One great way of playing the market is by using a trailing stop to simply follow the stock up. A trailing stop is ideal because it follows the stock up when the stock does go up, but it does not pull back as the stock pulls back. This allows you to limit your losses and secure your gains.
There are a ton of advantages to using trailing stops.
Everybody has wins and losses. They key is to limit any losses that you do have. This way any loss you do have will play a minimum role in your overall return.
If you decided to place a 10% stop for instance you would be risking only 10% of the investment that you just made. If the stock suddenly pulled back 50% you would get out near the top and could wait for it to turn around before getting back in.
A second advantage of using trailing stops is that it does not limit the potential gain of the position. If you bought a stock and placed a 10% stop loss on it you would not be limiting your gains, only your losses. The stock could double and you would still be in it. Only once the stock starts to turn around 10% or more would your stop be activated and your position would be sold.
Emotions have a big impact on our trading. We want to hold onto a stock when it is going up and we want to keep holding on and convince ourselves everything will be ok when it is crashing.
Sometimes you can create your own plan of action and end up side stepping that plan because you got scared. Well the great thing about trailing stops is that they are automated. You just have to set them up and then forget about them.
The trailing stop will follow the stock up and the trailing stop will eventually get you out of the position (hopefully for a profit). The only thing you need to do is to figure out how far behind you want to trail the stock and then walk away.
This is a perfect way to “stick to the game plan” when you cannot trust yourself to do it.
Trading in the stock market can be a very emotional experience. It can be hard to focus on logic and actually make rash decisions when your money is on the line. That is why, whenever you are thinking about investing into a stock you should ask yourself these three questions.
1. Why Am I Getting Into This Stock
Why are you actually getting into the stock? Is it because you heard somewhere that it is going to go up and you didn’t want to “miss out”? Or you have some fundamental or technical reason for getting into the stock. Unless there is something solid backing your decision it may be better to just walk away.
2. How Am I Going to Limit My Risk
Even if you have found a stock which you believe with 100% confidence will make you money, you may be wrong. Something may change. It happens, a lot of successful traders invest into bad stocks the trick is limiting your losses.
Maybe you want to only risk a small portion of your account on that one stock, or maybe you want to place some sort of stop to get you out of the position if the stock falls against you too much. Either way, it is important to limit your risk; otherwise you will lose all of your money on the first bad trade you make.
3. When Will I Get Out?
Something that people often forget is their exit strategy. Sure it is important to know when to enter, but even the best entry signal in the world will not help you out that much if you lose it all by holding onto the stock for too long. Figure out what you are trying to accomplish beforehand.
Trading in the stock market is a fantastic way to gain some extra money, grow your long term wealth, and to keep your mind sharp. There is basically no limit to the amount of money that a stock trader can make off of their investment and this can translate into unbelievable wealth.
What are the reasons to trade in the stock market? Below are the 4 reasons why someone would want to trade in the stock market.
1. It Can Be Very Profitable
There is no limit to the amount of money that someone can make in the stock market. There is also really no limit to how fast someone can make money. This is why you hear stories about people turning small amounts of money into millions of dollars in just a couple years.
Of course that is not the norm, but it does happen from time to time.
2. Extra Cash Flow
It is always nice to have some extra income and the stock market is one of those places that people can go about getting it. The only thing to remember is that it the extra income it brings is a byproduct of months or even years of experience. If you need the extra income tomorrow this is not the best way to get it.
3. Early Retirement
The Stock Market can make you a lot of money and in many cases it can even lead to financial freedom. All you need is the ability to make a decent return on the money and the ability to get enough money together and you can trade away living off of the money that you make off of the market alone.
4. Keeping Your Mind Sharp
When you trade the stock market you are constantly learning from your mistakes. This helps to challenge you a little bit and keep your mind sharp, which can actually be a good thing and help you have a quicker mind well into old age.
The stock market can be a terrific place to grow your money and to grow your overall wealth. Trading stocks can be extremely powerful and can lead to large gains. But it is not for everyone, most people will quit after they find out how much work is involved in learning to trade.
In addition to all the effort that it takes to make it big in the stock market there are also a few things that you will need to have in order to be successful trading stocks.
1. A lot of Confidence
A trader needs to be confident in themselves and in their own trading method in order to make it big in the stock market. Most newbies fail because instead of making decisions for themselves they listen to everyone else. The problem with this is that they never learn from their mistakes or even know why they are buying the stock in the first place. If you make your own decisions you may have losses here and then, but at least you can learn from them and try to do better next time.
So confidence can help you get past any problems you may have.
2. The Ability to Control Your Emotions
Trading in the stock market can definitely be an emotional thing. If your stock goes up you automatically want to hold onto it forever and you dream of becoming a millionaire. If stocks are going down you start panic selling and just try to get out without losing your shirt. Really whenever money is involved our emotions are going to be connected with it and they will impact how we make decisions.
Having the ability to control your emotions is an essential thing for all traders.
3. Eager to Learn
There are always going to be bumps in the road when it comes to the stock market, or really when it comes to anything in life. The best thing that you can do is to continue to learn from your mistakes and improve over time.
If you lose money, figure out why. If you make money also look at what that was. The more you learn the better you will do in the future so being a little curious can be a good thing in life.
Investing into stocks over the long term and trading stocks are two conflicting points of view. So, which one is better? Well this really depends; each strategy has its advantages and disadvantages.
Long term investing is simply the process of buying strong companies and holding onto them for the long term. Because the companies are fundamentally strong they are unlikely to go out of business any time soon and in fact they are very likely to increase in price as time goes by.
Trading stocks in the short term is actually a completely different strategy. Instead of holding onto stocks for the long term short term traders tend to use things such as chart patterns and technical indicators to attempt to catch the short term movements of stocks and hopefully make a larger profit then if they were to simply buy and hold the stock.
Which strategy is best? There are defiantly advantages and disadvantages to each method. The best strategy for you really depends on you and where you are at.
Trading stocks in the short term does have a lot more potential then buying and holding. If you can make short term gains relatively consistent over the long term then you can do pretty well for yourself. However it does take a lot of work and there are no guarantees that you will make any money. It is like starting a business most people will fail their first time around, but those who can keep getting back up and learning from their mistakes will likely do well eventually.
If you are willing to put all of the time and energy into short term trading the rewards can be pretty nice.
However if you just want something that is considered to be safe yet does have some potential then you can take a look at long term investing. The main advantages of long term investing are that it is passive and it is a relatively secure way of making a decent return over the span of a couple decades.
Basically it comes down to this, if you want to earn a relatively safe return passively then investing in the stock market can be a great idea. If however you want to attempt to increase your returns and put some extra time into it then trading stock might be better suited for you.
Stock market trading can be an interesting way of building your wealth and can lead to a lot of interesting learning experiences. There are a few mistakes that most newbie’s tend to repeat over and over again which harm their returns.
The first mistake that people tend to make when investing into the stock market is watching the news. The only thing the news is good for is making you panic and bringing emotions into the mix. You don’t need to watch the news to be a great trader. In fact staying away from other opinions and trusting yourself can be a bonus in the market.
The news has the tendency of pushing your emotional button and makes you do foolish things that you will regret later on. Instead of making decisions based on fear and greed conduct your own research to see how strong a company is yourself and create a game plan for what qualifies as a good buy,
One other mistake that people tend to make is to second guess themselves. They may enter into a position for one reason but get out for a completely different reason and not follow their original game plan. This is not always a bad thing. If you got into a stock because it was a hot stock tip and you really had no reason to get into it in the first place, (which you should never do), then of course second guessing that decision is important.
But if you actually have a plan that is another story. If you bought a stock at $50 and planed to exit out at $65 or cut your losses short at $45 there is no point in getting out at $49 just because you are scared that you might actually lose more money. Create a plan and stick with it.
The last major mistake that people make is not limiting their losses. Having some plan on limiting your losses whether it be through diversification or stop losses and money management every successful market participant limits their losses.
If you work hard at it there is no limit to what you can do with the stock market. It can be a very powerful tool for creating wealth.
A Simple, Winning Stock Picking Strategy
Not advocating or practising this method. However, it is nice to know what other investors do.
Diary of a Private Investor: how the pros make money from turbulence
Unfortunately there is no foolproof system to deal with these sort of situations. When a panic occurs, it is usually right to buy.
By James Bartholomew
Published: 9:49AM BST 27 May 2010
What a daunting few weeks this has been in the stock market. In normal times, one or two worries present themselves. Recently they have had to form a queue.
It was bad enough when we were just worrying about Greece and its budget deficit. One of the scary numbers I came across was that German financial institutions hold $37bn in Greek bonds. That, I presume, is not counting money lent in forms other than bonds. If Greece defaulted, some major German banks would take a big hit. Think through all the consequences of that and you get to higher lending costs around Europe and renewed recession.
My shares quoted in Hong Kong were probably not too worried about that but they spiralled down for a different reason. China has tightened lending to quieten down property prices. And what are my biggest holdings in that area? Why, property companies of course.
Back home, growing anguish about the coalition government’s apparent aim to tax capital gains more heavily in future is encouraging people to sell sooner rather than later. On Friday last week, I myself sold some Healthcare Locums (at 223p) held by one of my children to use up the tax free allowance under the current rules. The fear must be that many people will decide not to reinvest after selling if the new regime is harsh.
Then came news that the North Korean dictator has taken it into his head to prepare for war. Next came a crisis among Spanish banks. For those of us who are pretty fully invested, the bad news has been relentless. It has been like the charge of the light brigade: “Cannon to the right of them, cannon to the left of them, cannon in front of them … into the mouth of hell rode the six hundred”
Unfortunately there is no foolproof system to deal with these sort of situations. When a panic occurs, it is usually right to buy. But sometimes it is better to get out because the fears will turn out to be justified. As concerns about an uprising in Russia increased in 1917, I expect prices of Tsarist bonds fell back. It probably looked clever to buy on the dip. Unfortunately, as it turned out, when the communists took over, the bonds lost all their value except as wallpaper. So it all depends on how things actually turn out. Right now, if Greece and Spain do not default and if North Korea thinks better of starting a war, shares are cheap. On the other hand …
Investment obliges you to take a view on how things will turn out in politics and all sorts of other things. That is one of the things that makes it so interesting. Another aspect of investment is the influence of personality. I tend to be optimistic and that is probably key to why I think that we will probably muddle along. In any case, it occurs to me that even if North Korea attacks, this will probably not stop people going to have a drink at the pubs owned by one of my companies, Enterprise Inns. Some things you can rely on.
Last week I was even sanguine enough to buy more shares in Paragon, a mortgage lender, which came out with good results and made hopeful noises about restarting active lending. The purchase turned out to be horribly timed. I bought at 151p and, after the market falls, they are licking their wounds, as I write, at 133p. On Monday, my fears about Greece increased, and I wanted to reduce my exposure to further market weakness without selling any of my favoured companies. So I tried something I have never done before. I bought a few shares in an Exchange Traded Fund (ETF) designed to go up if the stock market goes down. It has the strange name, DB X-trackers FTSE 100 Short, and I bought at 938p.
Incidentally, I was astonished to see how big this fund is. The market capitalisation is an amazing £1.4bn. I had not realised just how big the business of being bearish on shares has become. This is just one of a number of such funds. But on Tuesday, the market fell so far and so fast – with Enterprise Inns down 10pc for example – that I decided the bearish trend had gone too far. I sold my bearish ETF for a little profit at 981p.
Unfortunately this bit of good timing was with only a tiny amount of money. Overall, I have been nearly fully invested and my portfolio had taken a bit of a battering.
Thank you Jo.
Padraig, I am sorry but you are wrong in so many ways. Long term ‘investing’ is just as risky as short term trading. It’s all a ‘gamble’ as you put it, I prefer the term ‘bet’ as it is all about calculated risk. You’re right in that gambling loses in the long run but proper trading is not gambling. You are also right that it is impossible to pick market movements correctly all the time. One does not need to and I am often wrong, but I manage my risk effectively and ensure I capitalise on the times when I am right so that I make money. I do this over and over and over. The stock market is not the only thing to money on and markets do not go up all the time. How can you say that the only way to make money is in a strong bull market,just sell futures!
And yes as you have all pointed out Warren Buffet is succesful, but he not the only one in the world. Please measure your success your own way. Mr Buffett is not the only succesful investor in the world. There are thousands. Mr Buffet has done extrememely well but I could not replicate his success with his style as my personality is not suited for the long term approach. In reality I will not be as rich as him because the volumes in the market will not accommodate my short term approach and that is fine by me. I make money and so do many others.
Don’t see your point, Paul. Stock or currency, bull or bear, you can make money. Day trading is fine if you’re after 5% gains here and there, but most of us are here for 5 years or so, therefore long positions on shares are a much better idea.
I too am mostly all-in, James. It’s been a pretty stressful year or two, hasn’t it? I’ve gone from 50% up to 35% down since Xmas, crazy times.
I agree entirely with you on the topic of your post, probably one of the most important lessons for any new PI for that matter.
Confident in Sarkozy talking tosh, I managed to pull out a blinding FTSE short (a proper CFD short, not an ETF) following the brief rally last week. It’s shooting up today, but that was a lot of resistance on the 5k line it broke through on Tuesday, so I’m not too confident s/term – any any ideas for next week??!