The Ace of Trades: 7 Tips for Flips
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch.
Yes, history does repeat itself. Recessions and stock market declines will continue to disrupt global economies and investors in the foreseeable future.
Remember the old adage…”what goes up, must come down.” Well, it’s a true fact that pertains not only to life but also investing.
To help you overcome the cyclical and emotional nature of stock investing, I’ve decided to share with you 7 tips that have served me well over the past decade as a trader. Following these general guidelines will also help you become a successful stock investor – the ace of trades!
Tip # 1 – Don’t Be Emotional
Emotional investors make bad decisions – period. With the myriad of exciting things happening in the markets everyday, it takes a very disciplined investor to remain calm and trade only when necessary. Quite often, you’ll find a flurry of information from the media persuading investors to buy, or sell, stocks of certain companies. Rather than act on impulse, I recommend that you do adequate research first.
Before buying or selling any stock, it would behoove you to review the firm’s financial statements (e.g. balance sheet, income statements, statements of retained earnings, cash flow) to determine their assets, liabilities, profitability, etc. You could also listen to their conference calls and it would give you a good indication of what they’re working on, along with the company’s vision for the future.
In essence, you should never be emotional about your current positions in the market. If you’re an emotional trader, you’ll end up changing your mind too frequently to the point where you’re trading unnecessarily and dangerously. Rather than succumb to the noise of the market, you must remain disciplined and base each trade on facts instead of emotions.
Tip # 2 – Start Small With Money You Can Afford To Lose
I can’t stress this enough. Many times, I hear of investors betting the entire farm on certain stocks and they end up losing everything. If you’re thinking of getting into the stock market, I would recommend starting with “free-trades.” There are many apps that you could install on your phone that’ll teach you the essentials of stock trading. This concept is similar to how poker players join a multitude of free games to learn the basics of poker prior to entering an actual tournament.
Once you’re ready, you can begin trading with a small amount of money that you could afford to lose. You NEVER want to trade with money that’s crucial to your family’s survival because that’ll ultimately cause fear. And when you’re fearful, the chances of you making sound trading decisions is unlikely because you’ll always be worried.
So start small and you’ll have the mental independence, including freedom, to make smart trade decisions.
Tip # 3 – Beware of the Hope Dope
Hope is like a narcotic in this industry. Even seasoned investors tend to speculate and hope that a company’s stock will perform well to the point where they over-commit to that particular stock and end up losing their shirts. While hope is encouraged in other areas of life, it could actually be a dangerous drug in the stock market similar to the negative repercussions of emotional investing. Do your best to make informed decisions based on facts.
Tip # 4 – Following The Crowd Will Take You Over The Cliff
This leads me to my next recommendation – don’t follow the crowd off the cliff! Historically speaking, the public tends to be incorrect the majority of the time when it comes to investment selections. This is why there are more unsuccessful traders than successful ones. Successful traders typically go against the grain and are uncomfortable when their positions are popular.
A good rule of thumb to follow is that if 85% of analysts are bullish, this indicates an overbought situation. On the other hand, if less than 25% of analysts are bullish, this indicates an oversold situation.
Tip # 5 – Never Trade During Off-Hours
You should never place a pending trade during off-hours that executes when the market opens. Reason being is that you never know where the market will really open at. If you’re not careful, you could end up losing a lot of money unnecessarily, especially if you’re trade decision was based on inaccurate data that led to excessive trading, commissions, fees, etc.
Don’t let the ups and downs of the market influence your game plan. Stick to it unless you’re absolutely sure that a change to your investment is required. If so, formulate a basic opinion prior to the markets opening and wait for the right time to execute your decision.
Personally, I always recommend placing a “price limit order” once you determine the valuation of the company and know what you’re willing to pay for that particular stock.
Tip # 6 – Don’t Be Greedy
As an investor, your primary goal is to be profitable. If you feel that a certain investment is nearing it’s peak, it would be wise to take the profits off the table. Don’t be greedy and take on more risks than you need to, especially since it’s extremely difficult to time the market accurately.
If you’re the gambling type and are unsure if the stock will go higher, you could take half the profits now and leave the remainder in play with a “stop-loss” in place.
Tip # 7 – Know When To Cut Your Losses
Losses are inevitable. To be a successful trader, you must be disciplined enough to know when to cut your losses and liquidate your positions. Overall, every trader will make bad investments over the course of their career. Don’t let pride dig you deeper in the hole. Admit your mistakes, learn from them, and move on. Most importantly, never add to a losing position regardless of how confident you feel about the potential turn-around.
Personally, I never carry a losing position for more than 3 days and never over the weekend in my trading account. The only time that I would is if I truly feel that the firm is facing a minor obstacle that set stock prices down momentarily but the concerns could be easily resolved.
To end this post, I leave you with a quote from renowned investor John Templeton who stated the following:
“Before this century is over, the Dow Jones Industrial Average will probably be over one million versus 10,000 now. So for the long-term, the outlook is tremendously bullish if you buy stocks blindly to keep for a century.”
In the end, research, timing, and good money management is crucial for trading success. You have to know when to be passive and when to be aggressive with certain stocks. As you gain more knowledge and experience, you’ll find that your inner voice and gut instinct becomes more accurate, thus allowing you to become the ace of trades.
Until next time my friends, happy investing!
