Tips To Avoid Losses In The Stock Market

There are countless sources of information on how to make money in the stock market

, but the resources on how to avoid losing money is scarce. As the saying goes, money saved is money earned.

Avoid High Commissions and Fees

Traders should select a broker with a low commission and fee structure - while maintaining best execution - is a great way to keep trading costs down and increase the probability of making a profitable trade. Paying higher commission costs is acceptable if traders are looking for hands on guidance via a full service brokerage house like Fidelity or Charles Schwab.

But for those who are trading in their own account, these high fee brokers are likely not the best option. Day traders and other individual investors would be best served by choosing one from the many discount brokerage houses that provide lower commission costs while still ensuring best execution. Traders should also educate themselves about a brokerage house's add on fees. Individual investors can be hit with unsuspected fees for reasons such as not having a sufficient account balance or add on charges for additional services.

Margin and Derivatives

Borrowing on margin will leverage up gains, but it will also result in amplified losses. Traders who do borrow on margin to trade may want to set aside adequate capital to cover any losses incurred on the margin loan. Because of the inherent risks associated with margin trading, only experienced traders should employ margin in their trading strategy.

There are a plethora of financial derivatives available to traders, but the most popular and widely used by the individual investor are options. Options leverage returns, but they are often misused, leading to the false assumption that they are dangerous financial instruments. Traders should gain an understanding of options before using them.

There are several simple tips that can help prevent losses. Traders can protect themselves by learning how options trade differently than stocks, how to hedge against risk with options, and by seeking out contracts with an ample amount of time left.

The Unprepared Trader

In the stock market, there are factors that are out of a trader's control. Preparation can help mitigate some of the external risks associated with trading through education and experience. Failing to prepare oneself is a surefire way to lose money in the market. Traders should be well versed in how to interpret earnings announcements, macroeconomic data, and other information that critically affects the market.

In addition to getting investing education, the best preparation a trader can get is to practice trade. Most brokerage accounts offer practice trading, or paper trading, through their quote software platform.

Trading off of hot tips or intuition is never a good idea. Prepare to achieve goals and the probability of success will increase dramatically. Success has a thousand fathers and defeat is an orphan.

Apathetic trading

The trading process is not difficult, but it does require a level of attention. Preparing to trade is the first step. After constructing a trading plan, traders should work to ensure that their strategy is being implemented as planned.

Unsuccessful traders are oftentimes those who fail to monitor or adjust their techniques or strategies in the face of changing conditions. For those traders who are unable to actively monitor trades, limit orders and stop losses are essential trading tools. Certain strategies may require avoid trading during amateur hour or adjusting stop loss in case certain price parameters are broken. Don't let your trades become orphans.

by: Matt kaldor

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