STOCK PRICES - Personally, after much penny trading when I first started playing the markets, I myself feel is it far better to make 10% on a $60 stock that moves $6, then to make 10% on a $5 stock that moves 50 cent. Why? Risk. First of all, stocks that are low priced are generally low priced for a reason... low P/E ratio generally means "no one cares". Sure you can buy a $1 stock and have it go to $3 - I've done it - but it doesn't happen that often and more times than not the stock goes the opposite direction. Yes you can buy a ton of shares, but when you really stop and think about it, it's all percentages - so who cares what the price of the stock is, as long as it is capable of producing the percentage moves you want? Higher priced stocks also tend to have higher volume (or at least the stocks you trade should have higher volume) - this means there are more eyes watching the stock and trying to decide if it's a good deal as the price dips. If you saw MSFT suddenly drop 25% don't you think everyone on the street would be thinking "Hmm, maybe I should buy MSFT today". But when XYZ oil drilling company drops 25% from $10 to $7.5 - most people could care less.
TRADE STOCKS THAT ARE MAKING MONEY - not stocks that "might make money". This is very important to me. What are you really doing when you buy stocks? You are OWNING part of a company. Do you really want to own a company that isn't making any money yet? Hell no. You want to own part of something that is rolling in cash, selling products left and right - something you don't otherwisehave! You want part of the greatest software company around (MSFT) or part of the company that is selling computers like they are going out of style (DELL). Why do you think prices for these stocks are high? Simple - supply and demand. Everyone wants a piece of the action, therefore the price to get on board is higher. Forget companies that "might make" money down the road when there are handfuls of companies making cold hard cash right now. You want to buy part of something where money is flowing. Part of the American dream that is happening right now! Stick to stocks that have earnings. Forget buying a dream - 9 times out of 10 you wake up and find out the only one that made any money on the deal was the CEO and board of directors. Besides, good ideas are a dime a dozen - profitable companies are only to be had at P/E ratios of 15 and above.
DON'T BUY THE "BIG EVENT" - This is sort of along the lines of the above paragraph. How many times have you piled on board a stock that "may announce a take over any day" or "could be approved for a deal of some sort". Talk is cheap... you can always buy the stock after the deal is announced. If it's that great a deal, it will help the company down the road too - look at a chart of SOC (sunbeam) as an example. The day Al "chainsaw" Dunlap came on board, the stock just about doubled.. but then it doubled again once he was on board making changes and fixing things. Generally, don't buy stocks that "might" have a big event - because when that big event doesn't happen, people bail out like they were on a sinking ship. And even when you do buy a stock that may have something like a take over coming - generally those things take months and months to finalize - How many times have you or I bought a stock on some "hot news coming" only to hold it for weeks and weeks? Then long after you sell the deal finally does go through (9 months later)- it's just (generally) not worth the wait - buy stocks with news that is happening, not stocks with news that "may happen".
DON'T CHASE STOCKS - This is a bad move generally, unless there is some really hot news that has caught the markets off guard. For the most part, if you have missed the stock, don't over pay just to get on board. Again, generally people that buy late are buying on pure emotion (greed and fear). Greed that they may make a bunch of money real fast and fear that they may miss out. Those are the two worst reasons to buy anything. Those that chase stocks generally over pay for them. A much better attitude (rather than "Oh my God I'm missing the boat, I must have that stock at any price") is "Forget it, unless the stock comes to me, I don't have any interest in it"... people write in sometimes and say "How do I get the low entry prices and high exit prices for my stocks like you guys do in your newsletter".. my answer is simple "Don't over pay". Put your buy order in near the low (or lower half) of the range that we list and if you miss the stock, so what, buy something else in the report - if you get the stock at the price you want, great, if not, then move on to something else. Plenty of stocks to buy in the stock market. Same goes for selling. If the stock moves up a great deal in one day, sure sell it. If you don't get the price you want, then you at least know you are in an uptrend.. hold on to it. Lots of times I say to myself "If I get this price TODAY, then I'll sell the stock" if not, then I don't mind holding until tomorrow. Today I'll sell at this price, otherwise we'll see what tomorrow brings. Sell at the price you want, not at the price the market wants you to sell at. That't the great thing about the stock market - there is always another great stock that must be bought.
DON'T RUSH IN - This is along the lines of the above comment.. but it is worth elaborating on - buy a little - test the waters.. see how your position develops, how it trades, how the market is doing. You know you will be paying much closer attention to a stock once you own even a little bit of it. Don't buy 5000 shares at one time.. buy 1000 shares here, 1000 there (or 100) and see how the stock moves. If it goes down and you still like it, you have the power to buy more and reduce your overall cost index. If it goes up and you see that you have made the right decision, buy more until you get to a level where you wish to sell. Sometimes adding to a position that is going up is the best thing you can do. Hold back cash so you have this sort of flexibility in the markets - money equals power over the market - don't give away all that power with a single move, because if you have to make adjustments (don't we all?) then you have left yourself powerless by your own doing. Don't rush in.
DON'T GET GREEDY - But don't sell too soon either. It's a fine line between the two, something you must work out for yourself. Decide how much money you are happy with and what it will take to get there. Decide how much risk you want - but once you make the play and get the amount of return you want, don't say "Wow, I bet I can get even more!" or "This stock is sure to double again". As soon as you start saying "I just made $5000 today, but I KNOW the stock is going to make me $10,000 if I hold it longer" - WARNING - those are warning signs of greed - check yourself right there! Ask yourself instead "Do I value this money I have on the table now?" "Is $5000 worth my efforts in this case - there is always another trade" "How long would it take me to make this money otherwise?". Those are much more rational (and smarter) ways of thinking. Think about how many times you have held out for a "home run" only to see the profits in your stock fade away. Just remember, when you have profits at hand - if you don't take them, there WILL be someone else who is less greedy that will. Rome wasn't built in a day - try saying that next time you have a few thousand dollars in profits and see if you don't end up selling at the right time. Generally when you think "I should sell" you are right. If you think there is more upside, use a stop loss in the money to protect your profits JUST IN CASE you are wrong.
BUY POPULAR STOCKS - You must buy stocks that have high volume. Two reasons, one they move better for trading and two, if you ever end up with a lot of shares of a low volume stock, you will quickly see how painful it can be to get out of the positions. I personally have bought so many shares in stocks that are so thinly traded in the past that when I placed my order to sell the lot I actually saw the price drop over 5%! Go where the buying is - stick to the high volume stocks.... you want to trade the market, not BE the market
NEVER INVEST MONEY YOU CAN'T AFFORD TO LOSE - This business can wipe you out OVER NIGHT - don't think it can't. If you have a family or do not own your own home or are too old to make your money over again and you are trading with over 10 to 20 percent of your total liquid assets, then you are a damn fool. You must absolutely look at this as high risk - never risk more money than you are comfortable losing. For one thing, if you do have too much money in the markets it will effect your thinking process (fear will start showing up to cloud your thinking). Also, if you are a family man your first priority is not becoming the #1 all star trader, it's your responsibility to your wife and kids - make sure the house payment is paid, the food is on the table, and the bills are taken care of first, then trade, not visa versa. Additionally, along these same lines, keep in mind that paying off your credit card bills in full is like getting an instant long term investment that pays you 17 plus percent a year. Not bad! Mutual fund mangers would sell their mothers to each other to get this kind of return a year! Generally, unless you have tremendous earning power, you should have very little debt and a stable housing situation before trading much capital in the markets for day trading. The key to trading is longevity and reducing risk - make sure you do so in your life, not just in the markets.
BIG GAIN - TAKE SOME MONEY OFF THE TABLE - At some point, just like experiencing a large loss, you will hit a HUGE winner. When that happens, take 1/2 the money and tuck it away for a raining day. It's free money, you never know when you might need it and generally big gains don't come in pairs.
BE 100% CONFIDENT IN YOUR TRADING - Never take up a position that you aren't 100% confident about (at least in your own mind) with the facts you have at hand. If you buy something and don't know why you bought it or are sweating out every tick, then you are off to a very bad start and are what we in the business call "a weak hand". Now calling Final Boarding for the "Capitulation Express Train"... . The weak hands make the money for everyone else in the markets. Unless you are confident in what you are doing, do not do it. If you are not, the result is that you could easily be swept into the "crowd mentality". You see a bunch of others sell and then you dump your stock at rock bottom prices. This is not how you trade - you must be confident enough in your thinking to say "I don't care what other's do with the stock, until I see a good reason to sell I will not change my position". Now a days, news hits the markets at record speed - generally you will know about something in plenty of time to re-evaluate a position. The only time this is not true is when a company is not playing fair or is deliberately lying to the public. For the most part (and this is another reason you want to stick to name brand stocks) you can look over what is really happening and make a decision. Once you have made that decision, if you are right, ultimately the markets will come to you. Others may sell because they see someone next to them sell, but that is not and never has been the road to success on Wall Street. The old saying "Would you jump off a cliff if you saw someone else do it" holds very true for buying and selling of stocks. Don't follow the crowd - follow your brain. Be confident in your thinking and you will generally (if you are smart and use all the facts at hand) come out on top a large percentage of the time.
DON'T INVEST TOO MUCH - what's the old joke.. they guy on wall street says "I own so much of this stock I can't sleep! What should I do??" The answer of course is "Sell down your position until you can get some rest!" haha... Diversity in the stock market is not only smart, but it will allow you to reduce risk - this will allow you to think clearer and not sell in a panic. Trade what you can afford and you will generally feel MUCH more comfortable in your trading and this will generally result in much clearer thinking and smarter moves on your part. Too much risk, will result in too much fear and that will cloud your thinking.
OKAY MOST IMPORTANT - NEVER TAKE UP A POSITION WITHOUT A PLAN FOR THE ENTER TRADE! This is so important yet I rarely see anyone do this. Before you ever pickup the phone to make a trade, you MUST - ABSOLUTELY MUST have a plan of attack for the trade. What price you are going to pay, what price you are going to sell at, how many shares you will buy, what price you will cut your losses at. This is critical. You MUST have a strategy to handle the upside AND down side - the good and the bad of the trade. Where do you sell when the stock goes up and what do you do if the stock goes south on you. This goes hand in hand with being 100% confident. You must have a plan of attack. Think of buying every stock like a small battle on the battle field. You are the 4 star General of the trade. Do you think a General would direct his army onto the battle field without a plan of attack? Without thinking out every possible scenario or what could go right or wrong? This is EXACTLY how you must think when trading. Beyond that, you must stick to your guns - most importantly when the stock hits your sell price, sell and move on... when the stock hits your stop, get out. Don't change your strategies because of your emotions. Don't change your approach to try to make yourself right in the trade. You are never right, the market is always right - that's the old saying. When you are right, you will know it (dollars go up) when you are wrong, you will also know it (dollars go down). It doesn't take long to figure out. You can be right and broke, or you can be wrong and save your ass.
KNOW YOUR LIMITIATIONS - This goes along the lines of what I just commented on - know your limitations (credits to our Neighbor Client Eastwood). A man (or woman) has got to know what they are capable off. I hate to say it, but some people are just not cut out for trading. Unless you can change and adapt. There is one easy way to know if you are cut out for trading... you make money at it! At least you can see yourself improving. It's a hard road - you don't learn this stuff over night - it takes months, even years to become even a half way decent and savvy trader. No one walks into this business and learns it over night, it's like anything else in life - it takes time, it takes practice and it take the ability to learn from your mistakes. If you don't have that, then get out now. If you blame your mistakes on everyone else - forget it - stop while you still have some money and get a day job. If you cannot say to yourself "I fucked up that trade big time! and I'll never make that mistake again" then you have selected the wrong business to be in. You have to be able to stand back and look over what you are doing that works and what you are doing that doesn't work, trading is a highly fluid type of business, it's always changing and you must adapt and change with it - if you cannot do that, then get good luck - but for those that can, the amount of money you can make if you are intelligent and willing to learn from your mistakes is really unlimited. So what you must do, ultimately is learn what works for YOU - not what works for everyone else - what style of trading, what stocks, what philosophy works for YOU - the bucks stops with you. And as an elaboration to that, one thing you will never hear a successful trader say is "I lost money, but it wasn't my fault". Every good trader I know takes full responsibility for every trade they make and every action they take. ?? Wasn't your fault ??? Who ordered the stock?
DIVERSIFY, DIVERSIFY, DIVERSIFY - You are not going to be right EVERYTIME
If you have all your trading capital in less than three stocks then you are just kidding yourself - at some point, either this year or in 10 years or at some point, maybe tomorrow at the opening bell, you will undergo owning a stock that drops like a rock. I've been there, it is no fun at all. There is only one thing you can do to reduce risk in the market - DON'T PUT ALL YOUR EGGS IN ONE BASKET - that is a gamble and that is not what we are here for. If you want to gamble, then honestly you can get better odds in Vegas. If you want to work the markets and make consistent money, then don't gamble, be smart - if you can out smart the other guy by trading more WISELY, then you can walk away from the table with the money.
TOPS AND BOTTOMS - Don't try to guess the exact top or bottom of a stocks trading range or move. I would much rather give away 10% at the top and 10% at the bottom. You will drive yourself crazy if you punish yourself for not selling at the high or buying at the low - it's almost impossible for most people. It can be done, don't get me wrong, but it almost always involves missing the trade at some point, or using a combination of averaging to get there. For all piratical purposes you will do much better if you just stick to buying and sell stocks at what you feel are attractive levels. HINT - once you stop worrying about buying and selling the highs and lows, you'll start hitting them more often!
STOPS - Use stops to protect your profits when you have them and your losses when you fear them. It can be hard to pickup the phone or push the button and make the trade, especially when it's going south - let stops do the work for you. And never feel bad about getting stopped out at a profit - if you are making any sort of profit in the stock market then you are doing darn good! At least 50% of the market is losing money!
USE SHORT AND LONG TERM POSITIONS - Nothing says every stock must be closed out in a single day. A combination of intraday trading and medium term holding generally works out quite nicely. Even a few long term holdings (as long as they are far in the money and protected with trailing stops) don't hurt.
REDUCING RISK AND PROTECTING CAPTIAL COME BEFORE making money in the markets. That sounds odd, but it's 100% true. If you aren't here for the game, then you can't play it. You must seek to reduce risk and protect yourself at every turn in the stock market, even before making a profit. Don't get me wrong, you are here to make a profit, but NOT at the expense of silly risks. Always consider the risk to reward ratio of a trade. Keep that ratio low and you will make more money generally - or at least you will be safer and hang on to your money. I would rather miss 10 trades, than make 10 bad ones. Reduce risk, reduce risk!
A bad trade is like a leaking damn - forget about everything until you plug the leak - then worry about increasing the water level.
NEVER CHANGE HOW YOU TRADE BASED ON THE PRICE OR MOVEMENT OF THE STOCK - Period. Never let the trade dictate how you play it - have a plan and stick to it.
MARKETS UP - use caution. When the markets are over extended, then likely that stocks are too (since they are the markets). When the markets are selling off, then stocks are typically at a discount. You should generally view a lot of buying in the markets as a bad thing for you "Oh geeze, all these prices are getting too high, I should start to thinking about selling my stocks to someone else at this over inflated price". Likewise, when the markets are dropping like a rock, you should start thinking "Oh wow.. hey, a sale in the stock market.. if I buy now, then once this is all over I can sell the stocks again once they go back up". Buy the dips, sell the rallies (sell the news).
NEVER SHORT a stock that has a good reason to be high priced, only short stocks that have "no good reason" to be over priced. Never short a stock just because of the price. In other words, just like you wouldn't buy a low priced stock just based on the price being low, never short a high priced stock just based on the price being high. There must be a reason to short - beyond just the price movement.
WHY THE MARKETS WILL ALWAYS GO UP - Negative people have a negative out look on things. Positive people have a positive out look on things. I am positive, I believe in good, I believe the markets will go up. If I thought the markets would only go down and were filled with negative, why would I want to play such a depressing game? Yet, there are people that are convinced that the markets will go down. These people generally either short the markets or buy at the wrong times. When they are short and the markets go up, they get "bought in". When they are short and the markets go down, they says "Oh, see I was right" and sell to get out. At that point all the negativity is out of the markets and it goes back up on positive people buying. It's a cycle, but since generally human nature is to be positive and to be successful, we will eventually weed out the negative factor in the stock market and produce a rally. At least that's what I believe. And so far history has proven me 100% right - the market has only gone up... until the stock market goes back to zero that is .. Besides, ask yourself this simple question? "What is a market?" It's a place where people buy things.. sellers are simply a result of a transaction that is based on buying. No buyers no sellers. It's the buyers that drive the process.. the demand creates the very market itself. Buying and demand lead to what? Prices
going higher.