Tip 9: Long Rising Stocks, Short Falling Stocks

In many ways trading and investing in the stock market comes down to probabilities. We assess the probability that a stock will go up or down, a company will grow or fail, a sector will expand or contract, or the whole market will continue its uptrend or downtrend.

Although it seems simplistic, it bears repeating. We want to increase our odds of making the right decision. In order to do so, we need to be aware of several situations. If we are going to buy a stock, we want its trend already to be going up. We want its sector to be doing well. And we want the market to be in an uptrend. If we are going to short a stock, we want it already to be in a downtrend. It’s also best if its sector is lagging and it’s best if the market is in a pullback or correction.

While it’s tempting to buy or short a stock when we think it’s on the verge of a change in trend, it’s mighty difficult to predict consistently and going against the trend is a unnecessarily difficult strategy. It lowers the odds of success. The market is constantly surprising people with how far it can take its trends.

Make life easier by stacking the odds in your favor. If a particular stock has less favorable odds, look elsewhere. There are thousands of stocks out there. You can find one that you like and that also has a good probability of making you money. Or, if you’re partial to a particular stock, wait until the time is right before making the trade or investment.

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Tip 8: Left Money on the Table? There’s Always Another Opportunity

Sometimes we make a winning trade or investment and cash in, only to see the stock continue to rise, now and again by a lot–meaning we could have made a lot more money. Instead of feeling happy about our success, we feel disappointed about missing out.

At the same time, trading and investing are long games. We’re better off when we follow our strategic plan. The home runs in the game are exciting, but at the end of the year winning comes down to consistency.

Also, the great thing about the market is that there are so many financial vehicles (stocks, ETFs/ETNs, REITs, Options, etc.) in so many areas (specific companies, sectors, commodities, currency, etc.) that there is always, always another opportunity to make money. Missing out doesn’t have to last longer than a day.

You can find those opportunities. Many base hits that follow your game plan rather than a few unexpected home runs will make you feel mighty good.

Tip 7: Do Your Homework with Help (25 Great Websites for Trading and Investing)

A common phrase is to “do your homework” when preparing for something. It’s similar for trading and investing. Researching which stocks have trade-worthy patterns or strong fundamentals is smart.

At the same time, you are only one person with limited resources and time. So, get help with your research. Here’s a list of 25 great websites for trading and investing.

General Information and Analysis

  1. cnbc.com
  2. marketwatch.com
  3. seekingalpha.com
  4. investors.com
  5. finance.yahoo.com
  6. nasdaq.com
  7. money.msn.com
  8. sixfigureinvesting.com
  9. traderhq.com
  10. thestreet.com

Finding Stocks to Trade or Invest In

  1. americanbulls.com
  2. chartmill.com
  3. swingtradebot.com
  4. stockfetcher.com
  5. zacks.com
  6. fool.com
  7. sectorspdr.com
  8. topbreakoutstocks.com
  9. etfdailynews.com

Market Tools

  1. stockcharts.com
  2. elliotwavetrader.net
  3. vixcentral.com

Communities of Traders and Investors

  1. stocktwits.com
  2. twitter.com
  3. etoro.com

Tip 6: Spikes vs Trends

The world in general and the financial world specifically are dynamic. Things can move fast, especially on a short-term basis, and then suddenly feel as if they’ve slowed to the pace of a snail–to only unexpectedly sprint off again. It’s exciting. It’s boring. It’s everything in between.

In such an area of life as the stock market, it’s good to be able to recognize the spikes from the trends. By spikes, we mean a stock or the whole market may shoot up or shoot down for a short period of time, from a shock like five minutes to fifteen minutes to an hour to a full day to a week. After the spike, however, the general trend continues. By trend, we mean the long term pattern, from a few weeks to over a year, remains steady. The trend can be downward or upward or even horizontal in a basing pattern.

It’s easy to, and tempting to, identify a spike as a change in the overall trend of the stock or the market. Yet, to do so will lead to frustration and loss of capital. Remember, as the old adage says, the trend is your friend.

One tool to help clarify whether a new trend is forming is to zoom out with a weekly candlestick chart. Seeing the broader pattern is likely to give a sense of the validity of a change in trend or if the movement is only a spike. Daily candlestick charts may also help, especially when the time frame is visible over months. Possibly the most popular and free charting program is stockcharts.com. Use it.

When crazy things happen, have patience, zoom out to get a bird’s eye view, and stick to your winning strategy.

 

Tip 5: Sometimes You Will Lose Money

Many beginning traders and investors envision quick and great returns from the stock market. They spend days dreaming of what they will do with all of the money, from paying off debt to celebrating with their loved ones in expensive restaurants.

At the same time, they assume that every trade and investment will be a winner. Then, with one loss, even a small one but certainly with a big one, their expectations come crashing down, to only be replaced by fear, confusion, and frustration.

One reason they experience these emotions is because they lack the recognition that every trader and investor loses money. Even the historical and current stock market greats, from Jesse Livermore to Warren Buffet, has lost money on a trade or an investment.

So, if you experience a loss, know that you are in good company. In fact, there are a significant number of traders and investors who have depleted their whole accounts, but have stuck with it (in their practice accounts until they have found new funds), learned from their losses, come back, and are quite wealthy now.

The thing to do, especially before catastrophe happens, is to learn how to keep the losses smaller than the payouts from the winners. This might entail using stop losses or diversifying your portfolio wisely. Some practitioners promote their win ratios. Yet, at the end of the day, high win ratios mean very little if a few losses wipe out all of the profits, and low win ratios mean a great deal if the more abundant losses are kept smaller in terms of money than the settlements of the comparatively fewer successes.

Be calm, know everyone loses money in the stock market at some point, and stick with your winning strategy.

Tip 4: Be Aware of Window Dressing

At the end of each month, quarter, and year, fund managers want their portfolios to look good. They sell or trim stocks that have lost them money and buy stocks that have done well. Even though fund managers’ overall portfolio performance won’t change much at these specific times, it is all about appearance–what’s on the books–to reassure investors that the people using their money are smart and making profitable choices. In the end, this strategy may work out for the fund managers, if the winners keep on winning, but it may fail as well and just hide poor decisions for a brief time.

For retail investors, it is good to know that this behavior may cause certain stocks to fall even further or rise even more–at least in the short term. If your money is in a fund, it is also a reminder to take a closer look at how well the fund manager is actually doing in order to avoid being lulled into a fake sense of security.

For retail traders, knowing about this behavior may be profitable. Study a stock or ETF and see if there is a pattern at these end points. If so, then, it may be worth either cutting losses beforehand, adding to winners, or waiting for the drop to buy low with the expectation of a short-term bounce.

While these patterns aren’t guaranteed to happen every time, they are good to keep in the back of our minds when a new month, quarter, and year come up.

Tip 3: Find A Strategy

What’s the difference between successful traders and investors and those that lose money? One important difference is that the ones who see green in their accounts typically follow some trading or investing strategy. It seems like there is no end to the number of strategies out there, and that’s a good thing because we are different people in different circumstances. A strategy that may work for one person may not work for another.

That is, you have a unique mentality, various emotional and physical strengths and weaknesses, particular times you are available to trade or invest, specific family and work obligations, certain financial resources and needs, a distinctive risk/reward level, and a limit to your desire and ability to study and understand the market. So, just like the rest of us, you have to figure yourself out in terms of what trading or investing strategy you like, feel comfortable with, and actually works for you.

You may want to search the internet for established strategies or you may want to experiment with devising your own, or you may want to use some combination of the two. The key point is to find a strategy that fits you and your life and then stick to it for as long as it consistently makes you more money than it loses.

Tip 2: Don’t Use Your Intuition

When we have to make a decision, we often resort to our intuition–that gut feeling. And, in many cases, it’s a good idea to listen to that feeling, especially if we are already familiar with the situation or if we already know what makes us comfortable and happy. For instance, in his book Blink, Malcolm Gladwell discusses how people who make snap judgments about a doctor, whether the relationship will be productive or not, are often correct. People tend to know what they like or don’t like in relationships from years of interacting with others and so they intuitively know quite quickly if they will get along with a new doctor or not, even if they can’t articulate the reasons.

Employers often use their intuition when interviewing prospective employees, calling it their gut feeling about the person, and more often than not they are correct when it comes to a potential employee who is likely to make a good fit in terms of relationships. Yet, research finds that intuition is not a good decision-making tool for employers in terms of finding the employee who will do the best job. That quality is better achieved with objective measures. The reason is because our internalized and emotional biases our excluded from the decision-making process with objective measures–some pre-arranged set of criteria that reflects an ideal employee, for example.

When trading and investing in the stock market, it is tempting to use our intuition to decide to buy or sell a stock. We may feel like we intuitively know if the stock will go up or down–it’s that gut feeling we get. On occasion, we may even hear of some stock guru who uses their intuition to make very profitable trades or investments. Or, we may visit a community site of traders or investors and it looks like some of the best ones are using their gut feelings to make decisions. Perhaps, there are some people who are so familiar with the workings of the stock market that they can do that successfully.

But, the odds are that we are not those rarefied, few people.

If we want to consistently make money in the stock market, we need objective measures that tell us when to buy and sell. In this way, our emotions will be excluded from the decision-making process. Our criteria–if already tested for success–will not win every time, but they will make us money in the long. And, in the end, that’s the goal–to make money, not to have an emotional roller coaster of a ride, as fun as that might be.

Tip 1: Practice

Practice. In all other areas of life, especially the most difficult ones, we practice the skill before we engage in the real work. This is particularly noticeable in sports. Before the first game is played the players practice for months. If we think about professional sports, most players have practiced for years in some type of minor league–high school, college, or a farm system. No Olympian has won gold without thousands of hours of practice, hard, long, practice. In the vast majority of occupations, the top income earners have spent many years and much money learning the necessary skills in order to succeed on the job.

So, why would we think it would be any different with trading in the stock market? Why would we think we could read a few books and jump right in and make money?

The stock market is a difficult environment. Even professional money managers get it wrong sometimes. There are numerous factors that affect whether the whole market will go up, down, or sideways. And specific stocks may be influenced by even more factors, from unforeseeable global affairs to unknown internal company issues. Trading stocks successfully over a long period of time is consequently a skill that requires practice.

Before entering a trade with real money take the time to practice with your broker’s practice account. They will typically give you an electronic account with around $30,000 in it and the account works just like a real account. So, you can make trades in real time without the possibility of losing real money. Get your feet wet. Set goals. Find a strategy. Reign in your emotions. Learn to use technical analysis indicators and oscillators that work for you. And practice, practice, practice, over a long period of time to see how the market or specific stocks move, before you ever put your real, hard earned money at risk. Be the Olympian stock trader that wins gold, just after you’ve seen yourself make money consistently in practice.