Five Top Tips From Stock Trading Gurus
While there are rarely hard and fast rules about trading stocks
, there are a few tips that are considered so fundamental to stock trading that not knowing them will unquestionably result in some harm coming to your portfolio. These five tips are some of the most commonly held mantras of gurus who have been trading stocks for many years.
Know Your Time Frame
If you are going to buy stock in a company, you should have a concrete idea as to how long you plan to hold that stock. If you are buying it because you like the company's long term prospects and truly believe you can hold it for at least ten years, then hold it for at least ten years unless the company's story changes.
Beware of the Death Cross
The "Death Cross" is a term from technical analysis, which is the study of past market data, primarily price, volume, and momentum to assist in forecasting the direction of prices. It occurs when the 50 day moving average of a stock's price crosses below the 200 day moving average. This often suggests the stock is in a serious downtrend from which it is not likely to recover for some time.
Let Your Winners Run
If you hold a stock that is doing very well and has increased in price since you purchased it, then unless the company's story has changed, dont sell the stock. The key to successful investing is to buy low and sell high. The key to very successful investing to have enough confidence in the reasons you invested in a stock in the first place, so that if things turn out even better than you expected, to stand back and let the market reward you.
The Trend is Your Friend
This all goes back to Newton's first law of motion which you may have learned in your high school physics class: "An object in motion tends to stay in motion. An object at rest tends to stay at rest". In other words, momentum is a very real thing in stock prices. As a stock moves higher over any given period of time, it tends to attract more money and is accumulated by other investors, and tends to move higher. News of this outperforming stock is spread, and more accumulation occurs, sending prices higher. The same applies to the reverse -- a stock that moves lower over a given period of time often continues to move lower. Thus, follow the trend. If you own a stock and the trend is higher, expect it to continue higher. If you dont own it yet, but have been considering it, it may be a good time to buy. Today, thanks to online stock trading, you can instantly enter a buy or sell order and have it executed in seconds, so you won't miss any more of the trend than you need to.
At some point, of course, the trend will cease. But the stock market is about buying low and selling high, not buying at the exact bottom and selling at the exact top. Once the trend plateaus, so will momentum. That may be a time to sell.
Don't Get Emotional!
This is the single most important rule in all
stock trading. The more mechanical you can make your approach to trading, the better off you will be. By having hard and fast rules, such as time frames or price targets for each investment, and sticking to them, you remove emotion from the equation. The biggest threat to discipline is emotion. Emotion will cause you to make irrational decisions, or worse, panicked ones. Once you begin making irrational decisions, it becomes very difficult to get back into a rational frame of mind.
This is why you see markets crash from time to time. Investors become panicked when they see not just their stocks falling, but the entire market. It triggers fears that if everyone else is getting out, you should be, too. However, if you have created a disciplined approach to trading, you can stand quietly by and wait for terrific bargains to develop.
by: Danielle Taylor
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