Tips That Guarantee Bigger Gains
To some degree, trading is about breaking the conventional rules.
Forget buy and hold. Trading is all about quick, repeatable profits. Forget balance sheets or income statements. Trading focuses on technical analysis instead. But just because the old rules no longer apply doesn’t mean that no rules apply to successful trading.
In fact, following a specific set of principles could mean the difference between racking up substantial trading profits — and suffering sizable losses.
Follow these three rules and you’ll quickly see bigger trading gains…
1. Paper Trade Your Way to Profitability
As with anything worthwhile, there’s a learning curve to technical trading. That’s why it’s so important to hone your abilities before you invest your first dollar in a technical trading opportunity. The best way to do that is by paper trading.
Paper trading is essentially simulated trading that uses hypothetical money instead of cold, hard cash. When you trade on paper, you get to see what your trading would have yielded without worrying about succumbing to costly rookie mistakes.
That’s because — believe it or not — there’s a whole lot more to successful trading than buying the right stock. Even with guidance from professional research services, there are variables you’ll want to get a handle on before you put your cash on the line. Lots of factors can cut into your trading profits: broker commissions and your position sizes are just a couple of them…
Paper trading also does one other important thing: It builds your confidence as a trader. When you see your hypothetical trades booking profits, you’ll become more comfortable holding out for bigger gains and cutting your losses on the odd trade that goes against you. That’s an essential part of becoming a successful trader.
So how do you paper trade?
If you’re using a broker whose trading platform has a paper trading feature (just call them to find out), I strongly recommend that you use that. By paper trading on the same platform as you’ll be trading your real money, not only will it be exceptionally easy to track your paper trades, you’ll also learn exactly how to best use your platform of choice.
Many brokers — like Scottrade, for example — let you open a paper trading account without actually having to fund it. That gives you an ideal way to test out whether or not their services are a good fit.
If you don’t use a broker that has a paper trading option, you can still paper trade. There are a slew of “simulated investing game” websites out there, and you also have the option to track your hypothetical trades yourself on paper or with a spreadsheet program.
2. Always Use a Limit Order
When it comes time to actually place your trades (either on paper or with real cash), the buying and selling terminology can be confusing. With market and limit orders, stops, trailing stops and a slew of other broker orders, pulling the trigger isn’t as simple as “buy” or “sell.”
For the most part, you don’t need to worry too much about the type of order you place with your broker to buy or sell shares of a penny stock. Complex orders (like buy stops, or market on close orders) aren’t something that novice traders need to be hugely concerned with.
But there’s one type of order you should avoid at all costs: the market order.
Market orders essentially tell your broker to “buy shares right now, whatever the cost.” While that’s not a terribly big deal when you’re buying shares of a heavily traded stock like Exxon Mobil or GE, it is a big deal when you’re trading penny stocks that have less trading volume and larger bid-ask spreads. When a stock makes a big move, it’s not uncommon for your actual execution price to happen at a less-than-attractive price.
Instead, always make sure you’re using limit orders when you buy or sell penny stocks. Limit orders tell your broker to buy (or sell) shares of a stock up to a certain price limit — they ensure that you have control over your buy and sell prices, not the market.
3. Avoid Extended Hours Trading
9:30 a.m. to 4:00 p.m. five days a week — those are the hours that make up the standard trading day. We’re talking about only 6½ hours per day, 32.5 hours per week.
For us, that’s plenty of time to take advantage of the market’s moves.
But not for everyone. That’s why the powers that be instituted extended hours trading. Extended hours trading gave investors the ability to trade stocks pre-market and after-hours (AH), making it possible to buy shares of a stock on most markets from 8 a.m. to 8 p.m…
As we all know, however, just because you can do something doesn’t mean you should.
There’s a reason that after-hours trading is called “amateur hour” trading in professional circles — extended hour investors often get their trades executed at poor prices. While extended hours trades are a viable tool for value investors looking to get into shares of a deeply discounted stock, they’re bad news for traders.
That’s because low trading volumes in the extended session mean that smaller positions can make a material dent in share prices. As a result, price swings before and after market hours are often poor indicators of how a stock will trade during the regular session.
Extended hours trading can be a good indicator of market sentiment before and after regular trading hours — but that’s about it…
Ultimately, you can’t guarantee investing success. Sometimes, trades will move against you. The key to successful trading, though, is to gain an edge to limit the number of bad trades you take on and maximize the good ones…
Following these three trading rules is just such an edge. Follow these suggestions for bigger gains and you’ll ensure that you avoid major trading missteps.
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