One week ago I wrote an
article 7 top stock trading tips. Today I want to continue the topic and give
you a few more important investment tips. I intend to write a series of
articles on the subject and I hope they will be useful for you. The good news
is that these tips can be applied not only for trading shares, but also for all
the rest securities: commodities, bonds, currencies and etc. I firmly believe
that most rules of trading that are good for one financial market will also be
good for all the rest. I came to this conclusion by watching various markets.
Securities are securities and people are people! And when people go to
securities you will notice the same price patterns, because people are the same and their expectations, fears and
greed are reflected (to the most extreme point) in any market. So, when you
learn general principals of investing you will be able to apply in any market
of your choice and go on to invest anywhere you want.
I see that most of the
things that I have learned in Forex market work perfectly in stock market too.
Don’t you believe that some markets are more secure than others! There is no
such thing as secure stock or investment tool in financial markets. Crises come
and they prove otherwise. And they most secure shares go to hell. The same can
be said about bonds, currencies and etc. Learn the basics and you will surely
be able to apply those anywhere. So, let me continue with the tips now.
- If you would not buy the securities that you own at the price they are sold in the market now it is better to sell them.
Having securities (in your
portfolio) that are overvalued is not less risky than buying them at high
prices. Prices can start falling very fast and an investor will have to incur
serious losses. It is therefore advisable to look through the investments that
you hold in your portfolio at least once per month.
Most investors always have
the dilemma whether to keep or sell the securities that they own. One of the
ways to help you solve the problem is by asking yourself whether you would be
willing to buy them at the current market price. If not, maybe it is high time
to sell them.
Investors tend to evaluate
whether the price of the share is overprices by determining if the price of the
shares grow faster than company’s profit. Even if the company has big potential
it is worthwhile to share at least some part of your position in the shares.
I believe Google and Apple
companies are good, but at the time of writing I would not buy the shares as
they are on the top (too expensive). I would sell them now and wait for major
correction to buy them again (at much better prices). You see, you have to take
profits from time to time and to feel the joy that you were right and made
profits by doing intelligent analysis and right predictions.
- Never buy securities for borrowed money.
It might be very tempting to
buy securities with money that is not yours. Who wouldn’t want to make money
with the money that does not belong to him? However, this possibility limits
your choices. If the market turned very bearish you would have to sell some or
all of your shares with loss, but you would still have to give back the money
you borrowed plus interest.
You will always have to face
requirements from those you borrow money from. They might order you to sell
your stocks at some point (when you least want this). You see, your
expectations might be absolutely than those of your bank. Would it believe you
that the share will bounce and start climbing up soon? This is not the way how
they do their lending business. They follow their rules you follow yours. You
need your money or that of your clients in order to be free and to do what you
believe you should do. You will also not have to pay interest to anybody. An
investor should be free to follow his investing strategy at all times. Trading
with borrowed money will take away this freedom from you.
- Markets look forward and so should you
What does that mean? Well,
market participants price in information that comes later. If positive news is released
from some company market has often (already) priced that in and the prices of
share may actually start falling after information has been released. You
should not be surprised markets rallying without any major economic news and
when it finally comes the rally stops.
One needs to develop
‘forward thinking’ and to learn how to trade expectations, not just effect that
you see in the economy. Markets are ahead of economy. What economy shows now
market participants have already foreseen months, sometimes years ago.
I do not mean to say that
markets are always right. By no means! But it quite often is! And you better
follow it rather than wait for some economic situation to become clear for all.
Smart investors see opportunities when nobody sees them and they see the signs
of trouble coming from afar. And they trade accordingly.
- The bigger the risk – the bigger the profits (and losses)! The smaller the risk – the smaller the losses (and profits)!
Those that want big profits
and fast have to understand that they only way to achieve it is by taking more
risks and increasing your leverage. Those that risk only 2 percent of their
capital on any given trade will hardly ever be able to boast of huge profits.
They will also hardly ever suffer severe losses. On the other hand, those that
decide to risk twenty percent of their capital can expect much bigger profits
and as a result much bigger losses.
You have to be realistic
about that. If you have just one thousand bucks you will hardly make a lot of
money trading securities. There are exceptions, but life is not made up of
exceptions. It is run by certain laws, concepts and if you break them you open
yourself for very negative things. High risk will most likely attract high
losses. Most of traders will lose their capital as they do not know how to
handle risk. So, knowing the facts it is advisable for newbies to trade with
minimum risk (2 percent) and only increase risk after seeing stable profits for
a year or two.
- Always have a plan B
You have to know what you do
if your predictions go wrong. Would you continue keeping the same securities in
your portfolio and wait for the times when things get better or you close your
position with loss and search for other opportunities to employ your capital? Even
if you are very good at predicting you will never be right in all situations.
If you are not careful those few unfortunate predictions can cause you all of
your capital.
It can happen to those who
trade without stops or haven’t foreseen the place of exit in case market starts
going against them. Over confidence in trading is just as bad as the lack of
self confidence. As some say:”Truth is found between two extremes”. So, trust
your predictions and protect yourself with stop loss orders and a plan B.
Final thoughts
As any of my posts this one
was not meant to be perfect and cover all possible angles of investing. I can
repeat myself by saying that I am going to continue with investing tips in my
future articles. I simply hope that these extra 5 tips were, are and will be
useful for those who intend to start investing on their own by creating their
own investment portfolio. I also believe that before an investor gets busy with
specifics of where to enter and when to exit a market he should know some
general things about market. That is what I am trying to highlight in these
articles.
If you liked the article I
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media. Thanks for reading.
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Disclaimer
Trading
financial markets carries a high level of risk, and may not be suitable for all
investors. All information on the blog http://trend0.blogspot.com/ is of educational
nature and cannot be considered as advice, recommendation or signals to trade
in any financial markets.