Monday, May 11, 2009

15 Ways to be a Smart and Intelligent Stock Trader

Like in all investments, remember that the higher the return, the higher the risk. Above all, remember to invest what you can afford to lose. Remember also the advice of Brain Tracy “the future belongs to the competent”. The future belongs to those men and women who are very good at what they do. Pat Riley says in his book - The Winner Within - “If you are not committed to getting better at what you are doing, you are bound to get worse”.

Many investors only look at the profit side of investments forgetting that a sword has two edges. While there are lots of benefits derivable from stocks investment, there are risks involved. That is why it is very necessary for investors to understand the risk before staking their funds in the stock market. However, experts believe that what is highly risky to one individual may be no problem to another.

If you have decided to be a smart and intelligent stock trader, the following tips may be of assistance to you:

1. Make a Plan – Before you invest any money, make an investment plan and stick to it at all times. This will help you become disciplined and will also help you organise your time and investments. Keeping things simple will result in less stress. Your plan should consist of the investments you are going to make and why and how much you are investing in stocks. It should also include your exit point and also the time you want to allocate for your investments each day.

2. Money – This is not just the money that is sitting in your bank account. It is not the money that you use to pay for your rent, your car or your food. Penny stocks can be extremely unpredictable and although you might make a great deal of money it is also true that you may lose everything. So it is important especially when you are starting out with penny stocks that you only use money that you can afford to lose. After you have built up a nice profit, you can re-invest your profits from past trades which will snowball your earnings.

3. Knowledge – This is without a doubt the single most important factor in determining whether your budding career as a penny stocks investor will be a spectacular triumph or a dismal failure. If you are a new comer to stock investing of any kind, there are various guides you can buy and it is a good idea to read several of these before spending any money. These are all good and although they will not help you with specific decisions such as whether to buy a particular penny stock, or when to sell, they give you a good background on how it all works and are invaluable in building a good knowledge base.

4. What is the Best Trader? –They control their emotions; do not allow fear and greed affect on their decisions. They understand the market, they know it is impossible to be winner in all trades but try to improve the winning per losing trade’s ratio. They stay in the present and view events truthfully, they are not regretful, review the past only to improve their performance in the future. There are many characteristics, but it does not mean that you must have all of them to become a successful trader.

5. Mistakes to Avoid –. Successful traders act without emotions and they have a strategy and follow the principles of their strategy. To succeed in the stock market, you should avoid some mistakes and learn some investment tips. A good way is to summarize investment advice in a list of rules.

6. Lack of Strategy – Having a strategy in the stock market is very important. You should know when to buy a stock, what the selling price is and how long you will hold the share. When you choose a strategy, follow its principles and do not change your strategy every day.

7. Waiting for Market – Many traders when they lose in a stock do not sell but stay till the stock price return to the price they have bought. This is one of the greatest mistakes that new traders make because they may lose much more money and time by holding a fail position.

8. Not Taking Profit – When a reasonable profit has already been made, overcome greed and sell the stock for profit.

9. Over-Trading – Many traders especially day traders feel the need to hold positions in the market at all times on every trading day. Often they will break their own rules in order to get all of their capital into the market. Sometimes, it is best to stand aside and avoid holding any position in the market at all.

10. Trading with the Money You Cannot Afford to Lose – Do not use money that you really cannot afford to lose. Examples of this would be money that is supposed to be used to pay the mortgage, bills or your child’s tuition. This is causing trading with fear and emotions.

11. Falling in Love with a Stock – Some people stick to a stock because they believe it is a good stock. They refuse to sell even when they lose money.

12. A Way to Get Rich Quickly – People will often expect to get rich in the market overnight, but they fail to realise that trading is like any profession; you must learn how to do it first.

13. Nor Adhering to a `Stop-Loss’ Position – A stop-loss is a predetermined price point at which a loss is accepted and an investor closes the position. Using this investment advice is not easy as much as you think. You must try in a regular way to apply this investment advice on your trading strategy.

14. Apply Investigative Journalism – Warren Buffett has always advised and will continue to advise investors to practice “investigative journalism”. This simply means that you personally take your time to find out all necessary details about a potential stock purchase on your own. No doubt you would have to ask questions, read materials etc. but the truth is that in the stock market, your best friend is yourself. Every other person out there especially brokers is interested in making a killing for themselves. As a matter of fact, brokers are more concerned about the commissions they charge you and as you know, commissions are charged whether you make a loss or profit. Don’t just listen to people who claim to have lost so much money and console yourself for also losing money in the process. Do you know what reason prompted them to invest?

15. Form or Join a Team – The decisions we make with respect to our investment are shaped by our association. Be it an association with a fellow investor friend or some stock analysis report you received in your mail or may be a tip from your stockbroker. You need to form or join a team of like-minds to discuss issues of common interest. Your present team will determine to a large extent the kind of individual you would be or kind of life you would live in years to come.

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