Golden Rules of Stock Trading
The lure of making big money has always pushed people towards the stock market. Nonetheless, this doesn’t mean that making money via stock trading is easy. Not only do you need oodles of discipline and patience, but you also have to have a sound understanding of the market. The volatility of the stock market means that you need to do your research and move cautiously, if you want to keep losses to a minimum. The good news is that there are some golden rules that you can follow for stock trading and they can help in boosting your chances of success. What are these rules? Read on to find out:
Rule 1: Avoid herd mentality
One of the first things you should do in stock trading is to not be influenced by someone else’s decisions. It doesn’t matter what your neighbors, friends, colleagues, acquaintances or relatives are doing. Just because they are trading a specific stock doesn’t mean you need to do the same. It is best to avoid herd mentality and consider your own risk tolerance, trading style and expectations before deciding which stock to trade.
Rule 2: Make informed decisions
You should never start stock trading without doing proper research. When you are deciding what stocks to trade, you shouldn’t just rely on the name of the company, its reputation or the industry they are in. It is certainly not the best way of investing your money because there are a number of other factors that need to be taken into account. Making an informed decision should be your priority at all times.
Rule 3: Don’t try timing the market
Timing the market is not a fruitful move and every experienced investor will tell you to avoid this practice. If you take a look at the statistics, then you will know that nobody has ever managed to time the market over multiple stock market or business cycles. Catching tops and bottoms is nothing less than a myth and it is best not to chase it.
Rule 4: Use a disciplined investment approach
If you take a look at past bull runs, you will notice that they have their panic moments. Due to the volatility in the markets, investors do end up losing money, regardless of bull runs. You need to have patience and use a disciplined investment approach in stock trading. This means putting in money systematically and in the right stocks and then holding onto your investments. Think about the long-term rather than the quick profits.
Rule 5: Don’t let emotions cloud your judgement
One of the top reasons many people fail in stock trading is because they let their emotions cloud their judgement, especially greed and fear. It can be difficult to resist the temptation of quick wealth in a bull market. When you hear stories of people making high returns in the stock market in the short-term, it can result in greed. In their eagerness and excitement, they don’t do the research that’s necessary and end up investing in the wrong stocks, leading to hefty losses. As far as a bear market is concerned, many stock traders panic and end up selling their stock at very low prices.
Rule 6: Diversify your portfolio
When you want to make optimum returns and keep your risk to a minimum when trading stocks, you should diversify your portfolio across different instruments and asset classes. The level of diversification you go for will depend on your risk tolerance.
Rule 7: Have realistic expectations
Of course, you want all your investments to be profitable, but this doesn’t mean that you should have unrealistic expectations. For instance, in recent years, a number of stocks have generated more than 50% returns during bull runs, but this doesn’t mean it will always be so and you can expect the same in future.
Follow these rules in stock trading and you will be able to become a capable and successful trader.