By: Wayne Duggan
There’s no guaranteed recipe for making big money trading stocks. If there were, every stock trader would be a billionaire in a matter of weeks. However, there are some universal trading tips that can help you minimize your risks and improve your chances of turning consistent profits in the market.
Here are four basic trading tips every investor should understand.
1. Keep Things Simple
Even the best NASCAR drivers in the world likely started with a tricycle, a bicycle and a go-cart. They didn’t start out behind the wheel of a 750 horsepower race car driving 200 miles per hour.
Wall Street can be extremely intimidating, particularly when it comes to things like complicated option trades, stock market derivatives and advanced technical analysis. It doesn’t mean you can’t understand and profit from these advanced ideas, but there’s no special prize for coming up with the most complicated trading system. Never make any trade in any asset if you aren’t 100% confident you understand the asset you are trading and the order you are submitting.
When in doubt, just keep things simple. There are plenty of traders who have made a killing with simple, basic stock trading.
2. Test Before You Invest
If you have a new trading strategy idea, don’t jump right in with real money before you test it out. There are plenty of trading strategy backtesting applications and services out there ranging from a basic free kit to extremely pricey software. Fortunately, you can test your own strategy in real time in a paper trading or virtual trading account.
Until you test a strategy, you won’t fully know how well it works or what unforeseen problems may arise. When those potential problems pop up, you don’t want it to cost you an arm or a leg because you jumped into a trade without testing. You can even test multiple potential versions of a trading idea to figure out which one works best before you put real money at stake.
3. Start Small
One key element of risk management is being smart with the size of your trade and the margin you use in your account. One catastrophic loss can wipe out weeks or even months of trading profits in the blink of an eye.
Putting too much money into a trade up front may also limit your ability to react and adapt to the market. If you go 100% all in on a trade out of the gate, you may be powerless to hedge the position or potentially add to it and lower your overall cost basis.
4. Don’t Chase Popular Stocks
There’s a big difference between seeking out volatility in stocks that are trending on social media and scrambling to buy the latest meme stock after it’s already up 30% just because you don’t want to miss out. FOMO, or fear of missing out, is a real phenomenon that can be costly.
Just because a stock like AMC Entertainment (NYSE: AMC) or GameStop (NYSE: GME) is popular on Reddit, Twitter, at church or among your poker buddies doesn’t mean it should be off limits, but it also doesn’t mean you should trade it no matter what. Before you chase a popular stock, ask yourself if you are confident you have a legitimate trading idea or if you are just trading the stock because you don’t want to feel left out of the fun.
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