Ten Ways to become a Great Trader
If you are reading this article I imagine you already have the desire to become a great trader. The only problem is you have been trading for the last few days, months, or year and seen no encouraging return. Perhaps you’re thinking about opening a new account and putting some of that spare money to work for you. So let me ask you, where are you going to put your money? How sure are you that you can trade stocks and trade well? Well the answer to that is who knows. The stock market is many things but one thing it is not is accurately predictable. What I can tell you is that in my six years of investing, I have found ten key concepts that will help you lock in those profits and outer perform the market. Still interested? Read below and get a jump start on becoming a great trader.
1) Overnight It or Not? The term of the trade is up to you!
This is a debate I face with myself on a regular basis. Is it time to get out of the trade or not? For this very reason as I have told you I will lock in any profits I can take when they are there, which usually range from 1% - 4%. But the truth is it may take a few days (3 to 4) for your trade to appreciate as you have expected. Be patient if you want, but I encourage taking the money at any time your profit is there because the less you hold your stock overnight the less risk you face at 9:30AM the next trading session. Overnight risks in the stock market are very high and talk about not being able to sleep at night (Those feelings will go away though after time). You never know what headline is going to come out the next day that might pummel the stock you own. I’ll leave that decision up to you, but don’t wait too long to make your mind up.
2) Don’t forfeit money to the market.
Whether it is buying or selling you should always use limit orders. This means that you will simply specify a price that you would like to buy your shares at and a price you would like to sell them for. Never use a market order to buy and sell the stock you have tracked. Limit orders will help you make the extra pennies that will add to your profit. There are a ton of traders out there just waiting for your market order so they can make just a few more pennies.
3) Watch the news, read headlines, and know what’s happening the next day!
I attribute a lot of my success to following the headlines and getting a general market mood for stocks. You are going to need to watch CNBC, Bloomberg, or some other financial news company to stay on top of what is happening in the market. Why has the market moved up or down so much in the last few days? Was it an earnings report, economic indicator, or just a speculative headline on a stock that has caused such a stir? This is the time when a calendar is your best friend. I encourage you to frequently (by that I mean daily) to read the headlines of the company you want to trade, brief the economic indicators that are coming out for the week and know there significance, also know when earnings are coming out for you stock and it’s peers so you can play off your sector’s earnings. Headlines control the market and you never know what they will be, but you can always know what is going to happen and you should be able to find out what analyst are expecting.
4) Find the trading ranges and buy on dips.
This is a huge point. You need to track the stock you are interested for a minimum of two weeks. This will give you a good idea to how the stock trades and what you can expect for an average price movement of the stock to be. Look at the support and resistance levels on your chart; they will help you tremendously on your quicker trades. Also, this will give you time to see how the stock has reacted to the market as a whole and even in the sector it trades. When you come to look at your chart at the end of the two weeks I imagine you will see what looks to be like a set of waves. This is exactly what you want. You should notice how the stock trades in ranges and how over the course of the two weeks it goes up then goes back down and repeats it’s self. You are going to want to buy the stock when it has gone down for the day or two because this will give you a great entry point to ride the next move up. I never buy a stock when it is on the way up, chasing profits it what they call it. I have found that buying on back days or dips have returned the most profit to my portfolio.
(It is very hard to predict when a stock is going to quit going down. Stick to your targets for the trade and push your emotions aside. If it is a good trade then your low entry point will eventually pay off.)
5) Know what company you are investing in by sector.
It is very important to know what your company’s core business is and what sector they trade in. The reason for this is that a lot of times in the market when one stock does badly in -let’s say metal’s industry- it will tend to pull the other peer related stocks down with it and vice versa. You want to make sure you are in what is expected to be a good sector over the next quarter or few quarters. This will help your trade fulfill your desires when you are in a good performing sector. Listen to the news, analyst, and read the headlines, they should give you enough information and recommendations to at least get an idea at what sector appears attractive.
6) If profit stares you in the face take it!
This subject relates a lot with the section on greed. Some of the best traders I know face this problem but I can tell you right now you have to get over your greedy inner desire and sell the stocks when you have made money on them. I have made many trades where I would make .75%, .5%, or even .25%. You might think wow that was not much money at all, but let me tell you these numbers add up very quickly especially when you compound them on your previous earnings. If you made only 4 trades a month and make only .5% on each trade (after all expenses are paid) i.e. 2% a month, then your looking at an annualized return of 24%. I think anyone would tell you that is a substantial amount of money for one year’s return, even better than most professional high paid portfolio managers. I think a measly .5% return is more than feasible in any trade. Never question yourself for making money on a stock. You may sell then realize you could have added on a few extra points, but what did I say about being greedy. Look at it this way if you sell for a gain you won, if it goes up by more you still have won, if it goes down not only have you won but you beat all those suckers who held on to their greedy positions.
7) Trade the large caps.
If will be in your best interest to stick to the large well know companies when it comes to trading. Do not become victim as I did in my earlier trading to what is known as penny stocks! The reason for the large caps is quite simple. They (blue-chips) usually do not move that much in share price even on days where the market swings back and forth like a pendulum. These stocks typically move .25cents to $1 a day and that’s the type of profit we are after. Large caps on very volatile days may lose 3% or 4%, but you will find out quickly how the low beta well known companies will make you more profit over time.
8) Greed is the root of all evil.
Have you ever heard the term bulls make money, bears make money, and pigs get slaughtered? Well this rings in very true for the short term traders. When you make a trade and you have posted your 1% or 2% gain, you probably tempted to think, I should hold on to this thing. What you should be thinking sell, sell, sell. I can not stress how important it is to not be greedy in the stock market. When you hold on to a stock especially in a volatile market (hint: that’s the best time for traders), you leave yourself exposed to too much risk. If you have made you trade and you are already on top why wait longer to see what happens. Take the money and run away. If you hold on to your greedy desires, be prepared to hold on to your losses.
9) Start with the right amount of cash.
To all of you who have a thousand dollars or so and feel like your ready to trade, I am sorry to say that you probably should be thinking of investing that money long term rather than trading. The fact of the matter is if you want to make money from the 1% or 2% trades, your going to need a little bit of capital for those percentages to really mean anything. The minimum amount of money I feel is necessary to have any impact trading on would be around $10,000. So what if you are going to make a few percentage points on $100, $500, or $1000. I think you’ll find out that your trading cost will kill your return and besides what good is an extra twenty to thirty bucks going to do you?
*(You may even want to check for incentive to starting with higher amounts of money, I know some companies offer free trades or cash bonuses.)
10) Stick to the low cost brokers.
Thanks to the wonderful world of online trading, we all can be players in the market from anywhere there is computer with online capabilities. So now that you have your money set aside ready to trade, what brokerage firm do you go with? From my personal experience I recommend either TD Ameritrade or Scottrade. They are among the lowest commission expense brokerages with TD charging $9.99 per internet trade and Scottrade $7.00 per internet order. Commissions add up quickly and eat in to your profits so you should always go with a very low commission fee to keep more of the money you earned.
*(There is a new firm Zecco.com who is offering free trades which is definitely worthy of research, I have not had time to review all the aspects of the company, but if free trades are available you may want to consider checking them out.)
These ten concepts have brought me a long way on the journey to being a great trader. For those of you who are still iffy about the whole subject, I encourage you to paper trade a little, meaning simulate the trades you think are going to be good, write down when you would have bought and then see where your trade goes. Practice makes perfect. It took me six years to get a strong understanding of how the market works and I still am probably considered by many to be a novice in some respects. What I am sure of is that with the right discipline and desire, you can become a great trader and outer perform the market on consistent basis. To do that of course you will need to learn about short selling, but that is a whole other discussion. Never be satisfied with what you will learn or know about the market. It takes consistency, time, and a superb effort to stay on top of the market. I wish you much success in your trading future!
***** *****
Avid Investor, Trader, and student of the stock market!
Below I have listed some trades I made in the past. Notice how the small percentages add up.
Bank of America .44%
Bear Stearns .22%
Northgate Minerals .63%
Goldman Sachs 2.18%
Goldman Sachs .58%
Research in Motion 1.67%
Research in Motion 1.26%
Total % Gain from trades using my ten concepts = 6.98%
Disclaimer: This is article is solely my opinion and is not be viewed as investment advice. I may or may not hold positions in any company(s) mentioned in the above discussion. I am not a professional
