Lesson 3 – The Best 50 Trading Tips
Section Four – Portfolio Rules
Tip 1 – Always keep some cash spare in your account
The reasoning behind this rule is that at some stage a stock will exhibit classic buy signals and you may find that your portfolio is fully invested. To avoid this it is always handy to keep a little spare cash in your account.
Keep some cash for emergencies.
Tip 2 – Always sell your worst performing stock
At some stage you may find that your portfolio is fully committed and you want to take advantage of another opportunity. The only way raise the necessary capital is to sell a stock. In this case always choose your worst performing stock; NEVER sell the stock that is in profit. If you were to continuously sell the best performing stock from a portfolio, you will end up with a portfolio full of losing stocks.
Getting rid of the losing stocks in the first instance will lead to a portfolio of stocks that are performing well. If all your trading funds are tied up in various stocks and you need funds from that account for any reason, always sell your worst performing stock to realize the required funds. There is usually the temptation to sell the stock with the greatest unrealized profit. This is simple psychology – in order to sell the worst performing stock you need to realize a loss and this is not easy to do, but it is definitely the best thing to do.
If you were to continuously sell the best performing stock from a portfolio, you will end
up with a portfolio full of losing stocks.
Tip 3 – Sector analysis
Top down analysis on determining the health of the economy (and whether you want to even be investing at that time), the strength of different sectors and then picking the strongest stocks within those sectors to maximize returns. In this article you will learn how to pinpoint the hottest sectors leading the market higher (or lower in a bear market) and how to find stocks within those sectors that will potentially maximize returns. Sector analysis can be a complex subject.
There are theories that suggest that you should be investing in the strongest stock in the strongest market in the strongest region; however my experience is that it is basically impossible to tell what may be the strongest stock in the future, let alone the strongest market sector. Personally, I would simply be attempting to purchase the best stock that I could find regardless of which sector it may be in. It is very easy to have a poor performing sector. For instance the gold sector may be weak but this will not stop the price of a stock soaring should it announce a new gold discovery.
When talking sector analysis the only consideration I would make is whether to avoid a particular sector for personal reasons. You may have an aversion to uranium mining and may choose to avoid any investment in that market sector. Consider whether you will own stocks in particular market sectors. You may have an aversion to the media sector or the energy sector.
Tip 4 – Do not over diversify
The Industry catch-cry is “The first rule of investing is to diversify”. To my mind it is sensible to diversify across different asset classes but once you are investing in the stock market there is a point at which diversification works against you. Any more than 12 stocks in a portfolio will generally cause a portfolio to move in unison with the All Ordinaries Index, particularly if your purchases are all in “The Top 50” stocks.
Obviously this can be very difficult if you have a very large amount to invest. Many people assume that diversification will help profitability, this is not the case. Diversification, at best, may lower risk.
The bottom line is that you want every stock in your portfolio to be profitable, regardless
of how many stocks you have.
Section Five – Order placement rules
Tip 1 – When to place orders
My preference is to place orders when the market is closed. I will usually do my analysis of an evening with end-of-day data. I am usually looking for stocks that have formed a resistance level over a reasonable period of time. I am then looking to purchase that stock when the price breaks above it’s resistance. Let us assume I have analysed an appropriate stock and there is a clear resistance level at $1.00.
I would be looking to purchase the stock when it trades at $1.005 or $1.01. I can email this instruction to my broker during the evening.
I believe that placing orders in this fashion gives me the best chance of making an educated, rational decision. If I place orders during trading hours I am more likely to make an emotional decision. It is an advantage to you to be able to keep your emotions out of any decision making process.
Make your decisions and place your orders when the market is closed.
Tip 2 – Expect some “slippage”
Slippage is an inevitable part of any trading experience. Put simply slippage is when you place a stop loss order at a price and your “filled” price comes back a little lower than you order. Let’s say you place a stop loss at $1.00, your fill price might be .99 or even .98 cents and in rare cases it could be worse. This can occur due to a lack of buyers at your price. A stop loss order is an instruction given to your broker to sell your stock “at market’ once your price level has traded. If there are no buyers at that level you will get a lower price.
Tip 3 – Order terminology
Try not to get too tied up in the correct jargon of order placement. Many orders that I learned in the very tough futures contract market in the US are either not available in Australia, not available on online platforms such as E*TRADE and Comsec or are worded differently. It can all become quite confusing and the last thing you need when placing an order is confusion!
Incorrect order placement can be very costly! If you choose the potentially cheap option of using an Online Broker it is imperative that you read the PDS and in particular learn how your particular broker handles your orders. I am not in a position to elaborate on this as I do not use an online broker. I have a strong preference for talking to a broker and explaining exactly what I want.