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Sunday, September 2, 2012

5 more key investment tips

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.

  1. 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. 

  1. 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.

  1. 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. 

  1. 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. 

  1. 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 would be grateful if you tweeted it, liked on Facebook or any other social media. Thanks for reading. 

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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.