Many believe that the stock market is like a money making machine which can turn them into millionaires over a period of time. Well, it is true that a lot of investors have made profits through stock trading. But it was possible because they’ve made some really smart choices by adopting carefully thought of strategies and good market knowledge. Such investors are also much disciplined in their approach which is why they’ve reaped the benefits of stock trading.
While you’re out there, thinking of a million ways to grow your money, we have charted out a few ways in which you can avoid losing out on it.
Don’t Be An Action Junkie
Some people trade for sport. They don’t need the money and they like the action. That’s fine if they can afford it. But for most people, the money means something, so know the reason you’re getting into the trade.
Even if it’s speculative, have a sound reason for it. Maybe the company has a great new cancer drug that, while the stock is risky, could be a 10-bagger if it works. Perhaps a stock is in an uptrend and breaking out to new highs. Or maybe insiders are loading up on it.
Whatever the reason is, be sure you understand why you’re buying the stock and what the risks are. Don’t buy a stock because your brother-in-law, who seems to know what he’s talking about and drives an expensive car, gave you a hot tip.
Take Emotions Out of the Equation
If you place a stop order, it will allow you to sell your stock automatically when it turns down. The best part is it removes emotion from the selling decision.
If a stop is implemented, your shares will be sold as soon as they hit the price level where you’ve set the stop. You don’t care why the stock hit that price. Shoot first and ask questions later. You can always buy it back if you decide you still like it. But many times when a stock is falling, it’s falling for a good reason – even if it’s not apparent why at first.
It’s very easy to rationalize why you should hang on to a stock when it’s sliding. Using a stop will help you make a clean break rather than prolonging the agony.
Never buy a stock based on its past performance
Stock markets moves in phases. If it goes up during one phase, it comes down during another. It actually depends on the performance of the economy. So, if the economy of a country is doing well stock markets go up and vice versa. A stock that gave certain returns the previous year, may not give similar returns in the current year. The returns will depend not only on the company’s movement, but also on market conditions and state of the economy. Although is always good to know the past performance of a company’s stock performance, it is risky to depend completely on it.
Diversify, however don’t overdo it
Avoid putting all your money in a single stock because if it performs you win, if not, your investment is gone. Diversification helps you under such circumstances where even if 1 or 2 sectors underperform, you could be gaining from the other sectors.
These are simple but effective rules to keep you in the game. If you can maintain discipline, you’ll have mastered the hardest part of trading – one that many pros have been unable or unwilling to learn.