Five rules for successful stock trading
File stock trading with mountain climbing and skydiving: These are all activities you should avoid聽if you 诲辞苍鈥檛 know what you鈥檙e doing.
But with practice and a good handle on the ground rules, these pastimes become聽a lot less risky.
The good news:聽聽isn鈥檛 typically a life-or-death situation 鈥� but it鈥檚 still best to make money, not lose it. Following these five rules will help you minimize losses and maximize gains.
1. Pay attention to costs
厂迟辞肠办-迟谤补诲颈苍驳听聽vary, from less than $5 per trade to more than $10 per trade. For active traders, even a few bucks per trade can quickly add up to hundreds of dollars per month and thousands per year. And even if you 诲辞苍鈥檛 trade often, every dollar you pay in commissions and account fees is a dollar you can subtract from your returns.
Keeping costs down can be tricky, particularly for聽: Often, the online brokers with the most comprehensive customer service and richest educational content charge higher commissions. But once you鈥檝e聽gained some experience trading, survey the marketplace again to see if you might benefit from switching to a lower-cost broker.
You can often avoid account fees completely by choosing a broker without trade minimums and by聽paying attention to any account balance requirements.
2. Make a plan 鈥� and stick to it
Go into the market with a plan, whether you鈥檙e saving for retirement or picking stocks. This will聽protect you when things诲辞苍鈥檛聽go as planned, because you鈥檒l have set rules for yourself and won鈥檛 be tempted to make聽a quick聽decision.
, you should know the maximum price you鈥檙e willing to pay, the maximum amount you鈥檙e willing to lose 鈥� in other words, how much the stock鈥檚 price will drop before you鈥檒l sell聽鈥� and the amount of聽money you can dedicate to stock trading. For most retail investors, that should be聽a fraction of an overall portfolio that is otherwise dedicated to a diversified mix of mutual funds 鈥� specifically, low-cost index funds and exchange-traded funds.
3. Be prepared to lose
You can鈥檛 trade stocks without losing money. The goal, of course, is for your gains to outpace your losses, but even when they do, the losses can hit you hard. Losing anything 鈥� especially money 鈥� doesn鈥檛 feel good.
But it feels even worse when you鈥檝e lost money that you were counting on for retirement or other long-term goals, such as聽your kid鈥檚 college education. That鈥檚 why it鈥檚 important to trade stocks only with money you鈥檙e willing to lose 鈥� money that was specifically allocated to stock trading.
4. Don鈥檛 go in blind
Trading stocks shouldn鈥檛 be impulsive. You should only make a trade once you鈥檝e done a significant amount of research, reviewing聽earnings reports, financial filings, analyst research reports, recent company news and SEC reports. This is called fundamental analysis.
Good online brokers provide much of this research, but it鈥檚 up to you to interpret it and聽, through things like charting and technical analysis, which involves examining聽both recent and historical trends in an attempt to predict future performance.
5. Make the most of technology
罢辞诲补测鈥檚听聽are advanced, which聽means that you have lots of tools at your disposal. Good traders take advantage of them.
First, and perhaps most important, enter orders with stop-loss limits, which will trigger a sale if a stock price drops below a certain amount, limiting your losses.
You can also聽test strategies without risk by using virtual paper trading, if your broker offers it. Become active in trader chat rooms 鈥� hosted by some online brokers and also available elsewhere on the Web 鈥� so you can bounce ideas off other investors and follow their trade strategies. And use mobile apps to track the markets, make trades on the go and聽receive聽customized alerts about your holdings.
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