Are you new to trading and feeling the pressure? That knot of excitement and dread in your stomach not passing? The unknown aspects of investing can be daunting, especially when success isn’t guaranteed. Although trading can reap big rewards, the most important thing to remember is that it doesn’t come without effort—to be successful, you must put in the work. Set yourself up for success with these seven stock tips for investment success.
1. Make the Right Type of Trade
There are options when it comes to trading, and finding the type that matches your personality, risk level, and financial goals is very important. Before deciding which trades to focus on, consider your risk tolerance; some people are comfortable putting up a lot of money in a high risk, high reward situation while others prefer to play it safe and possibly not earn as much money – but not lose as much either. There’s no right or wrong risk tolerance level. It’s simply personal preference. There are two differing characteristics to know in the stock market system: the trade order type and the stock type. Trading order type is essentially how you place your order. Some traders prefer instant orders, which mean you buy a stock at whatever the current price is, while other traders use pending orders, which locks you into a trade once it hits a certain price. There’s also the choice between options and futures. Although both are risky, futures are more speculative and tend to be a better option for people with at least a few years of experience.
2. Be Disciplined and Patient
Trading success doesn’t often happen overnight, and you may have to learn by trial and error before things work out. At the beginning, expect that you may lose some money, but know that if you stick with it, you will make up that money and then some in the long term. Don’t be discouraged when things don’t work out. Some of the most disciplined traders set a stop loss, which is essentially an automatic sale if a stock reaches a certain level. Many experts recommend an 8% stop loss order, which means you automatically sell a stock once it loses 8% of the purchased value to cut your losses before they get out of control. That way, you aren’t distracted by other factors or emotions and can instantly trade when the stock hits the desired level.
3. Put Aside Emotions.
Although it can be easy to get caught up in the excitement of trading, the best results come from a calculated and methodical approach. You may want to make a big trade because you like the person who gave the tip or you have a connection with the company, but taking the time to think about things rationally can lead to long-term success. Put aside your emotional feelings about a trade and look at it in black and white terms: will it make you money or set you up for long-term success? If so, go through with the trade. If your thoughts are clouded by emotion, set the trade aside and come back to it with fresh eyes and a clear mind. In many cases, greed can take over when the chance for an easy big win comes along. On the flip side, fear can cause traders to sell quickly. The most successful traders look for an average and book profit/loss to see the potential of a stock. Many traders create a set of buying rules to take the emotion out of play. If a stock follows all of their pre-set buying rules, then they can consider making a purchase.
4. Know the Market
Anyone can cash in on a “hot tip” for a one-time big payout, but to consistently make money, you need to know the market. A good understanding of historical data and market trends will help you see how current market behavior fits into the big picture. It also helps you not act rashly when things plummet or jump because you know the market will even out eventually. The old adage says that it isn’t a stock market but rather a market of stocks, which is to say that it is more important to know your individual stocks and industry trends instead of the trends of the entire market. To increase your stock knowledge, tap into reputable stock market information resources, such as market news from a variety of sources, trader groups, and industry research organizations. After every trade, analyze your actions to see what went well and what didn’t. The best traders are constantly learning from their own actions and how the market affects their trades and then adapting their actions to reach the optimal level of success.
5. Act Quickly
Trading is a fast game, so you need to be quick to get in and even quicker to get out. Beating the rush to buy or sell a stock can lead to huge profits, especially when you buy or sell the right stock. Amateur traders often buy at the wrong point, but a skilled trader knows exactly when to buy or sell. This knowledge often comes with experience and by watching more knowledgeable traders and reading stock reports.
6. Start Small
A successful trader can start with just $500. As you learn the trading ropes, it can be wise to play it safer until you are confident to take more risks and invest more money. At the beginning, try investing in less volatile stocks, such as mutual funds or domestic stocks. Many brokers even let you practice with a demo account, which allows you to run through different scenarios with a practice account before putting in real money.
7. Don’t Spread Yourself Thin
There are lots of options when it comes to trading, but successful traders know not to spread themselves too thin. If you put your attention into a few high-quality stocks, you can learn their trends and the industry very well, instead of throwing money at lots of lower-quality options. When it comes to trading, aim for quality over quantity—choose an area that works for you and become an expert. A general rule of thumb is to invest no less than $5,000 in a stock, which means that if you have $5,000 to invest, choose only one or two stocks. If you have $10,000 to invest, divide it between three to four stocks.
To mitigate some level of risk, you can split your focus into different areas to avoid investing everything into the same country, industry, etc. Not all traders prefer to diversify, and doing so doesn’t mean you’ll automatically be successful. The bottom line is to be calculated in the stocks you choose and watch them all closely, no matter if they are similar or very different.
Becoming a successful trader definitely takes time and effort, but it can be a rewarding and profitable experience when done right. Take the time to prepare and research before jumping into the volatile world of trading and you could have great success.