmly established a definite uptrend. So a more appropriate phrase might be, “buy high and sell higher.” Another piece of advice that goes along with this is as follows: don’t try to pick the bottom. Let someone else try to figure out what the bottom is. It could be that the stock has a few more weeks to go before it completely bottoms out. No use wasting your money guessing on where that point might be.
3. Don’t Swing for the Fences – Everyone wants to hit a home run once in a while, but making that your primary trading aim means you are risking your capital and your sanity. The only way to have long-term success in your trading career is by taking many small gains instead of a few big gains. Home runs are few and far between. They are a nice bonus when they happen, but don’t expect them every time. If a stock has made you some gains, take them. Don’t get greedy or expect a doubling or tripling in price, because you could end up losing what you have already gained, and sometimes a lot more. Take your profits, and move on to the next stock.
4. Know the Best Times of the Day to Trade – The best times of the trading day are the opening and the closing. More specifically, these times are the first hour and a half (9:30 to 11:00 am) and the last hour and a half (3:30 to 5:00 pm) that the stock market is open. That is when there is the most price movement and the highest volume. This is also why the opening and closing price quotes are used in mapping out stock charts. The volume around midday generally dies down quite a bit for one major reason: too many traders, especially the big institutional players (the ones who can noticeably move the market) are out to lunch. Some may take earlier lunches, and some may take later lunches, but there are always big players who have gone to lunch during this time. The people who they have left in charge are usually younger associates with less experience who don’t have much say in decision-making. So it’s best to avoid both buying and selling during this period of the day, as any price movements could be false signals or fake-outs.
5. Do Not queue to Buy or Sell Before the Market Open – Buying or selling a stock before the open (8:30-8:59 am), in what is known as a pre-market trade, is usually not recommended. During the pre-market period, there is a considerable lack of volume. As a result, a few small traders can quickly bid up the price of a stock to a fever pitch. If you try to buy this stock during this time, it will usually come back down after the market opens. Conversely, if you try to sell a stock pre-market, often times you would have sold for a better price if you have waited a minute or two (or five) after the opening bell. Because of the lack of volume, along with a real dearth of institutional investors, it’s best to avoid pre-market trades altogether.
6. Sometimes No Trade is the Best Trade – When markets are falling and volatility is running rampant, staying “on the sidelines” in an all-cash position is often the best policy. Now it’s true that opportunities do arise when market volatility starts going crazy, but this is not the time to be a hero. Wait out the storm. When there is blood in the streets, stay out of the way of the stampeding masses. Once the market sorts itself out, and volatility dies down, it becomes safe to get back in the market. That is also why you should never feel bad about getting your stops hit (getting “stopped out” of a trade). Those stops, which often indicate small losses, save you from much bigger losses later on, bigger losses which can stop you from trading altogether. In fact, what may appear as a small loss at first, may actually be a “gain” in your favor; for example, if you sell a stock for a $0.50 loss, but the stock then continues to lose another $2, you should not consider that trade as a loss.
7. Trading online yourself or calling your stockbroker to execute trades? – If you are not getting the results you hoped for in your trading, should you get professional assistance? Being human beings, we are all susceptible to the ebb and flow of our emotional states. One of the hardest things to do is to disengage your emotions when trading, whether those emotions involve fear (when your stocks are falling) or greed (when your stocks are rising), or just the everyday emotions that stem from your personal life. If you can find a trusted and reliable good stockbroker, you are then able to bypass a lot of your own emotional baggage, and follow the lead of someone who is experienced in the discipline of trading. Find someone who has a good track record, and is willing to back up their claims of success.