You hear a lot of people get rich in the stock market. You get curious. You want to try it out but you get loaded with so much complex information that you just give up before you even start. Hey, I’ve been there. The truth is, much of the information you hear is not even relevant unless placed in the appropriate context. Even paid seminars give lackluster information without equipping attendees with a sound strategy. But here at Value Voyagers, we always go the extra mile to help others. So let’s give you a sound platform to start your trading journey.
Failing to Plan is Planning to Fail
Before you start dabbling with stock trading, it is imperative that you realize the consequences of going in without a plan. Chances are, you’ll get lucky with a few trades and you’ll lose big on most. Especially with newbies who venture in trading without any background or strategy, the trauma of continuously losing to the market can cause them to quit altogether. Well, the truth here is that stock trading, like any other skill, must be honed and practiced continuously if any perpetual success is to be achieved. A strategy anchored on risk management, market sentiment, and rock solid psychology is mandatory.
Here’s a simple straightforward trade plan to get you started:
1. Check the status of the general market
The Philippines Stock Exchange Index is a good gauge to check the overall condition of the market. For example, if the general market is in a downtrend, most bluechip/index stocks will either go down or move slowly in a sideways fashion. This is a frustrating climate for trading stocks in the short term. Seasoned traders will usually lighten their position and remain in cash until the overall market reverses.
2. Qualify the stocks to invest in using technical and fundamental analysis
There is no going around this. If you want to trade well, you have to have a level of mastery in technical and fundamental analysis.
Technical Analysis: The use of charts to interpret the historical and present movement of stock prices.
Fundamental Analysis: The use of official financial reports and data to gauge the value of a company and forecast their future performance.
As a general rule, you want to invest in stocks that exhibit strong earnings and a favourable technical chart formation. An uptrending stock chart means that there is buying interest amongst investors/traders and a downtrending one means that most are selling the stock for a variety of reasons. You want to be buying when there is strong demand and to be locking profits when the stock shows signs of increased selling pressure. This ebb and flow of supply and demand is what moves stock prices over time.
3. Manage Risk
Stock trading has plenty of surprises. Generally, things can get sour pretty quick and if you have no risk management element in place, you’ll end up stuck at a loss for a long period of time. To prevent this, a cutloss point has to be placed in your stock position when it goes below your entry price. Selling at a small loss to prevent a much bigger one is a healthy move for your trading. Essentially a -2% to -5% cutloss point from the entry price is a good benchmark. To get better in stock trading, you have to execute a lot of winning trades and learn from failed ones while maintaining losses at a minimum. A cutloss point allows this. No progress can be made if you’re stuck on losing trades while you hope for it to go up again.
4. Use technical indicators to guide you in analyzing the proper entries and exits for your trades
Technical indicators are simply mathematical chart tools that interpret the historical data of a stock price. It provides you valuable information that show the level of buying and selling happening in a given timeframe. Seasoned traders interpret this data and see the levels that provide favourable entries and exits. Think of it as a compass that helps sailors navigate turbulent waters.
Here are the most notable charting indicators for trading:
Moving Averages
MACD
RSI
Bollinger Bands
Ichimoku Cloud
5. Have the proper psychology to execute trades
Losing traders are usually emotional people. They let emotions get the best of their trading. Even if they have a plan, they tend to divert from it by arbitrarily buying and selling stocks out of impulse. They buy at the top and sell at the bottom. A perfect recipe to wipe out investment capital in record time!
To be psychologically prepared for trading, you have to do your homework and constantly research. When you are familiar with your trade plan and have back tested it on numerous scenarios, you will be mentally and emotionally alert to respond to sudden spikes in volatility. Remember that you can only respond properly when you are prepared.
Successful traders do not hold on to their analysis. If the market proves them wrong, they cutloss and shift their strategies to adapt to the situation. A big ego is the biggest setback to succeed in trading. Become a constant learner and let your failures fuel your hunger to win!
We hope this post has helped you. To read more stock trade strategies and tips, check out the online learning module in this website. We are constantly updating content to better serve you. Happy investing!
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