Having been trading stocks and options in the capital markets professionally over the years, I have seen many ups and downs.
I have seen paupers become millionaires overnight...
And
I have seen millionaires become paupers overnight...
One story told to me by my mentor is still etched in my mind:
"Once, there were two Wall Street stock market multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their stock market forecasts in newsletters. Each charged US$10,000 for their opinions. One trader was so curious to know their views that he spent all of his $20,000 savings to buy both their opinions. His friends were naturally excited about what the two masters had to say about the stock market's direction. When they asked their friend, he was fuming mad. Confused, they asked their friend about his anger. He said, ‘One said BULLISH and the other said BEARISH!'"
The point of this illustration is that it was the trader who was wrong. In today's stock and option market, people can have different opinions of future market direction and still profit. The differences lay in the stock picking or options strategy and in the mental attitude and discipline one uses in implementing that strategy.
I share here the basic stock and option trading principles I follow. By holding these principles firmly in your mind, they will guide you consistently to profitability. These principles will help you decrease your risk and allow you to assess both what you are doing right and what you may be doing wrong.
You may have read ideas similar to these before. I and others use them because they work. And if you memorize and reflect on these principles, your mind can use them to guide you in your stock and options trading.
PRINCIPLE 1
SIMPLICITY IS MASTERY
When you feel that the stock and options trading method that you are following is too complex even for simple understanding, it is probably not the best.
In all aspects of successful stock and options trading, the simplest approaches often emerge victorious. In the heat of a trade, it is easy for our brains to become emotionally overloaded. If we have a complex strategy, we cannot keep up with the action. Simpler is better.
PRINCIPLE 2
NOBODY IS OBJECTIVE ENOUGH
If you feel that you have absolute control over your emotions and can be objective in the heat of a stock or options trade, you are either a dangerous species or you are an inexperienced trader.
No trader can be absolutely objective, especially when market action is unusual or wildly erratic. Just like the perfect storm can still shake the nerves of the most seasoned sailors, the perfect stock market storm can still unnerve and sink a trader very quickly. Therefore, one must endeavor to automate as many critical aspects of your strategy as possible, especially your profit-taking and stop-loss points.
PRINCIPLE 3
HOLD ON TO YOUR GAINS AND CUT YOUR LOSSES
This is the most important principle.
Most stock and options traders do the opposite...
They hold on to their losses way too long and watch their equity sink and sink and sink, or they get out of their gains too soon only to see the price go up and up and up. Over time, their gains never cover their losses.
This principle takes time to master properly. Reflect upon this principle and review your past stock and options trades. If you have been undisciplined, you will see its truth.
PRINCIPLE 4
BE AFRAID TO LOSE MONEY
Are you like most beginners who can't wait to jump right into the stock and options market with your money hoping to trade as soon as possible?
On this point, I have found that most unprincipled traders are more afraid of missing out on "the next big trade" than they are afraid of losing money! The key here is STICK TO YOUR STRATEGY! Take stock and options trades when your strategy signals to do so and avoid taking trades when the conditions are not met. Exit trades when your strategy says to do so and leave them alone when the exit conditions are not in place.
The point here is to be afraid to throw away your money because you traded needlessly and without following your stock and options strategy.
PRINCIPLE 5
YOUR NEXT TRADE COULD BE A LOSING TRADE
Do you absolutely believe that your next stock or options trade is going to be such a big winner that you break your own money management rules and put in everything you have? Do you remember what usually happens after that? It isn't pretty, is it?
No matter how confident you may be when entering a trade, the stock and options market has a way of doing the unexpected. Therefore, always stick to your portfolio management system. Do not compound your anticipated wins because you may end up compounding your very real losses.
PRINCIPLE 6
GAUGE YOUR EMOTIONAL CAPACITY BEFORE INCREASING CAPITAL OUTLAY
You know by now how different paper trading and real stock and options trading is, don't you?
In the very same way, after you get used to trading real money consistently, you find it extremely different when you increase your capital by ten fold, don't you?
What, then, is the difference? The difference is in the emotional burden that comes with the possibility of losing more and more real money. This happens when you cross from paper trading to real trading and also when you increase your capital after some successes.
After a while, most traders realize their maximum capacity in both dollars and emotion. Are you comfortable trading up to a few thousand or tens of thousands or hundreds of thousands? Know your capacity before committing the funds.
PRINCIPLE 7
YOU ARE A NOVICE AT EVERY TRADE
Ever felt like an expert after a few wins and then lose a lot on the next stock or options trade?
Overconfidence and the false sense of invincibility based on past wins is a recipe for disaster. All professionals respect their next trade and go through all the proper steps of their stock or options strategy before entry. Treat every trade as the first trade you have ever made in your life. Never deviate from your stock or options strategy. Never.
PRINCIPLE 8
YOU ARE YOUR FORMULA TO SUCCESS OR FAILURE
Ever followed a successful stock or options strategy only to fail badly?
You are the one who determines whether a strategy succeeds or fails. Your personality and your discipline make or break the strategy that you use not vice versa. Like Robert Kiyosaki says, "The investor is the asset or the liability, not the investment."
Understanding yourself first will lead to eventual success.
PRINCIPLE 9
CONSISTENCY
Have you ever changed your mind about how to implement a strategy? When you make changes day after day, you end up catching nothing but the wind.
Stock market fluctuations have more variables than can be mathematically formulated. By following a proven strategy, we are assured that someone successful has stacked the odds in our favour. When you review both winning and losing trades, determine whether the entry, management, and exit met every criteria in the strategy and whether you have followed it precisely before changing anything.
In conclusion...
I hope these simple guidelines that have led my ship out of the harshest of seas and into the best harvests of my life will guide you too. Good Luck.
Thursday, October 23, 2008
Ultimate Stock Market Trading Survival Guide
Stock market trading is often touted as something so simple anyone can do it and do it better themselves than if they used a broker. While this is true, it's important to keep an eye out for some of the common mistakes people make.
People are always advised never to invest money they can't afford to loose in the stock market. Even with the best decision, there's still a chance that things can go wrong, especially when emotions are involved. Pay attention to all the information you can find. Choosing a stock because its symbol is your initials might be a good sign that you need to double check how rational you're prepared to be about investing.
A rational investor has a plan. Knowing when to get out is as important as when to get in for a given stock. Planning your work and then working your plan isolates you from more volatile emotions and emotional responses. You're taking an active role in the stewardship of your finances; remember the long term goals you have.
But no plan, no matter now good will work all the time. Invest your money in discrete lots and never invest all your money in one stock. Yes, you're giving up the potential for gains but you're also providing a hedge against things going tragically wrong.
Understand that you're learning in this and set up a mock portfolio first to allow you to gain experience. The more experience you have the better you'll do at trading stocks. Getting better means you can make more profitable trades, trade more stocks - but you have to earn that experience. There is no substitute for it.
When we learned how to drive we didn't start off driving a Formula One car or a drag racer. Most of us learned with something that wasn't so dangerous to us and more forgiving of mistakes. The stock market should be treated like that. While it's possible to having amazing returns and success with the stock market, handled inappositely can lead to disastrous results. Before you play with your entire budget and exercise more complex options, be careful that you know how the basics work.
Like driving, investing in the stock market can become second nature and allow you to take into consideration more factors and produce better results. While you might feel out of your depth when you first start investing, you'll build up the experience to jump onto the highway with cars traveling 70 miles an hour and feel comfortable.
Keep in mind that it's a learning experience and don't be afraid to make mistakes. Also remember that it is game and the stakes are very real. When you do something, know why you're doing it.Rright down a log of your activities and your decisions and read and understand your environment. Darwin said that it's not the strongest species that survives, but the most adaptable. Survive and overcome the initial learning curve and you can succeed.
People are always advised never to invest money they can't afford to loose in the stock market. Even with the best decision, there's still a chance that things can go wrong, especially when emotions are involved. Pay attention to all the information you can find. Choosing a stock because its symbol is your initials might be a good sign that you need to double check how rational you're prepared to be about investing.
A rational investor has a plan. Knowing when to get out is as important as when to get in for a given stock. Planning your work and then working your plan isolates you from more volatile emotions and emotional responses. You're taking an active role in the stewardship of your finances; remember the long term goals you have.
But no plan, no matter now good will work all the time. Invest your money in discrete lots and never invest all your money in one stock. Yes, you're giving up the potential for gains but you're also providing a hedge against things going tragically wrong.
Understand that you're learning in this and set up a mock portfolio first to allow you to gain experience. The more experience you have the better you'll do at trading stocks. Getting better means you can make more profitable trades, trade more stocks - but you have to earn that experience. There is no substitute for it.
When we learned how to drive we didn't start off driving a Formula One car or a drag racer. Most of us learned with something that wasn't so dangerous to us and more forgiving of mistakes. The stock market should be treated like that. While it's possible to having amazing returns and success with the stock market, handled inappositely can lead to disastrous results. Before you play with your entire budget and exercise more complex options, be careful that you know how the basics work.
Like driving, investing in the stock market can become second nature and allow you to take into consideration more factors and produce better results. While you might feel out of your depth when you first start investing, you'll build up the experience to jump onto the highway with cars traveling 70 miles an hour and feel comfortable.
Keep in mind that it's a learning experience and don't be afraid to make mistakes. Also remember that it is game and the stakes are very real. When you do something, know why you're doing it.Rright down a log of your activities and your decisions and read and understand your environment. Darwin said that it's not the strongest species that survives, but the most adaptable. Survive and overcome the initial learning curve and you can succeed.
Stock Market Trading Tutorial
There's nothing more exciting than playing the stock market. Playing is the key word here. When you can invest $1000 and within 24 hours make it become $1500, then you develop a hunger for the game. If you dream of doing this, but are afraid to take your first step into the world of stock trading, don't worry. Here's a little stock market trading tutorial that should whet your appetite enough to open a brokerage account.
Every stock market trading tutorial needs to begin with the language of the trade. Of course, you know what the stock symbol is; it's the letters that represent the company. You should know what stock shares are. If you don't, it's actually part ownership in a company.
When you make a trade, there are two types. The first type is the market trade; you buy or sell the stocks for the going rate, whatever it is at the moment. The second is a limit trade and one of the most important types in the stock market trading tutorial. Here you set the price to you'll buy or sell the shares. When you trade penny stock, you ALWAYS use a limit order. If you remember nothing else from this share market education, remember that. If you want to buy shares for .001 per share and have $1000 to do that, plus the cost of the trade, and order 1,000,000 shares but use the market price you find out very quickly that you don't always get what you think you'll get. Market makers, the men that control the shares of specific companies, can decide that they really want .01 a share and suddenly you owe $10,000. Even if there is no foul play, the market moves swiftly and a tenth of a penny can make the difference between a profit and a loss. So, lesson one of the stock trading tutorial is use the limit order and decide ahead of time how much you want to pay and what price you want from the stock.
Lesson two of the stock market tutorial goes with the limit order. You don't need to be a slave to the market. Look for stocks with trends. Some prices go up and down in regular intervals. They volley between two prices. If you find one that does, pick a number close to its bottom price and put in a limit order. You can then go about your business and when it hits that price, you automatically bought it. If the price is lower, you got it for the lower price. The share trading education doesn't end there. As soon as you find you bought the stock, put in a sell limit order for the upper end of the cycle, and go watch television or eat lunch. The transaction takes place when it hits that price. Do you always make as much as you can? Absolutely not, but you didn't have expend all the effort either. This stock market trading tutorial gives some share trading education that doesn't require a lot of effort.
Lesson three of the stock market trading tutorial involves knowing how much you want to make on the trade. "What a silly lesson for a stock market trading tutorial." You say. "I want to make as much as possible." Sorry, wrong answer. You need to find a comfortable profit and not get greedy. Remember, much of the money you make is in just a few days if you're a short-term investor. If you made $50 the first day and then added it to you investment and made $60 on that the second day and kept adding and increasing your return, the numbers grow geometrically and just like the penny doubled every day for one year, you soon make a huge sum. If you try to guess at exactly when to trade, you often end up losing all profit. Investing shares for beginners quote, "A profit, like cash, makes no enemies." Keep that in mind from this stock market trading tutorial.
A quick review of the three lessons from the stock market trading tutorial:
1. Use a limit order particularly with penny stocks.
2. Look for trends and set buy and sell limits with them and don't be a slave to the market.
3. Know how much profit is comfortable and sell when you reach it.
Every stock market trading tutorial needs to begin with the language of the trade. Of course, you know what the stock symbol is; it's the letters that represent the company. You should know what stock shares are. If you don't, it's actually part ownership in a company.
When you make a trade, there are two types. The first type is the market trade; you buy or sell the stocks for the going rate, whatever it is at the moment. The second is a limit trade and one of the most important types in the stock market trading tutorial. Here you set the price to you'll buy or sell the shares. When you trade penny stock, you ALWAYS use a limit order. If you remember nothing else from this share market education, remember that. If you want to buy shares for .001 per share and have $1000 to do that, plus the cost of the trade, and order 1,000,000 shares but use the market price you find out very quickly that you don't always get what you think you'll get. Market makers, the men that control the shares of specific companies, can decide that they really want .01 a share and suddenly you owe $10,000. Even if there is no foul play, the market moves swiftly and a tenth of a penny can make the difference between a profit and a loss. So, lesson one of the stock trading tutorial is use the limit order and decide ahead of time how much you want to pay and what price you want from the stock.
Lesson two of the stock market tutorial goes with the limit order. You don't need to be a slave to the market. Look for stocks with trends. Some prices go up and down in regular intervals. They volley between two prices. If you find one that does, pick a number close to its bottom price and put in a limit order. You can then go about your business and when it hits that price, you automatically bought it. If the price is lower, you got it for the lower price. The share trading education doesn't end there. As soon as you find you bought the stock, put in a sell limit order for the upper end of the cycle, and go watch television or eat lunch. The transaction takes place when it hits that price. Do you always make as much as you can? Absolutely not, but you didn't have expend all the effort either. This stock market trading tutorial gives some share trading education that doesn't require a lot of effort.
Lesson three of the stock market trading tutorial involves knowing how much you want to make on the trade. "What a silly lesson for a stock market trading tutorial." You say. "I want to make as much as possible." Sorry, wrong answer. You need to find a comfortable profit and not get greedy. Remember, much of the money you make is in just a few days if you're a short-term investor. If you made $50 the first day and then added it to you investment and made $60 on that the second day and kept adding and increasing your return, the numbers grow geometrically and just like the penny doubled every day for one year, you soon make a huge sum. If you try to guess at exactly when to trade, you often end up losing all profit. Investing shares for beginners quote, "A profit, like cash, makes no enemies." Keep that in mind from this stock market trading tutorial.
A quick review of the three lessons from the stock market trading tutorial:
1. Use a limit order particularly with penny stocks.
2. Look for trends and set buy and sell limits with them and don't be a slave to the market.
3. Know how much profit is comfortable and sell when you reach it.
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