Think Before You Start Trading in the Stock Market

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We will assume that you are considering going into the stock market.Of course you have high expectations of acquiring a very significant return on your capital on which you intend to invest.

Hopefully it should also provide a far better return than what you would otherwise achieve by investing your money into managed funds (less risky than single stocks) or even possibly term deposits where your returns are guaranteed.

Well, how do you achieve such nice fat returns? The answer naturally is very simple. All you need to do is Buy low and sell high.If you can do that just about most of the time you will turn out to be a very successful profitable stock trader.

It sounds so very easy,but in reality it takes a bit more effort than just doing that.

But firstly what type of trader do you want to be? There are mainly two types but of course it is all a matter of degree as some traders have a bit of each type in their makeup.

We shall cover the first type of trader, the most prolific of all traders. Just answer these questions truthfully .I don't care if you don't as the only person you are fooling is yourself. Do not worry we are all guilty of that from time to time, myself included.

Do you listen to the financial news and do you do what exactly what everybody else is doing? Are you selling when the market sells? Are you buying when everybody else does? You hear there is a run on Gold or Uranium or whatever, and right NOW this is the time to buy in before you miss out! Does this sound familiar? It should, because this is happening every day in every stock market around the world.

If this sounds like you do not despair, you are in good company for at least 80% traders are influenced by these outside circumstances. You have gone and joined that exclusive club called the HERD. This is an acronym for: How Everybody Reacts Differently.

In case you are wondering I just made that up.But it gets my point across. There is no method or system being used in the Herds reactions in the market place, all you will find is panic,mayhem and emotions that reign supreme.

The second type of trader is forever learning, in fact it never ends. They have learned by bitter experience how emotional trading can cost them money.The difference between the first and second trader is that the second trader has become aware of their emotions , though they still experience problems in this area.

The first trader is just swept along in a sea of emotion. Please bear in mind the second trader will still slip up from time to time as no one is ever perfect. With out belaboring this point too much as this area of the second traders expertise and what is required has been adequately covered in past articles.

Ok, now for some basics.Believe it or not.Not every trader uses these basics, if they did there would be a lot more profitable traders around.

Now the first thing you must learn: is how do you know when it is the right time to buy? As I said above Buy low and sell high

There are a couple of ways to do just that.There are other ways of course but two will suffice to give you some idea.

1. As we have covered in a very recent article. A good time is when a quality stock has been oversold due to either bad news or just plain panic selling. We are seeing a lot of these types of stocks in today's markets.These are ideal stocks for medium to long term gains.

2. If you use technical analysis i.e. Bollinger Bands, you might see a break through about to appear after the stock has been side tracking for a while. Or you might see where a stock has been consistently hitting a resistance line for a while but is trending slightly upwards. Obviously it is only a matter of time till that resistance line will become the new support line.

Of course this all involves time and research, but let me assure you that it is well worth the effort you put into it.

Eventually there comes a time when is it really the best time. to sell? When you have made a profit of course. Easy? The hard part is knowing how much profit to take.

For example: we shall assume the stock has risen up to around a nice 20% profit, so what are you going to do? Sell now, or wait until it is up 50%, 100% or 200%? This really is up to you. Get too greedy and you might risk seeing a reversal in the share price and you could possibly end up with a little or worse no profit at all.

I myself have usually sold by the time it has has hit 20% as I personally have a preset profit set. If and only if the stock is still trending upwards consistently, then and only then will I put off selling. But I always without fail, make sure a stop loss is set in place to lock in my profits.

You will hear traders say in chat rooms "I had that stock, I sold it when it was up 20%, but if I had not sold it at that time, now it would be up to 300% profit at least. How stupid I was I when I sold it!"
If only! It could have just as easily gone the other way and you ended up penniless. Hindsight can be a wonderful thing if you can learn from the mistakes you make.

Next how much of the stock you should sell? All or nothing? Again this is really up to you. The situation that I like happens when I am trading a Penny dreadful. If the stock has made me 100%.(it does happen occasionally) I sell of exactly half, get my original investment back and that leaves me with a stock which has virtually cost me nothing, and I still keep an eye on it, let it go, and raise the stop losses when needed. Money for Jam!

Many traders are losing good money today because they are second guessing and are always trying to beat the market. If you are very new to this game and are NOT planning to spend much time on either research or teaching yourself then unfortunately the chances are you will lose your money. In fact I can guarantee that you will, because the odds are against you right from the very start.

You might not be aware of it but you are competing with professional traders, big players and smart insiders who are consistently making good profits mostly because many other traders keep losing. Plus what are the chances that you can predict the market? The chances are exceedingly slim. I shall reiterate once more "There is no crystal ball!

The bottom line is that it is very easy to look at the past and see all the mistakes you will have made, and you will. However it can be very hard to make the right decisions needed in the future to make a profit. Unless you learn to know all the market trends well, and begin to understand how the different stocks perform, and take the time to educate yourself then most likely you will not be able to make profitable trades.

Even professional traders do make mistakes and lose money. If you are currently not one of these professionals or not planning to become one, then your best bet would be investing into term deposits or managed funds it is a lot safer.

Chris Strudwick is a successful share trader on the Australian Stock Market Visit his weblogs at  www.ASXNewbie.com for more free articles and useful information about the stock market.

Chris Strudwick is a successful share trader on the Australian Stock Market. For more info please visit my blog at www.asxnewbie.com.

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