Stock Trading

Think and Trade Like a Geek

The use of strategies alone is not enough. In order to further increase your chances of making a profit, you also need to observe the best practices followed by successful stock investors.

 

Sufficient Research

It is not surprising why so many people lose their money when they invest in stocks. Although books on the subject always emphasize the importance of doing research, only a few are able to research properly. Unfortunately, many investors think that simply because they have researched the market for two straight hours, then it would be enough foundation to come up with a sound investment decision. This is wrong. Make sure that you conduct a sufficient research. If you are serious about being a successful investor, then research should be a natural part of your day-to-day life.

 

Start Small

It does not matter how much money you have in your account that you can use for investing. When you are a beginner, you should always start small. In fact, it is recommended that you first use a demo account, so that you can test the water without risking any money. This will also give you a chance to learn how to properly navigate your broker’s platform.

Always start small. Your objective is to familiarize yourself with the actual practice of buying and selling stocks, as well as to develop a winning strategy. Do not worry, once you have a reliable strategy in place, you can always increase the amount of your investment, which will also increase your potential profit.

 

Diversification

Diversifying your investment is one of the best ways to minimize your losses. As they say, you should not put all your eggs in one basket. The reason is that no matter how much you study the stock market, it can only increase our chances of success. But, it can never guarantee the return of positive profit. In fact, there is a possibility that you may even lose your investment. Investing in stocks has its risks, just like any other profitable investment opportunity. By diversifying your investment, you can lower your risk and minimize your losses.

There are different ways to diversify. The most common way is simply to purchase stocks from different companies and not place all your money in a single company. Another way is to diversify by industry. Industries rise, and fall and such is outside of your control. An industry that is well and blooming today may no longer be considered a profitable investment by tomorrow. Therefore, scatter your investment over different industries.

Asset class diversification is another way to diversify. You do this by investing in the different asset class, such as in bonds, stocks, commodities, and others. When you apply this strategy, you should learn how to time it well. For example, in case of an economic recovery, stocks may be your best asset to invest in. However, in case of recession, investing in bonds could be a better option than investing in stocks. Strategy diversification is another effective way to cut down your risk. Depending on where you want to invest or how you want to invest (short term or long term), certain strategies may be more applicable than others. For example, in case of a long-term investment, you simply cannot neglect the use of financial analysis. In the case of a short-term investment, technical analysis may be one of the best strategies that you can use. You might also like to use geographic diversification. Many investors are quite biased and only invest in companies that are located in a particular territory. Take note that there is no industry in a specific geographical location can outperform others continuously. Ups and downs are normal in the stock market. You can also diversify as to time. Take note that you do not need to invest all the money in your account in one day. You can scatter your investments over time. For example, you can invest 20% of your money today and then follow it up with a 30% next month. Just like anything in business, proper timing is essential to success.

Diversifying simply means spreading your investment and not placing it in a single basket. Take note that diversifying alone is not a key to profit. One important part of diversifying is choosing where to diversify and place your money. Therefore, you cannot sacrifice the importance of doing research and analysis.

 

Avoid following Expert Advice all the time

When you are a beginner, you may find it helpful to search the net for pieces of advice coming from the so-called “experts.” This is a common mistake because not all of these “experts” are real experts. These days, it is fairly easy to spread a word and promote one’s self online. In fact, if you are good at marketing, you can easily project an image that you are an expert stock investor even if you have not invested in a single stock in your life. It is also worth noting that even the real experts also commit mistakes from time to time.

The best way to avoid relying on expert is to develop your own understanding of the stock market. After all, what separates an expert from a complete beginner is that an expert has his own view of the stock market and is able to support his view with reasonable defenses, while a beginner usually relies on what other people say. Of course, this does not mean that you should never take the time to read or listen to what the experts have to say. Rather, this only means that you should take every message or advice with a grain of salt. Instead of relying on what experts have to say, you can use their views as additional references to help support your own investment strategy.

 

Beware of the Pump and Dump Scheme

The pump and dump is a common scheme that you should watch out for. Unfortunately, although people are aware of it, many still fall for this fraudulent scheme. So, how does it work? A business or person who owns stocks promotes his stocks and spread positive rumors about them. This is a promotional hype that oversells the value of the stocks. This will tend to draw more attention to the stocks. In turn, this will increase the price of the stocks. When this happens, other investors will offer to buy the stocks thinking that they are a good investment. Now, after the sale of the stocks, the promotion and bad rumor will stop. The price of the stocks will then begin to dwindle down. After all, the true value of the stocks is lower than its value or price during the promotion. The end result is that the seller of the stocks makes a profit, while the buyer possesses a stock whose price is uncontrollably falling down.

Take note that the pump and dump scheme is not a completely bad thing. As you can see, you can take advantage of it and earn a profit. The key is to buy the stocks before or immediately right after the initial part of the pump and dump scheme. You then have to sell them just before their value begins to drop. The best way to do this is to sell the stocks after you see even just a small amount of profit. Do not wait for the promotion to stop. After all, such is outside your control.

 

Do not Hold On to the Stocks for Too Long

It is worth noting that not all investors lose their money for picking the wrong stocks. Some lose their money because they pick the right stocks but hold on to them for too long. Do not underestimate the volatility of the stock market. Make sure to sell your stocks before their price drops. Take your profit while you still can.

 

Understand Volatility

You should have a right understanding of what volatility is. Many people think of volatility as something where the prices of stocks simply rise and fall almost randomly. They often think that after a big rise, then a massive fall can be expected, and vice versa. However, this is not always the case. If it were so, then volatility would be something that is easy to predict. The volatility of the stock market is influenced by various forces. This means that even after a massive drop in the prices of stocks, it is still possible that another drop will take place. This also means that the result of a particular trade is independent of past trades or transactions. Unfortunately, some people think that since their last three investments did not work out, then it is most probably that the next trade will end up with a favorable outcome as long as they use the same strategy. However, this is wrong. In fact, there is a good chance that the subsequent trade or investment will also be a loss. The reason lies in the strategy that you are using. If the strategy keeps on losing, then it is a sign that you should change or at least modify your strategy. True professional investors do not rely on mere luck. They know that if they come up with a true winning strategy, then the chances of raking in some profits would be high. Take note that even if you have a good strategy, there is still a chance that you may lose an investment. After all, there is no strategy that can guarantee 100% the return of positive profits. But, with consistent research, hard work, and practice, you can tilt a favorable outcome to your side and establish a winning edge over the stock market.

 

Keep a Trading Journal

Although not required, keeping a trading journal can be beneficial. Do not worry; you do not need to be a professional writer to maintain a trading journal. However, you do need two things: One, you need to be completely honest. This means that you should admit and accept your strengths and weaknesses, as well as the outcome of every investment that you make without any bias. And, two, you need to update your journal on a regular basis.

Your trading journal can contain any information that you want that is related to your life being an investor. Ideally, you should write in your journal the reasons why you want to invest in stocks, as well as your short-term and long-term goals. This is something that you can come back to in the future in case you get lost or confused along the way. Your journal should also include your strategies, the investments that you make, and your objectives. Simply put, your journal is as meaningful as you make it.

It is recommended that you write as much as you can in your journal. The reason is that your journal should serve as an unbiased mirror that will allow you to view yourself from a different perspective. It will make it easier for you to spot any weakness or part of your strategy that still needs to be modified. There are many things that your journal can teach you. Again, the important thing is for you to be completely honest with every detail that you write in your journal, and update it regularly.

 

Do NOT Approach Investing as a Hobby

The sad truth is that most people who invest in stocks approach the stock market as a hobby. Although you are always free to consider it a mere hobby, you can also expect to get a fair result just as when you approach any other business as a mere hobby, without any commitment or dedication. If you want to get a good amount of regular income from your investment, then you should take it as a business or a profession. The problem with those that consider this kind of venture as mere hobby is that they fail to exert the right amount of effort and research that will enable them to increase their chances of making a profit.

 

Wait it Out

Sometimes the best way to deal with the stock market is simply to wait it out. It is inevitable that you will soon encounter a time when the market is simply going down. Instead of being too bothered and placing risky investments, just wait it out. Waiting things out does not mean that you would completely ignore the market. It means that you should still follow what is happening in the market, but do not make any move or investment. Wait for the right time to act. When the market recovers, then be sure that you are there to take advantage of it.

 

Do NOT be an Emotional Trader

Although it is good to have passion in what you do, you should not allow your passion or emotion to get in the way and cloud your judgment. When you make an investment, it is not enough that you feel good and confident about it. Rather, you should feel confident of your trade because you have done the right research and study, and that there are good reasons to believe that it is the best investment. When you allow your emotions to cloud your judgment, you will not be able to think clearly. Therefore, at any time that you feel like your emotion is getting in the way of your decision making, stop and do not place any investment whatsoever. Wait for the undue emotion to disappear before you make a move.

 

Take Advantage of a Bull Market

A bull market describes the stock market. It signifies that the prices of stock in the market are rising — which is good. On the contrary, when the prices are falling, then it is called as a bear or bearish market.

You should learn to take advantage of a bull market. Of course, the key here is to be able to recognize that a bull market is the current situation of the market or when a bull market is just about to take place. You need to place your positions (investments) as early as possible so that you can take advantage of the rise in the prices of stocks. A bull market usually takes place after a bearish market. It is important for you to recognize as quickly as possible when a bear market would end and a bull market to begin. To do this, you need to keep up with your day-to-day research and analysis. Although a bull market may be promoted on the news, the best way to take advantage of it is by placing your investments at its inception. The reason is that a bull market is usually followed by a bearish market. If you wait for a bull market to be announced before you act up, then it may already be too late for you. Take note that the way to be ahead of the stock market is to be ahead of the competition. Be the first to grab every opportunity.

 

Test and Develop your Strategy

Always test your strategy, and test it multiple times before you use it with real money involved. Take note that you have to repeat this process even if you just change or adjust a minor part of your strategy. A good way to do this is by using a demo account or by investing the minimum amount.

When you are a beginner, a big part of your time should be spent on developing a reliable strategy that can earn you some profits. It is advisable that you should focus on increasing your success rate. Take note that as a beginner, your main objective is not to earn money right away. Your first concern is to develop a winning strategy. Of course, a winning strategy depends on the situation, as well as on the amount of research that you make. When it comes to success in the stock market, the more information you have, the better is your chances of hitting the right investment. Do not rush. It takes times to know the best investment decision.

 

Never Chase After your Losses

This is a common advice given to gamblers: Do not chase after your losses. A quite surprising truth about this is that most people who chase after their losses are well aware of this advice. But, despite the knowledge that it is not a good practice to chase after one’s losses, they still fall into this pitfall.

Investors usually get strongly tempted to chase after their losses after a big loss. After a big loss, you simply cannot think clearly. Hence, even if you know that chasing after your losses is not a good idea, you may get tempted to rush and do everything to get back what you have lost. In the process, you will probably lose all your money. Therefore, so that you will not lose control of yourself, make sure to have the strength to stop making any investment when you encounter a significant loss. In fact, give yourself a time to forget everything about the stock market. People usually chase after their losses by placing a bigger investment with a hope that they may be able to recover what they have lost and also win even a bit of profit. After all, they have already invested some times and effort. The key here is that instead of chasing after what you have already lost, you should stay calm and focus on your winnings or profits. Take note that every investment that you make is unique from all the rest. Therefore, when you encounter a loss, just admit and accept the loss, and move on. After all, even the best strategy in the world will also lose from time to time. The important thing is for you to end up with a positive profit once you add up everything.

 

Only Invest the Money that you can Afford to Lose

Another common advice given to gamblers is to only play with the money that you can afford to lose. Well, although you will not be gambling, you must realize that this is still an investment. And, like any other investment, there is a chance that you may not earn anything or even lose all your money. Therefore, to be safe, you should not use the money that you need to pay for your obligations, such as the money for your household expenses. It is also not advisable to borrow money from other people. This is to protect you from being drowned in debt in case the worst thing happens. You can, however, partner up with someone, if you need more financial backing.

 

Do NOT Give Up

The best stock investors have their own bad stories to tell. They have many experiences of being defeated in the stock market. However, they are the ones who have survived the challenges and have won the competition. As you journey and spend more time investing in stocks, you will also face numerous challenges. The important thing is for you not to give up and to learn from your mistakes. The stock market is not your enemy. In fact, it is your goldmine for profit. Your only enemy is yourself. You should exercise discipline and professionalism. When you encounter some bad streaks, you need to stay strong and give yourself time to recover. Do not give up.

 

Relax

Give yourself a break. It is so easy to get addicted to the stock market, especially when you see some profits coming in. However, you need to give yourself time to relax. Remember that you can come up with better investment decisions if you allow your mind to rest. Also, it takes time to earn a significant profit in the stock market. Therefore, give yourself time to relax from time to time, and then come back to work stronger.