Newcomers to the stock market often follow a simple set of rules to stay sane and preserve their investment capital. Some of the guidelines have been around for nearly a hundred years while others are relatively new.
The goal of a new trader should be to learn, make a profit and not feel the need to be in the action every day. The simple truth is that the securities markets don’t offer profitable opportunities very often.
Smart investors know when to stay out, when to get in and when to shift gears. Along with selecting a specific segment of the market that you want to specialize in, it helps to maintain lists of potential money-making stocks, trade with the trend, keep an eye on how much you spend on each trade, and learn to employ technical trading strategies.
Here’s a quick view of how each of the five approaches can assist you as you learn the ropes:
Choose Your Niche
Spreading yourself too thin is a common hazard in the business of trading. Experienced professionals tend to select a niche. The definition of that word is up to you. It can mean something like technology, or retail, which would be rather wide. Or, you can really get narrow and only buy and sell one particular company’s shares.In reality, the most active market enthusiasts choose a handful of stocks in a single sector and trade only those shares. Picking a niche is one of the easiest ways of staying sane, but it’s also an effective strategy for acquiring an in-depth knowledge of several companies.
Make a List of Stocks to Watch
Even if you are only trade a few times per month, it’s a good idea to maintain a list of stocks to watch. If the companies are in your chosen niche, you’ll probably look at their price moves every day, just out of curiosity. It’s also easy to set your software to send you a text or email alert when significant price barriers are broken. A market survey done last year said that the average trader kept a watch list of at least 10 securities.
Use at Least 2 Technical Indicators
It’s easy to get over-zealous about technical indicators. A common pitfall is relying solely on a basket of the numerical signals at the exclusion of all else. Meanwhile, back in the real world, the most experienced folks usually use just two or three indicators to assist them with identifying profitable entries. Moving averages are the most common ones chosen, but there are also MACD, stochastics and more. Check your platform and see which indicators work best for you.
Only Trade with the Trend
The so-called golden rule of Wall Street, the concept of not going against the grain makes a lot of sense. A common myth is that this rule only allows you to buy and sell when the market is rising. In fact, trading with the trend means you can go short when times are bad.
Follow the 2 Percent Rule
Many people have survived the worst economic slumps by following this prudent guideline. It works like this: never place more than two percent of your total capital on a single purchase. If your account stands at $5,000, you’ll be limiting yourself to stock purchases no greater than $100.