The great thing about the stock market and trading is that there are unlimited opportunities to make money. If you embrace these 10 ideas, to some extent your chances of being a tremendous trader are much better. Here you go:
#1 Partial Buys and Partial Sells
Traders often think of the trading as making a single buy and a single sale of a single stock-buy 1000 shares here and sell 1000 shares there. The problem with that approach is that it puts a premium on precision. If your timing is off just a little, a good trade opportunity turns out to be mediocre. When you build a position incrementally and then sell it off in pieces, you have a much better chance of catching a more significant move. It is impossible to predict exact lows and exact highs, but if you average in and out, the likelihood is that you will end up with better overall results.
#2 Diversify by Time Frame
One of the great advantages of the incremental approach to trading in tip one is that it also serves as a form of diversification. You can diversify and limit risk by holding many different stocks, but you can also do it by trading in a variety of time frames. Incremental trading helps you to reduce risk by using a variety of time frames. There is no need to hold as many stock if you trade the ones you like both short and long term
#3 Pressing When You’re Right
Another advantage of the incremental approach to trading is that it allows you to be more aggressive when a trade is working and less aggressive when it isn’t. Too often a trader will spot a good trade but ends up with small profits because they never position themselves well. As George Soros has said, the point isn’t whether you are right or wrong but how much money you lose when you are wrong and how much you make when you are right.
#4 Force Yourself to Make a Decision
The biggest losses most traders suffer are due to inertia. They buy a position that doesn’t work, and rather than dump it, they just sit on it and do nothing. One mental trick that can be helpful is to force yourself to make a decision when a stock drops a certain amount. Make the decision to either buy more or sell it. Inaction is not an option. Do you have enough confidence in the trade to add shares? If not, then why are you holding it? If you don’t want to buy then sell it.
#5 Selling Is Your Most Powerful Tool
The ability to sell a position instantaneously is your most powerful strategic tool. It is your insurance against substantial losses. The key is that there is nothing stopping you from rebuying a stock you have sold. If you end up paying a little more, then think of it as an insurance policy that kept you safe in cash for a while. Selling is how you manage risk. It is your best friend and is the key to protecting your precious capital.
#6 Focus on Reaction Rather Than Prediction
The market is full of experts making predictions about what is going to happen next. Once in a while, they are actually correct, but usually, they are wildly wrong. How many ‘experts’ predicted a pandemic and the market’s reaction over the next year? None, zero, zip. The way you make money is to react as conditions change. No one knows the future, but if you react quickly to changing conditions, your chances of making money increase dramatically.
#7 Keep Accounts Close to Highs
As Warren Buffett would tell you, the key to getting rich is compounding. Most people think of compounding as holding a single stock for a very long time as it increases in price. However, compounding also works for active traders that keep their accounts close to highs as possible. The same dynamic that benefits someone that holds Apple (AAPL) for years also benefits a trader that keeps producing returns as their accounts continue to hit new highs.
#8 Charts Are Your Best Management Tool
Charts are an extremely useful tool, but not for the reason that most people think. Charts provide a framework for managing trades. Most people think of them as predictive devices that tell you where a stock is heading. They are helpful with short-term movement, but the predictive ability of a chart erodes fast, and then they become a tool that will help guide you when to take gains or losses or add more. Forget the fortune teller and stick to trade management.
#9 Worry More About Positions Than the Indices
Many traders spend far too much time worrying about the indices and big picture macro matters rather than the stocks they hold. 2021 has been a particularly good example of how the indices don’t always represent what is really going on with the majority of stocks. Rather than try to time the market by looking at the indices, time it by managing the individual stocks you own. When they are acting poorly, you sell them and raise cash. That is the best timing of all.
#10 Stay Positive
The great thing about the stock market and trading is that there are unlimited opportunities to make money. As long as you have capital and patience, you have the ability to find a money-making opportunity. The market will go through cycles of ups and downs and we need to embrace that inevitability, but if you keep slogging away, you will find trades that work. If you are negative and pessimistic, then the job of finding great trades is much harder. Pessimism is great if you want to preserve wealth, but it won’t help you build it.
I hope to have a new book out eventually that will cover all those tips and more to a greater degree.
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