Many people are attracted to trading stocks. They are attracted to the possibility of making large profits. Indeed, some people do.
Keep in mind, however, that many people lose money when they trade. By honoring tried-and-true rules of thumb and honing your skills, you can greatly increase the probability of your profits.
Pick Good Companies When Trading Stocks
When you trade, you want to stick with good stocks. Trading high-quality stocks rather than thinly-traded issues is a smart move.
Quality stocks tend to have fewer downside surprises and are characterized by high liquidity, both of which can help achieve consistent profits.
Hone Your Trading Strategy
Don’t just jump into trading willy-nilly. You need to be guided by an overall plan. Think about these points:
- What is your expected timeframe per trade?
- Are you trading in specific sectors of the market?
- Will you exclude certain stocks from consideration?
Leave Emotions Out of Your Decision Making
Needless to say, crafting a well-thought-out plan is a logical process. Once you have a trading plan, don’t deviate from it by succumbing to emotional decisions.
Trade with an Entry Plan
Your plan should tell you exactly how you will enter the trade.
For example, will you go in on a dip in price or wait for a stock to move up from a low before entering?
Know Your Exit Strategy
Your exit plan is a critical part of your trading behavior. You need to know two prices: the price at which you will take your profit and the price at which you will cut your loss.
Cut Your Losses
Yes, cutting losses is perhaps the single most important component of profitability. By not accepting a small loss, you run the risk of destroying your trading capital and being washed out of the trading game.
Overtrading must be avoided. It is often indicative of emotional attachments that are not associated with your well-thought-out plan.
The number of trades that you make depends on the type of trading that you do. If you are engaged in day trading or short-term trading, then you will probably have to trade more frequently. But as a beginner, you should limit the number of trades to a few per week.
Follow the Path of Great Stock Traders
Some people have made fortunes trading stocks. Here are a few of them.
- Warren Buffet, the famous “Oracle of Omaha”, maintained two trading rules: Firstly, never lose money. Secondly, never violate the first rule.
- Sir John Templeton, the legendary global investor, offered that humility in making predictions about stock prices is an important lesson to learn.
Learn by Paper Trading
Paper trading is simply practicing your trading ideas without using real money. It is used to test out your trading strategy to see if it is profitable without putting your capital at risk.
In the old days, traders recorded their stock entries on paper. Then they followed their trading plan until they captured their intended profit or took a small loss.
These days, most traders practice their trading ideas using stock trading demo accounts. This adds more realism to the practice sessions since most demo accounts mimic real-time trading.
Don’t Follow the Trading Gurus Too Closely
Finally, don’t be glued to the talking heads on the news channels. It is far better to come up with a system that suits your personality, temperament and risk profile to a tee.
Yes, you can make great profits trading stocks. Your probability of doing so increases when you follow logical rules and keep your emotions in check.
Interesting Related Article: “The behaviours of profitable forex traders“