I have been trading stocks and shares for at least 6 years now so these tips for share trading come from direct experience in the markets.
For me, stocks are the best instruments to trade. There are so many of them that there is always an opportunity to be found.
14 tips for share trading
Stick to what you know
My number one tip for successful share trading is to stick to what you know as that way you will always come out ahead. Your interests and passions can often lead you to know more about an industry than the average Wall Street trader does. If you stick to the companies you know a lot about, industries that you are interested in, then you’ll be able to foresee changes more quickly.
Never follow tips
When I say never follow tips I don’t mean stop reading this list. I mean you should never, ever follow a tip to buy a stock from your broker or man in the street. (At least not without doing your due diligence first at least).
There’s several reasons for this. First, your broker has a conflict of interest. She wants you to buy the stock so that she can get a commission so she doesn’t really care if the stock goes up or down. Also, if she was actually a good share trader she’d be doing that instead of stockbroking.
Second, if you get a tip from someone else, you have no idea what their intentions are. That person may have bought the stock at much lower levels, or they may have already hedged it with another short trade. They probably haven’t told you about their exit strategy either.
Volume can indicate direction
It’s not always the case but volume often shows direction and this is particularly true for smaller cap stocks with less liquidity. Basically, when a stock moves up and this is accompanied by an unusual increase in volume it shows that investors know something and they’re bullish.
Take a look at this stock as an example. $EXH provides equipment to oil producers and as you can see the stock moved up strongly in August 2013 accompanied by very high volume. In fact, volume surged from an average of just 2-3 million shares traded a day to $15m shares. The strong volume indicated investors were bullish and this turned out to be a good buy signal.
Use money management
This tip could easily be number one but you should probably know about it by now. In order to profit from stock market moves, it’s important to work out how much money you are going to risk and this is best done in a scientific way. That way, you can develop your own system and never put too much capital in any one trade.
Stocks do not always trend
There’s a couple of interesting points to note about stocks. First is that they don’t always trend. In fact some stocks never trend at all.
You see, every stock has it’s own personality, some are high risk, some are defensive, some are speculative and some are high growth. Peter Lynch does a great job talking about the different personalities of stocks in One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. Working out the personality of a stock is great way to set up your money management.
The second point is that stocks often move aggressively, which means you need to be invested at the right time in order to capture the gain. Stocks frequently jump on the open or rally 10-20% in one day and then do nothing for the rest of the month or even year.
Shorting stocks requires extra care
Plenty of stocks lose money and several go to zero. However, backtesting shows that shorting stocks is a very difficult thing to do. From countless tests that I have performed shorting shares, I have found no real method that gives results anything better than break-even.
Most of your gains will come from a handful of shares
Traders and investors who have been around for a while all seem to say the same thing when it comes to share trading returns. That is, that most of your profits come from just a handful of shares. That’s why it’s important to have a good portfolio of attractive stocks. Capturing those ten and twenty baggers, the one’s that go up 100%, 200%, 1000%, are the ones that really help a portfolio grow. The rest of the portfolio usually just hovers around break-even.
Don’t fight the tape
Even if you do the hard work and find a great stock, you should never become too tied down to it. Even George Soros will change his mind if the trade is not going his way. There’s no more point trying to fight the market. If you have a stock that is going down when you think it should go up, you should cut your losses and look for a better opportunity.
Shorter term timeframes are more risky
Trading commissions and the spread (difference between bid and ask price of a stock), mean that short term trading is more difficult. Short term trading is also dominated by algorithms and high frequency trading. Fundamental factors like valuations need much longer periods in order to come into effect. Weekly and monthly timeframes are easier to trade.
Another thing I have found over the years is that the smoother a stock comes down, the smoother it goes up. I tend to stay away from volatile, erratic stocks and look for those that trade in smooth trends with little noise. Those stocks where most of the candlesticks have very short wicks.
A stock can always go higher
Most of the profits from a share portfolio can come from just one or two stocks so it makes sense that those big winners will have hit multiple new highs on their way. For example, a stock like Coca-Cola will have made tens of thousands of new highs through it’s history. The conclusion is that a stock can always go higher and for the same reason, it can always go lower.
Test your stock-picking on historical data
It’s true that a stock can always go higher but does that necessarily mean you should buy any stock that makes a new high?
Not likely. A better way is to get hold of historical stock market data and test your strategies on the data. That’s the only real way of finding out what worked in the past and therefore, what is likely to work in the future.
Don’t hold too many
Going back to the first of these 14 tips for share trading tip, when you buy a stock, buy something that you know a lot about. That means holding a small enough portfolio so you can understand what is going on, not holding an unmanageable bag of 30, 40 stocks.
Put in the work
Look at the financial ratios and the balance sheet. Read up what people are saying about it on Seeking Alpha, read the annual report and listen to the company’s most recent conference call. Read as many books as you can about trading and seek out the latest journals If you put in a bit of work at the beginning, you’ll be able to pick a winner and will have less work to do in the long run.
I hope you enjoyed these tips for share trading. For more tips, advice, and secrets, make sure to check out my new book which is on Amazon and discounted for a limited period of time: