WARNING: TRADE STOCKS AT YOUR OWN RISK.
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The following steps are designed to assist the novice do-it-yourself trader/investor from making the same costly mistakes the vast majority (the so called ‘dumb money’) makes when investing in the stock market. They buy and sell on hype, like sheep, and some 95% of them make a loss as a result. Following these steps will help you to minimise risk and maximise returns whilst protecting your risk capital. It is buy low sell high in its purest and simplest form. The fundamental objective is ‘preservation of capital’ and this should remain in the forefront of every trading strategy.
THE TEN STEPS
1. Study 12 month charts of several reasonably well known companies and pick out stocks that have been in a steady UPWARD trend throughout the period. There are always plenty of them, even in a falling market. If you are still stuck, check out Jason Kelly’s automated stock trading robot
No stock is ever a sure thing, but give yourself a head start by choosing one which is going in the right direction! Fundamentals don’t mean anything if the price of your chosen stock is trending downwards. Don’t care what the company is or what it does. This is irrelevant, you are just here to make money, period.
2. Check out the trading volumes and eliminate any which lack decent liquidity.
Avoid stocks with not much liquidity (not a lot of buyers/sellers) as you need to be able to get in and out easily and without effecting the price yourself. Consider a basket stock (like Nasdaq: QQQQ) for liquidity and a moderate risk/reward.
3. Study the 3 month chart and check the recent levels of resistance. These are points where the stock price has peaked and pulled back, before breaking new heights again.
4. Place a note to buy at a price just above the most recent top. You are not actually buying at this point, just making a mental note to buy when it hits this price.
The stock will need to reverse upwards again and ‘break through’ that last resistance level to effectively ‘buy you in’. If the stock price does not reverse but instead further drops away, simply lower your ‘buy order’ to just above the resistance levels going down and wait for the stock to reverse back upwards again. The more it drops the better as you have still not bought in and there will be more to be made when it reverses from a larger pull back.
5. When the stock price eventually reverses direction and passes up through your buy order, immediately buy at market price.
6. Now set your stop loss. Study the last couple of months of the chart and check the rising levels of support. These are points where the stock has resumed its upward direction following a pull back.
7. Place a ‘note to sell’ at a price just below a recent support level. Not too close but not more than 5-8% below your buying price. Your sell order is now your stop-loss. I cannot stress more – you MUST use a stop loss. Your stop loss will protect your capital if the stock unexpectedly reverses down again. You can always get back in later when it recovers from a very deep pull back (and make even more money in the process).
8. As the stock price moves up, but as soon as reasonably possible, move your stop loss (sell order) up to your buying price. Your stop loss is now your break even. Don’t do this too soon as the stock price may possibly test the support level above your stop loss before heading up again. Give it a few days to do that if it’s going to.
9. As the stock price continues up, keep trailing your sell order up with it to just below the support levels going up.
10. When the stock price reverses direction and passes down through your sell order, immediately sell at market price. Your sell order is now your stop gain.
Rinse and repeat steps 1 – 10 with the same or new stocks. If you really feel brave, consider doing the same in reverse by shorting …
Top TEN DONT’S:
1. DON’T risk more than 5-8% in any one trade
2. DON’T neglect to set stops
3. DON’T ignore your stops
4. DON’T hold on to a loss
5. DON’T average down
6. DON’T bottom fish
7. DON’T try to catch a falling knife
8. DON’T be influenced by hype and market noise
9. DON’T fall in love with your stock
10. DON’T expect to win on every trade
No matter what, preservation of capital is key. Everything else is secondary. Stops must set religiously and be adhered to religiously. If possible use automated buy and sell orders to remove yourself from the process completely. Better still arrange to be notified when your stops have triggered, you can find out why afterwards. Human beings cannot help themselves, they ignore stops and end up holding onto a loss, often for a long time. Money tied up in a loss is dead money and could be better used elsewhere, such as a profitable stock, so don’t let that happen to you. Be prepared to move on to new stocks if the ones you target flatten out or don’t bounce back. If possible, choose at least 3 stocks to follow. Too few means too much risk exposure, too many means more of your time working them.
Remember,if you are looking for profitable opportunites in the stock market we recommend you take a look at Jason Kelly’s automated stock trading robot
Above all … GOOD LUCK!