10 Rules for Successful Trading on the Stock Market
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The stock market can be a volatile place, with prices rising and falling as investors react to new information. If you’t know what you’re doing, it’s easy to panic and sell at the worst possible time, or fail to take action when a good opportunity presents itself. Even experienced traders struggle sometimes, so it’s important to have a clear set of strategies you can follow under any circumstances. These 10 rules will help you succeed as a trader no matter how the market behaves.
Set Clear Goals Before You Start Trading
Before you even begin trading, you should have a clear idea of what you want to achieve. You might want to earn a regular income, get a certain amount of extra investment each month, or set a goal that’s connected to an upcoming life event like buying a house. Whatever your objectives, write them down and keep them where you can see them every day. This will help you stay focused on the things you really want out of trading, rather than just hoping to get lucky and make some money by chance.
Don’t Trade Based on Emotions
The market doesn’t care about your feelings. It doesn’t care about the company you work for, or how you feel about your job. It doesn’t care about your relationship status, or the fact you just had a fight with your partner. And it certainly doesn’t care about the news you just saw related to any of these things. The market is an emotionless machine that responds to supply and demand, and nothing else. If you base your trades on how you feel, you will invariably find yourself buying at the market’s peak, and selling at some low point when you’re feeling nervous or depressed. Trading based on moods is one of the easiest ways to lose money in the stock market.
Only Use Quality Research
The first rule of trading is to buy low and sell high. What this means is that you want to buy stocks when they’re low in price, and sell them when they’re high. This can be a very profitable strategy, but only if you buy at the right price. You can’t buy low if you don’t know what the current price is. At the same time, you can’t sell high if you don’t know what the current price is. Countless new traders have started out with great plans for buying low and selling high, but have failed after picking the wrong price. If you only use price as your indicator for buying low and selling high, you’ll almost certainly lose money. Instead, you need to combine price with other indicators, like the price trend of a stock, or the strength of the fundamentals behind the company that issue it. Only use price as one indicator among many. It’s easy to get it wrong, but it’s also the easiest indicator to fix if you make a mistake.
Track the Behavior of Key Indicators
The best way to track the health of a particular stock, industry, or sector is by using the indicators that measure their performance. Some of the best indicators to watch are the moving average, the relative strength index (RSI), and the moving average convergence divergence (MACD). There are plenty of others, but these three are particularly important to track. The moving average is the average price of a stock over the last 50 to 100 trading days. The RSI measures the strength of a trend over the last 14 days. And MACD is calculated from the difference between a moving average and the price of a stock over the last 9 days. Tracking these three indicators will give you a good idea of how well a particular stock, industry, or sector is doing, and if it’s likely to rise or fall in the coming days or weeks. Combining this with price and other indicators like the price trend can help you make better decisions when it comes to trading.
Be Careful With Leveraged Investments
Leveraged investments are those that offer two-to-one or three-to-one multipliers on your initial deposit. This means that if the market moves 50%, your deposit will move 100%. This can be very profitable, but also extremely risky. If you get in at a good time, and the market moves in your favor, you can make a huge amount of money in a very short amount of time. But if you get in at the wrong time, or the market moves against you, you can lose everything very quickly. In order to make leveraged investments work for you, you need to be certain that you understand exactly how they work before you ever invest your money. Many brokers will offer to open these accounts for you, but you should decline the offer. You must open the account yourself, and be certain you fully understand the risks involved. Only invest what you can afford to lose, and make sure you keep track of the account so that you can close it as soon as possible if things start going badly.
Rule Out Strategies with High Risk and Reward
Many traders like to try a little bit of everything, hoping that their luck will lead them to profitable investments in one or two sectors. This is risky, especially if you lack experience in those areas. Instead, pick a couple of strategies that you know inside out, and focus on them. Once you’ve got the basics down, you can expand the range of strategies you use, but until then, focus on only what you know. As you gain experience, you’ll also be able to rule out strategies that have a high risk but low reward. If a strategy has a very good chance of making you money, but also has a very high chance of losing it again, it’s best to leave that strategy for when you have more experience and are better able to handle the risk.
Don’t Listen to Shady Advisors
There are plenty of “stock pickers” out there who claim to be able to pick the perfect stocks. However, these people are truly experts, and they don’t charge you to share their advice. Instead, they publish their picks on sites like Seeking Alpha and Business Insider. Avoid the “stock picking gurus” who charge you thousands of dollars to tell you what stocks to buy. Chances are, the advice won’t be any better than the free advice you can get from true experts. On the other hand, you can also follow the advice of true experts by reading the articles of successful traders in the field you want to trade in. While it’s true that no two people make the same trading decisions, and some experts are more successful than others, their advice is just as valuable as the advice of the “shady gurus” you should ignore.
Lock in Your Earning and Trading Strategies Before the Window Opens
Before you begin trading, you should decide on both an earning and trading strategy. For example, you might decide to focus on buying shares of stocks that pay high dividends. You can earn a regular income from these stocks, and over time, their value will also increase as the company behind the share grows. You should also decide on a trading strategy. Perhaps you want to focus on purchasing shares in companies with a high “moat,” a term that refers to their ability to defend themselves against new competitors. You can use fundamental indicators to find these kinds of stocks, and then use technical indicators to decide when to buy them. When you know what you want to do, you can keep a close eye on the markets, looking for opportunities to buy and sell at the right times. But when you see a good opportunity, don’t sit on your hands. Make sure you take action before the opportunity disappears.
Summary
The stock market can be a volatile place, with prices rising and falling as investors react to new information. If you’t know what you’re doing, it’s easy to panic and sell at the worst possible time, or fail to take action when a good opportunity presents itself. Even experienced traders struggle sometimes, so it’s important to have a clear set of strategies you can follow under any circumstances. These 10 rules will help you succeed as a trader no matter how the market behaves.
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