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Saturday, February 4, 2012

7 essential share trading tips and strategies

Most of what I have been talking about in my posts is connected to Forex and futures trading. However, in terms of technical analysis, almost anything that works in one market will work in other markets too. Today I want to share some stock and share trading tips and strategies. They, of course, can be applied to Currency Exchange market as well as to the Futures. One of my favorite authors who used to write on the subject is Jesse Livermore and I often like refer back to him in my analysis and trading. I got my initial ideas for my trend trading system by reading his books and I want to drop a few ideas on the topic in the article too.

Share trading tip number 1: Analyze stock behavior 

The first thing that you have to define when you start analyzing a particular stock or security is its’ behavior. Stocks like people have their peculiar behavior. Some act in a chaotic way, some trade very orderly, some are very volatile, yet some have very low volatility. If I could refer back to currencies you could see that very well by comparing price action of eur/chf and gbp/jpy. I hope you see now what I mean by behavior of securities. Why do they act so differently?  Because, different kind of people, having different kind of goals trade them. I do not want to expand on this, but if you have a specific way of trading I would recommend finding the securities that fit in to your trading style best. This will dramatically increase your possibility to make money in stocks. It is not one day’s work. We are not here to gamble. Do not look at share market as a place to make quick money. See it as opportunity to make a lot of money in the long run. Any kind of work needs patience and a lot of practice. The same can be said about share trading. 

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Share trading tip number 2: Trade big market trends

So, when you see some behavior of a stock that indicates that it is ready to breakout, you should be ready to jump into the market and go with the flow. On the whole, my experience shows that big money is made in big moves and one should wait for those if one expects to make consistent money. Now, in case of breakout, the stock would act right if it continued going in the direction of breakout the following days and weeks after the breakout occurs. If it retraces back into its’ former range that would be a warning signal that something is not right with the move and you should get out of the market as fast as you can. Nowadays, trends often end with sharp reversals and if you are not careful you might lose big part of your profit. Big ranges usually follow a reversal, but that does not always happen and you can never be sure whether the price will come back to its’ previous top (or bottom if you were shorting) or not. Why entertain false hopes and lose money. Get out with a small loss and wait for better opportunities. I know that there are a lot of false breakouts nowadays, but still one should not be scared of that. One day real trend starts and your losses will be offset by much bigger profit. If you are patient enough to wait till the move starts! Trading is also about character, not only about your trading strategy!

Share trading tip number 3: Beware of the timing element

Timing is another key element in order to trade stocks and shares successfully. You cannot be successful trading all the time. There are times when you should not trade, but analyze markets. You cannot be an expert in all market conditions. You have to find out which markets’ conditions you understand best and to trade those. If you are able to trade breakouts and trends that follow them, then try to identify the best timing and market conditions when those real breakouts occur and filter out those when false breakouts happen.
If you are a range trader you can connect price levels with timing element. Buying at bottom of the range and selling at the top or near it could be the best strategy range trading stocks. The prices often reach those important levels just before some important fundamental releases: company reports, central bank interest rate decision, Non-farm payrolls and etc.  

Share trading tip number 4: Follow the leader 

You have to learn to identify a leader of an upcoming move in the shares. There are a few things which will help you to do that. If we talk about a breakout (which we expect) the leader will break out first and usually achieve the biggest gain when the move is over. It may take a few days or even weeks for other stocks to catch up to those shares. You should place your biggest bets on the leaders for they will bring you the biggest profit. 

Share trading tip number 5: Enter market at a pivotal point

Enter the market at the beginning of the move. Jesse Livermore called it entering the market at a “Pivotal Point”. This is good for a couple of reasons. Firstly, you start accumulating profits at the very beginning of a move. Secondly, you feel much better psychologically, because you do not have to guess where could be the next best entrance point. Of course, it is best to enter back into the market when we have retracements, but sometimes trends are so strong (especially after very long range periods) that markets hardly take time to look back and you have to get into a trade at whatever place that is possible at the time. 

Share trading tip number 6: Build a line of positions

This is very important if you want to become a professional speculator or investor. If you see market going one direction it is wise to start opening additional positions to increase your profits. At the same time, you slowly move your stop loss orders in the direction of the market. I have done it a lot of times and saw my profits increase tremendously as market proceeded in the direction of a trend. Of course, nobody can guarantee that the market will not turn around earlier than you expect, but you should never tell market what to do, but rather adapt to the market and turn around with it when you see it giving reversal signals. 

Share trading tip number 7: Exit market while the move is still going on

I believe this is the best time to exit the market. You do it in incremental steps in this way taking your profit bit by bit. I know there are certain regulations that were set recently that somewhat limit your possibilities here, but still a little bit of creative thinking will help you to trade market in multiple positions and exiting it in stages. In any case, you should always trade using stop loss orders. Always! Even if you are right ninety percent of the time. You can never know what may happen in the world. Some events may cause markets to plummet across the board. You do not want to be on the wrong side of the market without stop loss at these periods of time. Better safe than sorry!

I hope these stock and share trading tips and strategies were useful. Hope to expand them with time.

See also:

Swing trading

If you want to see and experience what real investing in financial markets such as Forex, stocks and commodities is all about I recommend trying innovative social investment platform of Etoro. Initial deposits are as low as a few hundred bucks. The best dealer I have heard of so far!  

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.