On line stock trading is now one of the most popular ways for people to make money on the internet. But the stock market does not generate wealth – all it does is redistribute it. Around 90 per cent of traders, mostly newcomers, end up transferring their money to the other 10 per cent. So how can you avoid being one of the 90 per cent and become one of the 10 per cent?
Probably the most important thing for you, as a new trader, to realise is that making as much money as possible in as short a time as possible is not the objective. If that is your aim you’ll probably fail. It’s far more important to develop a successful trading strategy, even if you only trade in tiny amounts until you’re satisfied that it works.
It’s very difficult to do this if you trade over the short term, for example as a day trader. Concentrate on the medium to long term. Most stocks move slowly. Only on rare occasions do they have rapid price movements. If you can learn to accept that and work on ways to leverage the price movements that do occur then you have another distinct advantage over all the others.
There are far more ways of trading than simply purchasing stocks and waiting for their prices to rise. What if there is a predominantly bear market? Suitable stocks would be very hard to find. Consider commodities, bonds, futures and options. Consider covered warrants and exchange traded funds. Learn as much as you can about all these financial instruments and how you can use them to make profits, even in a falling market.
Don’t be mesmerised, as so many are, by the charts and indicators that abound on stock brokers’ web sites and in various stock trading software packages. These have their uses, but you may come to consider them as simply control levers to assist the timing of a trade that you’ve selected on the basis of your own knowledge of what is going on in that market sector. It’s far more important to focus on one particular segment of the market and become familiar with everything that’s going on in it. Your charts can then be used to confirm your belief of what has been happening and what is most likely to happen in the near future.
Accept that you are probably never going to get in at the bottom and out at the top. This is another pitfall for the unwary newcomer. Don’t look at the stock market graph later and wish you had traded differently so as to have made the maximum profit from any particular price movement. None of us are blessed with second sight. You can only do your best, and if you can ride part of a price move, and do that with a majority of your trades, then you will be very successful.
Be aware that the market is driven by fear and greed. When something happens that injects fresh optimism into the market prices shoot up beyond what would have been the right level for the new circumstances. When everyone realises that, the prices drop sharply, but, again, beyond the point where they should be. There is then a reversal once more towards the “correct” level, and so on, until something else happens to affect the price. It’s the same, though in reverse, if a development causes panic and a rapid fall in prices. Once you realise that fact then you can avoid making many mistakes that you otherwise may have made.
Finally, the biggest unfair advantage you can give yourself in on line stock trading is to find a software program or “robot” that you can master and get to work for you in developing successful trading strategies.
Philip Gegan
