The Best 50 Trading Tips
Section one – Before you trade
Trader or investor? Short-term or long-term? Perhaps you will address these issues prior to making your first stock market investment although that is unlikely. I imagine most people will jump into the market without any great thought given to any aspect of trading. Usually the first investment that someone makes is based on word of mouth from a well- meaning friend. No plan, no exit strategy, no idea of anything.
This book is a book of trading (or investing – the words are interchangeable) tips. It is not a book with in depth detail on developing a trading plan or how to use stop loss orders effectively or what sort of buy signals work best. That sort of detail is written in my book “Exploding the Myths – What your broker doesn’t know or won’t tell you”.
Tip 1 – Develop a trading plan
The only aspect of the market where all the experts agree is that you should develop a trading plan. While this is sound advice, very few are willing to tell you precisely what should be in that plan. Trading plans will differ in some areas due to an individual’s needs, risk profile and age. There are many other areas where the same rules should apply to all market participants. For instance a “buy signal” is a buy signal regardless of age, trader, investor, long-term, short-term etc.
This document is not designed to give all the required details of a trading plan however the vital components as I see it are; recognized buy signals, confirmation signals, risk management rules, money management rules, managing the trade and exit strategies.
Your plan will evolve over time as you gather experience and it will alter a little between bull and bear markets so you must cater for a degree of flexibility. The ultimate goal of your plan should be to have written it in such a way that it can be implemented by a novice teenager.
Before purchasing a stock, ask yourself the question “How much am I risking on this trade?” rather than “How much could I make on this trade?”
Tip 2 – Invest Visually
By investing visually I am strongly suggesting that you look at a price chart of any stock prior to any purchase. Too often people say to me “every time I buy a stock it goes down one or two days later”. I would suggest that these purchases are generally made when the price is in an established downward trend.
Only by looking at price action on a chart can you make a fair assessment of whether the price is rising or falling.
Tip 3 – Set goals
Set goals as you would with business ventures. These goals would include things such as what hours you are going to work, whether you are going to work from home or an office where you are free to do some analysis. Track your win/loss ratio so that you have a target to improve upon.
Another statistic you should keep is your profit/loss ratio so you can target, revise and improve your trading.
You need to be doing your best to have a win/loss ratio of better than five out of ten and a profit/loss ratio of two to one. If you get to the point where you are winning six out of each ten trades and making twice as much on the winning trades compared to the losing trades then you are going to be very profitable.
In particular track your win/loss ratio and profit loss ratio so that you have a target to improve upon.
Tip 4 – Do not make fresh trading decisions during market hours
Make all of your trading decisions when the market is closed, then those decisions will be based on your analysis and your plan. Decisions made during the day when looking at live data are generally spur of the moment decisions based on emotion. Many people have the mistaken impression that watching a screen with prices flashing everywhere gives the watcher the divine right to know the next price. Unfortunately this is a total fallacy; no one truly knows what the next 1 minute will bring, let alone the next week.
Watching “live data” can be exciting, but for most people it does not lead to higher trading profitability. On the contrary it usually leads to over trading, therefore high brokerage costs and emotional and erratic trading.
Tip 5 – Take windfall profits
With stocks priced above two dollars I have a rule for taking unexpected large profits. The rule is simple: “If in any five consecutive day period the price advances twenty percent I will sell the stock”. Each weekend I check the closing price of my stocks, add twenty percent and place an order to sell at any time during the next week if that price target is reached. This will generally happen on the announcement of a takeover bid. Using this rule also overcomes the big question of “What should I do with the stock that I own during a takeover?”
The rule is simple: “If in any five consecutive day period the price advances twenty percent I will sell a minimum of half my holding.” This rule is applicable for stocks priced over $2.00.
Tip 6 – Trading Journal
Keep a journal of your trades listing your trading plan criteria and how the buy/sell fits the plan. Create a daily trading journal to record feelings and actions. Print out charts and record entry signals and stop losses. Once the trade is closed print a chart and mark exit points. Apart from recording details of a particular trade I feel it is important to record your emotions prior to entering a particular trade. Your trading plan should give you consistency and this should be shown in your trading Journal. Quite often traders will ask me what they are doing wrong.
Generally I have found that they might have done, say, 10 trades all with different entry and exit methods. In this case it is bordering on impossible to help them but if they were consistent and did the same thing five times I would then be able to offer constructive criticism and probably detect any methodology that is not working.
Apart from recording details of a particular trade I feel it is important to record your emotions prior to entering a particular trade.
Tip 7 – Record keeping
The record keeping I am talking about is not the information that you would enter into the trading journal; it is the records required for the tax man. Talk to your accountant regarding this matter. Most brokers or broking platforms can provide accurate end of year statements to satisfy the needs of auditors, accountants and the tax man.
Tip 8 – Paper Trading
Many experts will recommend paper trading. This is practicing your trades without actually making an investment. This theory is quite sound however having watched literally hundreds of new investors paper trading I have never seen one that was not profitable. The problem is that the instant they put their paper trading into practice, almost without exception they start to lose money. There is a very good reason for this. Your emotions change dramatically once you actually make an investment and start watching the fluctuations in a share price. My advice is by all means do some paper trading but when you start paper trading make a small investment and buy a stock.
You will then feel the emotions of trading why you are still practicing. Trading is not for everyone but it is only once you have entered the market that you will be in a position to determine whether you have a future as a trader. I liken paper trading to sitting in a car for months reading the manual. I believe that it is far better to turn the key on and get moving, preferably with someone at your side helping you on your journey. In other words find a mentor that you can work with.
If you are going to “paper trade” don’t spend too much time at it. Better to test yourself in the market with a small investment.
Tip 9 – Never try to pick a bottom
Never buy a falling stock thinking that you are buying a bargain – it could be like catching a falling knife. Unfortunately our lifelong indoctrination leads us to attempt to buy something at a low price, however applying that philosophy to the stock market can be fraught with danger. None of us know where the bottom price will be or when the price of a stock will cease to fall, so generally it is far easier and safer to buy a stock once it has begun to rise in price.
Always wait for a buy signal before entering the market.
Tip 10 – Never over trade
At some stage during your trading career you will probably find that you are trading too often. This is one of the reasons why you need a trading plan with strict rules. Self-discipline is imperative.
Tip 11 – Never plunge
The majority of new entrants to the market will open an account with 5 or 10 thousand dollars and invest all those funds into one stock, in all likelihood based on a “hot tip”. Far better to have a planned approach and invest in more than one stock, “Don’t put all your eggs in one basket” is an old expression with major relevance to the stock market. By the same token you need to avoid over diversifying.
Tip 12 – Beware “The Market”
Too much emphasis can be placed on the movement of “the market”. Is it going up or down and what will happen next? You will often hear economists and various brokers and market commentators having their say. It is all crystal ball gazing at best and can also be very confusing. It’s far better to concentrate on each individual stock.
Unless you are an index trader there is no gain to be made from analysing which way the market is heading. Concentrate on the stocks you own. That is where you make money.
Tip 13 – Beware the “big” numbers
Anyone who has been out shopping should be aware that the large number of items you may wish to purchase are priced at $2.99 or $9.99 or $13,990.
$2.99 sounds far cheaper than three dollars and yet an item priced at $2.99 is going to cost is three dollars anyway. The price of stocks meets the same form of psychological resistance. I would never buy a stock at $2.99 as I can virtually guarantee that there will be a large number of sellers at the big number of $3.00. If I had purchased the stock at a price of $2.55 and wanted to set a profit target I would look at selling at $2.96 or $2.97 – never at the $3.00 level.
Tip 14 – Beware of averaging down
Averaging down is, to my mind, generally compounding a poor decision.
If you have bought a stock and the price begins to fall, it would make more sense to me to exit that stock rather than buy more. During my broking career I have seen many people buy a stock at, say, $1.00, then buy more at $0.70, and again at, say, $0.30 only to see the stock price deteriorate and ultimately disappear from the boards.
If your timing is accurate averaging down on Top 20 stocks can prove beneficial for the more experienced trader.
Tip 15 – Beware “Hot Tips”
A very large portion of first time traders enter the market based on the “advice” of a close friend or a newsletter “tip”. Occasionally these tips will lead to a profitable trade but invariably by the time you receive a tip from someone, everyone else has heard the tip and the stock has already moved up considerably so you often buy near the high price. Most times the “hot tip” leads to a losing trade.
This does not mean that you should ignore tips, just learn how to treat them and how to pick the good tips from the bad. The best way of treating a tip is to look at a chart of the stock’s history. If when you get the tip the price has already moved up considerably with accompanying high volume then you should be very wary.
On the other hand if the price has not moved and volume is low, then you may be in on the ground floor but you should still wait for a “buy signal” before investing. Remember “buyer beware”.
The best way of treating a tip is to look at a chart of the stock’s history. If when you get the tip the price has already moved up considerably with accompanying high volume then you should be very wary.
Tip 16 – Beware live data
With the ability for the private retail client to access live data during trading hours comes many myths and difficulties. In the first instance it is very convenient to be able to “log in” and trade from anywhere where there is an internet connection. The myth is that somehow by watching this live auction you will suddenly have the ability to trade profitably and know whether the next trade will be higher or lower than the previous trade. Total fallacy! What backup facility do you have if the internet signal fails?
Tip 17 – No B.H.P.
B.H.P. stands for “Buy, Hold and Pray” and this is the standard operating procedure for many funds and brokers. Give us your hard earned money, we will bang it into the market and earn a commission and you can come back in ten years and see what’s left. That practice never did generate great profits but particularly
in today’s volatile environment it is just very lazy. Any investment or trade must be actively managed to ensure the best result. Active portfolio management is essential in today’s volatile markets.
Tip 18 – Never blame your broker
Your broker should be compared to a waiter in a fine restaurant. That is to say that he is there to do your bidding, but ultimately the decision to buy or sell is yours and you must learn to accept the good and the bad.
Every purchase and sale is your decision and your decision alone.