Are you interested in
trading in the stock markets? Do
you have questions about getting started? You are certainly not alone. Almost weekly I hear from ordinary
folks with basic questions about trading stocks. After addressing these on a consulting
basis for years, I’ll outline some of the basics in this essay.
The
Rewards of Stock Trading
Trading stocks is an incredibly rewarding journey. Everyone is intrigued by the stock
markets because traders can make big
money there. This is certainly
true. But the potentially
extraordinary financial winnings are not the most gratifying part of trading
stocks. The best part is really
the endless learning and personal growth that trading naturally
generates. Trading is a
most-fascinating voyage of discovery.
When you buy stocks, you
can’t help but grow interested in what the companies you own are
actually doing. You learn about
their businesses, their markets, their competitors, and the economy in
general. Everything in the
markets is interconnected to some degree. So every piece of knowledge you glean,
no matter how trivial it may seem at the time, helps you grow smarter and
make better decisions in the future.
Learning is always fun and
fulfilling. And trading stocks
doesn’t just teach you about the business world around us, it illuminates your inner self like few other endeavors. To
become successful in the stock markets, you have to master your own
emotions. Trading stocks brings
all of your emotional and character traits, both good and bad, to the surface
where you are forced to deal with
them. You can’t hide here.
Through trading stocks
you’ll learn more about yourself than you ever thought possible. You’ll learn to recognize your
unique God-given strengths and utilize them in the markets as well as other
areas of your life. You’ll
learn to work around your weaknesses too, and gain priceless emotional
control that will greatly improve your life beyond trading. Curiously, stock trading is more of a
mirror inward to your heart than a window outward to the world.
Stock trading is one of the
last true meritocracies. All that
matters for your success is your own decisions. If you make good decisions on balance,
you will win on balance. It
doesn’t matter what anyone else thinks of you. Anything in your life that others have
used to classify or judge you is totally irrelevant in the markets. The markets are truly blind to
everything but merit. Regardless of the hand you’ve
been dealt in life, you can become an excellent stock trader if you apply
yourself.
The stock markets also free
us from the tyranny of time. Most
of our lives we trade our time for money in the form of salaries and
wages. But in the markets,
instead of us working for our money our
money works for us! Unlike
everyday life, time on task is irrelevant in the stock markets. If you pick the right stocks, your
capital will grow regardless of how your time is spent. So stock trading is incredibly
liberating.
Who
Can Trade Stocks?
And you are never too young
or old to start trading stocks. My
father opened a brokerage account for me when I was 12. I had a little money from a summer of
mowing lawns and retrieving golf balls from water traps, and he thought I
might be interested in investing.
Boy was he right! His
seemingly tiny decision to help me start investing changed my life
forever. So parents, consider
getting your kids started young and their odds of being very successful as
adults will multiply dramatically.
I also know investors who
never bought a single individual stock before they formally retired. Yet even starting in their later years
they’ve grown to become excellent traders and have been blessed with
great success. If you are closer
to this end of the age spectrum, your hard-won life wisdom will greatly aid
your journey as a trader. And a
big side benefit of trading stocks is it will help keep your mind
razor-sharp.
All the usual factors that
the world unjustly uses to limit people, such as age, sex, complexion,
attractiveness, nationality, faith, and station in life are totally
meaningless in the stock markets.
To get started only one thing is necessary, a little bit of surplus
capital. This is money you have
saved by consuming less than you earn.
Saving is hard work, no doubt.
But you can do it. By
cutting back a little in your entertainment budget, odds are it won’t
take you too long to save enough to open a stock-trading account.
Opening
Your Stock-Trading Account
And you really don’t
need much. Minimum opening
balances for new online brokerage accounts are typically just $1000 to
$2000. In some cases, no minimum
is required at all. And you
definitely do want to start trading even if it is on a small scale. The reason is stock-trading knowledge
scales beautifully. If you can successfully grow $1k in
the stock markets, then you can do the same thing with $1m later. All the priceless lessons you learn
starting small will prevent you from losing big later as your capital grows.
From a practical
standpoint, I would recommend starting with at least $1000. While you can trade with less,
commissions become more onerous with smaller amounts. If it costs $10 flat each time you
trade, and you are only trading $100, you are effectively paying your broker
10% for trading a stock which is far too high. But if you are trading $1000, and
still paying the same $10 commission, then it works out to 1%. The bigger your initial balance you
can save to start, the lower your effective commissions will become. Regardless of your starting capital,
make sure it is money you can afford to
lose as stock trading is risky!
Once you have saved some
money to start trading stocks, you need to open a brokerage account. I highly recommend an online trading
account that you can access over the Internet from your computer. Online trading is inexpensive, fast,
and efficient. From the time you
decide to buy a stock to when you actually own it is measured in seconds. And you never have to talk to a pushy
broker on the telephone who will second-guess your
trading decisions and try to steer you into stocks his firm wants to get rid
of.
As far as picking a
particular broker, all the top-tier online names are great. These include Charles Schwab, Fidelity, TDAmeritrade, and E*Trade among others. All brokers are federally-insured
through the SIPC to $500k per customer, and many carry additional private
umbrella insurance beyond this that takes their per-customer insurance limits
in excess of $100m. So you
don’t have to worry about your money. My personal favorite
online broker, and the one I have the most experience trading with, is TDAmeritrade.
To open your account, just
visit these brokers’ websites and find one that will work for you. Then you can click on the appropriate
new account link and print out the necessary forms to complete. Then just mail in your forms along
with your check to fund your account, and you are good to go. Realize that this process can take a
couple weeks, so don’t expect to be trading the first morning that you
try to open your account. Also,
if you think you may want to trade stock options at some point, it is easiest
to specify this up front in your initial forms.
Buying
and Selling Stocks
Once your stock-trading
account is open and funded, the actual mechanics of trading are very
easy. To trade any stock, all you
have to do is go to your broker’s website and log in to your
account. Logging in will take you
to a screen where you can actually execute trades. The screenshots in the exhibit below
show TDAmeritrade’s interface, but most of
the online brokers’ interfaces are very similar and easy to use.
First you have to tell your
broker whether you want to buy or sell a stock, which is done with the
buttons on the left side of this interface. Then you have to enter the quantity of
shares you want to trade as well as the stock’s symbol. In these examples I am using the stock
of BHP Billiton, the world’s largest mining company. Both orders above, one buy and one
sell example, use 10 shares of BHP.
Now in order to keep the
stock markets running, we need market makers. These are specialized financial
companies that buy and sell shares of particular stocks whenever sell and buy
orders come in from traders. Even
if no other traders want to trade at a particular moment, market makers will always buy and sell the stocks in
which they make markets. Their
service guarantees liquidity, that you can trade
anytime you want. Market makers
are compensated for this service through the bid-ask spreads.
Bid-ask spreads are
different from commissions. When
you trade a stock, you’ll probably have to pay your broker around $10
for the trade. The bid-ask
spreads are an entirely different beast than these brokerage
commissions. The bid price for a
stock is the price at which the market maker is currently willing to buy, or
is bidding for, shares. The ask
price is where the market maker is currently willing to sell, or is asking
for, shares. The bid price is
always lower than the ask price so the market maker can earn a living on this
spread.
Today these prices are
determined instantly by computer.
If traders are offering to sell 1000 shares of a particular company in
a given second but other traders only want to buy 500, computers lower the
bid and ask prices until supply meets demand. Maybe if the prices are lowered $0.05,
for example, 750 shares will be offered for sale by some traders and
simultaneously bid on by others. The
slightly lower price reduces incentives to sell so supply drops and it
increases incentives to buy so demand rises and they meet in the middle. This sell-side imbalance lowers
real-time prices, while a buy-side imbalance raises them.
These relative
supply-and-demand imbalances on a moment-by-moment basis are what drive stock
prices. The bid and ask move
higher or lower in lockstep, with the spread between remaining intact to
compensate the market makers. So
as a trader, when you want to buy a stock the higher “ask” price
is what you will pay. It is what
the market maker is asking (demanding) per share in order to do business with
you.
And of course the lower
“bid” price is what the market maker is willing to pay you for
your own shares of a company. The
market maker buys at his bid price and sells at his ask, earning the spread
for this service. This means that
you as a trader buy at the ask and sell at the bid, effectively paying the
spread to the market maker. Many
new traders get confused on bid and ask prices, but they make perfect sense
if you remember they are from the
market-maker’s perspective, not yours.
So to buy a stock, type in
its symbol to get a price quote. Then
look at the market-maker’s ask price. This is what you’ll have to
pay. Then enter the stock symbol
again if necessary in the actual buy interface (as opposed to the quotation
one) and the number of shares you want to buy. Then you decide on “order
type”, which is generally “market” or
“limit”. This is a
very important distinction that can save traders much angst.
The conventional type of
order is a market order. This
means you are willing to buy X number of shares of XYZ at whatever price the market maker happens to be asking when he
receives your order. This sounds
fine, and it is 99% of the time.
But sometimes prices can move fast or even worse trading anomalies can
happen that lead to bad fills on market orders. For example, what if you placed a
market buy order when a stock traded at $70 but then it rocketed to $80 just
before your order hit? You’d
be stuck paying $80 a share when you thought you’d pay around $70. While very rare, there is still no
need to accept this price risk.
It is far more prudent to
use limit orders. A limit order
is a conditional order to buy stock but only at or under a certain price.
In the example above, BHP’s ask price
is $70.50. So I put in a
limit-buy order slightly over this at $70.65. This means, no matter what, I will not
pay more than $70.65 for this stock.
If it happens to run over this price before my order hits, then it
simply won’t be executed and I can cancel it. And there is no charge for orders that
aren’t executed. And since
computers fill my order, if the ask is still $70.50 when it hits it will
still fill at $70.50 despite my $70.65 limit. A limit buy order caps your buy price
on the topside but you can still get a lower price if the ask is lower when
your order is executed.
Limit orders work similarly
on the sell side. If I want to
sell 10 shares of BHP like in this example, the market maker is currently
bidding $70.45 per share for my stock.
But since I don’t want to get caught
in some price anomaly and sell out at a way lower price than I intend, I can
put in a limit sell order. In
this case I went slightly under the bid, offering to
sell my BHP at $70.30 or higher while the market maker is offering to pay
$70.45. In practice I will still
get $70.45 or whatever the current bid is when I execute my order, but I
won’t get stuck selling my shares for $60 if some weird spike happens.
Now I don’t want to
make you paranoid here, price anomalies are virtually nonexistent in major
stocks and extremely rare in little stocks. Despite this, it is very prudent to
protect yourself with limit orders.
Limit orders allow you to specify the highest price at which you are
willing to buy or the lowest at which you are willing to sell. So by setting limits on buys slightly
above asks and limits on sells slightly below bids, you ensure that those are
indeed the prices you will get. I
always use limit orders for every single stock trade.
In the old days, limit
orders could take longer to execute.
This is no longer the case in our computerized markets. As long as your limit order is
“marketable”, which means it is above the ask
for a buy order or below the bid for a sell order, it will still execute
instantly just like a market order.
Although limit orders used to cost more than market orders in
brokerage commissions, today they are usually all the same price. So use “marketable” limit
orders to protect yourself whenever buying or selling stocks.
As you can see, actually
buying and selling stocks is very easy mechanically. All you need to know is the symbol of
the company you want to trade and the number of shares. You type this symbol into your trading
account to get the current bid and ask prices from the market maker. Then you enter a buy or sell limit
order with limit prices slightly outside the current ask or bid. Then hit the appropriate
“finished” button to execute the trade, and within a second or
two you will have bought or sold a real stock! Congratulations.
Picking
Stocks - Fundamentals
Stock trading is a lot like
the classic game of chess. You
can learn the basic moves in an hour, but it can take a lifetime to master
all the strategies and nuances. So
funding a trading account and learning how to buy and sell mechanically is
the easy part. The hard part,
which you will continue learning about as long as you trade, is picking the
individual stocks to trade and deciding when to buy and sell them.
This is the entire mission
of mutual funds, which are the vehicle in which most people choose to
invest. The mutual-fund managers research stocks, pick their favorites,
and try to buy and sell them at optimal times to make profitable trades. But the problem with mutual funds is
the vast majority fail to even equal, let alone beat, general stock-market
returns. You can do the same
thing fund managers do, and often do it better,
since no one cares more about growing your capital than you do.
The first thing to consider
when picking stocks to trade is fundamentals. They are the underlying
supply-and-demand dynamics affecting a particular company or sector, which is
a group of companies in the same business. You want to pick stocks in a sector
with strong fundamentals, where demand for their goods or services
is growing faster than they are able to supply it. Demand outstripping supply means
higher prices, which translates into higher profits for producers and
ultimately higher stock prices.
As a student of the markets
and speculator, my favorite sectors since 2000 have
been in the commodities arena. Commodities infrastructure was rusted
and neglected after two decades of bear markets ending in the early 2000s,
crimping supplies. While
worldwide supplies were low, Asia started
demanding enormous amounts of raw materials to industrialize. Now global demand in many commodities
is at record highs while miners struggle to keep pace. But finding and bringing new mineral
deposits to market takes years or even decades, so prices tend to stay high
for many years before supply growth catches up with demand growth. In the meantime the profits for mining
commodities soar, driving up producers’ stock prices.
Within a particular broad
theme, like the industrialization of Asia’s
affect on global commodities demand, there are individual sectors. One example is gold mining. Asians have a millennia-old
traditional affinity for gold as an investment so as they get more prosperous
they demand more gold. And within
specific sectors like gold mining, you can research individual miners and
explorers to find the best-of-breed companies. And it is these companies, the elite
within a strong sector benefitting fundamentally
from a major long-term global trend, in which you should consider trading
since they will rise on balance.
Unfortunately there is no
denying that researching individual stocks is a tremendous amount of
work. At Zeal we are constantly
researching stocks looking for our favorites within
given sectors. We dig deeply into
hundreds of stocks in a given sector, examining their financial statements,
reading their quarterly SEC filings, and learning about their unique
projects, in order to find our favorites. Winnowing out the best-of-breed
companies from all the players in a sector is a challenging and laborious
task.
Thankfully there are
specialists who can do this work for you. At Zeal, for example, we sell
comprehensive reports detailing our in-depth fundamental research into
sectors of interest. After
carefully examining the greater population of stocks in a sector, we
gradually narrow down the field to our favorite
20. Then we write up profiles on
these promising companies, which we believe are best-of-breed, and sell them
in the form of reports. You can
get the fruits from many hundreds of hours of our research for a modest
price.
In fact, we just completed
an awesome new report on our 20 favorite
gold-producing stocks. It is now
available for sale on our website.
If you are interested in trading high-potential gold stocks, you will
really enjoy this report. Buy it today! It will bring you up to speed on the
most promising gold producers on a project-by-project basis. Our reports are a great way to learn
about the fundamentally strong best-of-breed stocks within a sector, the key
targets for trading.
Timing
Stock Trades - Technicals
Picking
fundamentally-strong stocks in fundamentally-strong sectors is very
important. You want to buy stocks
that other traders will want to buy
from you later at higher prices.
But the real key to profitable trading is timing. In order to
buy low and sell high, you have to have some idea of when these great stocks
are relatively low or relatively high.
Stock price behavior, or technicals,
offers insights here.
Thankfully timing stocks is
a lot less arduous than researching their fundamentals. Nevertheless, much of the art of
speculation is dedicated to studying timing to make sound buying and selling
decisions. Countless trading
tools and indicators have sprung up to game timing, to try to gain an idea of
when the probabilities for success for a given stock trade are high or
low. Obviously you only want to
buy or sell when your odds for success of executing an optimally profitable
trade are high.
My favorite
simple timing tool is based on a trading system I developed, Relativity. In bull markets when prices are
trending higher, they don’t move up in a straight line. Instead they advance forward two steps
in uplegs before retreating back one step in
corrections. The best time to buy
is late in these corrections. Interestingly
these optimal buy times are fairly easy to discern on a chart because they often emerge at a common point. This point is the 200-day moving
average of the stock price itself.
For any given stock, you
can easily and quickly see where it is trading relative to its own 200dma by
visiting www.StockCharts.com and entering its
symbol. I love this website and
use it many times a day, it is outstanding. The resulting chart will look
something like this example of BHP Billiton, the world’s biggest mining
company. The solid red line, labeled “MA(200)” in
the chart legend, is its 200dma.
Note that BHP tended to
retreat back down near or under its 200dma in corrections and then soar far
above it in uplegs. When it was down near its 200dma, odds
are its price would next head higher in the coming months. When it was stretched far over its
200dma, odds are its price would next head lower in the coming months. This simple general
bull-market tendency forms an excellent basic guideline for buy and sell
timing. So always check a
stock’s price relative to its own 200dma before buying or selling.
If you want to buy a given
stock low, you have a pretty good chance of achieving it when that stock is
down near its 200dma. This is because in order to get to its 200dma, the stock had
to just do one of two things. It
either fell sharply back down to its 200dma in a short period of time (a
correction) or it gradually ground sideways for a longer period of time (a
consolidation) to give its 200dma time to catch up. Either way, it is likely trading at a
relatively low level compared to where it will be in the coming months.
So if you want to buy a
stock that is gradually climbing higher within a bull market, you should wait until it is near its
200dma before buying. Everything
else being equal, odds are it is relatively low at that point compared to
where it is going. Sometimes it
is hard to wait for a hot stock to fall far enough or drift long enough to
hits its 200dma, but patience before buying is essential to make sure you
have a good shot at buying relatively low. Stalking trades well in advance,
waiting for an optimal entry point, is a critical part of trading.
On the opposite end, your
odds of selling high are greatest if you wait until a stock stretches far
above its own 200dma. As this
chart shows, after soaring well above its 200dma BHP tended to correct or
consolidate. This is true of all
stocks in long-term bull markets.
You have an excellent probability of achieving a near-optimal sell
point in a trade if you wait to sell until your stock is stretched way over
its own 200dma.
Now I realize this rule
sounds overly simple, and it is. And
no it doesn’t always work 100% of the time, but no other trading system
does either. The markets are full
of exceptions to any rule-set that traders try to impose upon them. Nevertheless, I have personally earned
a fortune trading stocks largely based on this simple principle. The key caveat is this strategy is
only valid for stocks within long-term
bull markets. This works best
when a stock is likely to rise on balance for years to come for fundamental
reasons.
Timing
Stock Trades - Sentiment
Researching stocks
fundamentally is straightforward, albeit arduous and time-consuming. And timing stock trades based on technicals is not difficult to learn. But the challenges of learning
fundamentals and technicals are greatly eclipsed by the supreme
challenge of sentiment, or emotions.
Learning to manage your own internal emotions, while simultaneously
becoming hyper-sensitive to the psychological state of other traders, is
crucial to your long-term success.
Why? Virtually all trading is driven by two
destructive human emotions, greed and fear. The great majority of traders who
choose not to study the underlying sentiment aspects of their art are never
able to transcend their own emotions.
So they become trapped within them, careening from one irrational
extreme to the next. They buy
stocks when they share the greed that permeates the rest of the markets. And they sell stocks when general fear
grows too great for them to bear.
But this is the recipe for failure.
Greed only reigns supreme after a major upleg,
when a stock is stretched far above its own 200dma. So a trader who buys stocks when he
and his peers are the most greedy is going to get
stuck buying high. And soon when
the inevitable correction arrives, stocks bought high will rapidly bleed into
losses. So if you want to buy
low, you cannot buy stocks when everyone else is greedy and thinks it is a
great idea.
Conversely, fear only grows
intense after a major correction,
when a stock falls to or under its 200dma. After such a long or fast decline is
when traders as a group are the most scared and feel the strongest urge to
sell. Yet if they succumb to
temptation and sell at these times of great fear, they are selling low. If you want to sell high, you cannot
wait to sell until everyone else is scared and thinks the time to exit
positions has drawn nigh.
Despite most traders buying
greed near highs and selling fear near bottoms, and losing money as a result,
you can transcend this natural human tendency. To grow successful at stock trading,
you have to learn to totally ignore
your own emotions. When everyone
else is greedy and it looks like a great time to buy, odds are it is
not. In reality that is the time
to sell. And when everyone else
is scared and you are really uncomfortable and want to sell, it is not the right
time. Instead that is the time to
buy.
This is the essence of
contrarianism, doing the opposite of what the majority is doing. The best time to buy a stock is when
it is the most beaten up and you least want to buy it. And the best time to sell is when a
stock is thriving and you absolutely don’t want to sell it. Trading is so challenging, and so many
people fail at it, because it
demands you do your buying and selling when
you least want to. You have
to be a black sheep, buying when most others are selling (fear-laden bottoms)
and selling when most others are buying (greed-laden tops). Fight the crowd to win!
Although extraordinarily
hard at first, thankfully like everything in life this gradually gets easier
with practice. The longer you trade,
the longer you suppress and ignore your own emotions, the longer you observe
the emotional state of other traders, the more natural this becomes. Eventually you will approach the point
of immunity from your own greed and fear, and then you will really start multiplying your
wealth. It is a hard journey, but
well worth it. Mastering your own
emotions has countless benefits outside of trading too, as it makes you much
easier to get along with.
Other
Key Principles of Stock Trading
The riskier a particular
stock trade, the higher the probability for big gains as well as big losses.
Remember that volatile stocks that have high potential to rise are
also the ones that can fall the fastest. In general the lower the market
capitalization of a stock (shares outstanding times stock price), the higher
its price-to-earnings ratio (P/E), and the bigger and faster its recent
gains, the riskier the stock. If
you want to shoot for big gains fast, you have to be prepared for big losses
fast if you are wrong. Risk works
both ways.
And believe me, you will be wrong often when trading. Losing trades are inevitable and are a
normal and expected “cost of business” of trading. Like me you are a mere mortal, neither
of us can see the future. So when
we guess on the future performance of a stock, we will certainly not always
be right. The longer you trade,
the better you will get at this, but you will still make bad trades. So don’t let a losing trade or
streak of them demoralize you or damage your confidence. Every trader, no matter how elite and
experienced, has losing trades.
Ultimately trading is an
averages game. Since it is
impossible to win on all trades, you want to maximize your winning trades
while minimizing your losing ones.
If you do this successfully, you will still multiply your capital
rapidly despite your losses. Most
new traders fail at this because
of a natural tendency we all have.
We tend to want to let our losses run in the hopes they will
eventually return to break-even. And
we tend to want to sell our wins fast because
a locked-in profit is a far surer thing than an unrealized one.
But just like buying when
you are greedy and selling when you are scared is disastrous despite it being
your natural instinct, so is letting losses run and cutting wins fast. Instead, when you have a losing trade
you should sell out of it as soon as possible and take the loss. If you bet on a stock rising, but it
has not risen since you bought it, then it is time to face the facts that you
were wrong. Your stock itself
probably isn’t a bad choice, but your timing was clearly off. In this case sell the stock right away
and take the loss so you can redeploy this capital elsewhere.
And with winning trades,
don’t succumb to the temptation to sell right away to realize your
profits. If a farmer plants his
fields in May he doesn’t expect to harvest them in June. Like crops, winning trades take time
to mature into a bountiful harvest.
You may be tempted to sell out soon for a 10% gain, but by doing so
you may miss the far bigger 100% gain you could have achieved over the next
six months. So never be in a
hurry to sell a winning trade, unless of course a price stretches way over
its 200dma and greed waxes extreme.
Give your winners the time they need to reach maturity and grant you a
bountiful harvest.
The best way I have found
to let my wins run and cut my losses fast is to use stop losses. A stop
loss is a conditional sell order you place with your broker. It tells your broker that after a
stock you own slides more than a certain percentage from its best price
achieved during your trade, say 20%, that the broker should automatically sell the stock. If you prudently use these trailing
stop losses, you won’t even have to worry about selling. The stops do all the work, eliminating
human decisions. Stops automatically let your wins run unmolested while
cutting your losses fast. I
highly recommend you use them religiously.
In a winning trade, having
a trailing stop eliminates your temptation to sell too early. As long as your winner doesn’t
correct by more than your stop percentage, then you’ll keep the trade
in your portfolio and it will continue maturing. And in a losing trade, having a
trailing stop eliminates your temptation to hold on until you break
even. As soon as your loser falls
more than your predetermined percentage, you are automatically
sold out. This is great because you can then redeploy this recovered capital
in greener pastures elsewhere.
And since trading is an
averages game and you won’t win all the time, it is critically
important to be diversified. Ideally,
you should never have more than 5% to 10% of your stock-trading capital
deployed in any individual
stock. Obviously if you start
with $1000 this is hard, but once you get over $10k or so it gets a lot
easier. Since so much can go
wrong with any individual company at any time, never put all your eggs in one
basket. Own a trading portfolio
of 10 to 20 different stocks, with your capital allocated roughly equally
among all, as soon as you can afford to.
When you are properly
diversified like this, bad news in one company doesn’t hurt you
irreparably. If you own only one
stock, and the company misses its earnings expectations so it falls 20% in a
single day, you are going to take a massive 20% loss on your entire trading
portfolio. This is
unacceptable. But if you own 10
stocks, and one falls 20% in a day, you only lose 2% of your portfolio. To thrive for a long time as a trader
and survive all the curve balls the markets will throw at you, you must diversify your trading portfolio.
Another benefit of
diversification is it greatly reduces the risk of emotional attachment to any
one stock. To be a great trader,
you have to be a total mercenary with no loyalties to any particular
company. If a stock is doing well
for you, that is great and you should keep it. But if a stock isn’t performing
as you expected, you should be able to sell it instantly without a second
thought. It is far easier
psychologically to dump a loser that is less than 10% of your portfolio than
one that is more than 10%. Proper
diversification minimizes emotional attachment that interferes with timely
and prudent trading decisions.
Most of the risk you
encounter in trading stocks, which is considerable, should be managed before you even buy a particular
stock. Managing this risk
includes never allocating too much of your trading capital to any one stock,
10% max. It also includes
deciding in advance before you buy
what the biggest loss you are willing to accept in any individual position
is. Then you effectively lock
this in by setting your trailing stop to that level. The less money you lose, the quicker
you will multiply your capital in the markets.
And definitely don’t
worry about a hot stock you missed out on. There is a constant and endless parade
of opportunities coming your way in the stock markets. The markets are like a major
airport. If you miss one
airplane, there is no reason to fret because
another flight is always heading out shortly. So there is no need to dwell on the
past and wish you would’ve bought a particular stock. Instead look to the future and try to
figure out what the next hot stock will be.
Trading stocks is analogous
to the great European sea trade of centuries past. Brave entrepreneurs would finance
ships, hire crews, and sail to Asia to buy
spices. If they could
successfully bring the spices back to the European markets, they would earn
fortunes. Trading stocks is about
supply and demand and risk too, but the oceans we sail across are time itself. When you buy a stock today, you have
to think about whether lots more traders will want to buy it from you later
in the future at a higher price. So
fill your holds with stocks that, while not highly desired now, are likely to
be highly desired by other traders in the future.
Finally, avoid the
temptation to use margin. Margin
is borrowing money and using this debt to buy stocks. Fully margined, you can double your
wins or losses in a given trade. The
problem is margin greatly increases your risk and amplifies your dangerous
emotions. If you have to worry
about paying back borrowed money, it is really hard to make wise real-time
trading decisions. Trading with
capital you own outright, free and clear, is the way
to go. It is usually far wiser to
increase your risk and potential returns by trading more volatile stocks than
by borrowing money.
Yes,
You Can Excel in Stock Trading
I realize this is a lot of
information if you have never traded stocks before. But you really can do it. Every
trader on the planet today started with zero knowledge of the markets. We all start from nothing and that is
totally normal. It will seem
difficult at first, but with each trade you make your experience will grow
and your probability for future success will rise. Like everything in life, the more you
trade the better you will get at it.
If you want some help along
the way, subscribe to our acclaimed monthly newsletter Zeal Intelligence. It is essentially my ongoing personal
journal as a lifelong stock trader.
In it I discuss fundamentals, technicals,
and sentiment and apply all of our research to real-world stock trading. Our primary focus since 2000 has been
in commodities stocks, as commodities are in the world’s greatest bull
market today and legendary profits are being won here.
Our newsletter will show
you what specific stocks my partners and I are trading, exactly when we make
these trades, and why we are doing them.
You can mirror our trades to accelerate your own intellectual,
emotional, and financial growth as a trader. Subscribe today for an ongoing
profitable education in real-world stock trading!
The bottom line is stock
trading is fantastically fulfilling and fun. Not only can you earn big profits
doing it, but it will teach you a great deal about yourself. The emotional control that stock trading
demands will help you be a more stable and less
volatile person in all aspects of your life. And the self confidence that trading
naturally builds will be a boon for all your personal interactions. The crucible of trading will gradually
forge you into a better, and richer, person.
While there is a lot to learn, the basics are
pretty straightforward. And there
is no better time to start than today.
Cut back on your entertainment expenses to save some money, open a
trading account as soon as you can fund it, and start trading. With each trade your confidence and
success will grow. And
eventually, if you stick with it and practice good trading discipline, you
will grow into a successful stock trader.
Adam
Hamilton, CPA
Zealllc.com
November
23, 2007
So how can
you profit from this information?
We publish an acclaimed monthly newsletter, Zeal Intelligence,
that details exactly what we are doing in terms of actual stock and options trading
based on all the lessons we have learned in our market research. Please consider joining us each month
for tactical trading details and more in our premium Zeal Intelligence
service at … www.zealllc.com/subscribe.htm
Questions
for Adam? I would be more
than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more
information.
Thoughts,
comments, or flames? Fire away at
zelotes@zealllc.com. Due to my staggering and perpetually
increasing e-mail load, I regret that I am not able to respond to comments
personally. I will read all
messages though and really appreciate your feedback!
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2000 - 2006 Zeal Research (www.ZealLLC.com)
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