First, a few words of warning
I will list some of the basic and essential trading guidelines later in this piece, but first a general word of caution to introduce the stock market for dummies approach to the would-be trader in stocks.
I do not like the term “dummies” and I only use it here to make a simple point, not to put anyone down, so to speak. The truth is that without an understanding of the stock market basics, it is unlikely a trader will be successful and without a knowledge of basic guidelines to follow, trading would often be no better than leaving your money at the casino.
Start small and learn the “ropes” gradually
When someone has been around the block a few times and traded in the “Market” for years, their first word of advice to the eager newcomer is that this is not a game. This is not betting on the Broncos vs. the Patriots, this is business with your money and your retirement as part of the equation.
You can make money by trading stocks, but some losses are inevitable
I would suggest that it is best to start in a small way so that any losses that may occur will not be devastating but can be limited to an amount that can be tolerated and can be seen as a cost of a learning process that brings you out of the “stock market for dummies” category. There are ways to limit losses but it takes action. And everyone experiences losses, especially in the early days of learning how to trade.
Stock brokers and education
You need to approach stock trading with a maximum of education even if you use a broker. The stockbroker wants you to make money and to continue to make winning trades, because that’s good for business. But the brokers have their own agenda and you need to understand this if you use them. They get their commission in part for trading stocks and selling what the company finds attractive. They are not in business to see your portfolio increase since they do not get a percentage of the “profits” but rather they receive sales commissions. It is to their advantage to have you buy and sell stocks since they make their money on trades. That said, many brokers are good guys with your best interest at heart, but be aware.
Read all you can, books and items by William J. O’Neil, Peter Lynch, and others and columns such as John Waggoner’s in USA Today on Fridays for example, or go to the website SeekingAlpha. The more you learn the better you will be able to assess the merits of the information provided. Not everyone comes to the same conclusions about given stock or market situations, so with conflicting viewpoints offered, you, the trader, must make the judgement – aided by your existing fund of knowledge and accumulated experiences. The more you read the more you will understand and the better investor you will likely become, but it takes time and effort.
But most trading is done online these days, without the aid of a broker, especially in the case of the small trader, who is classed in the category of “retail trader” as opposed to the bigger professional traders whose combined actions comprise, by far, the greatest portion of all trading in the stock market and thus responsible for most of the movement in their underlying stocks of interest.
The stock market is not for the faint at heart, but there always opportunities to make money. Buy and hold may not be the best option as the market has periods where it swings like a tempestuous pendulum.
So what are some of the basic guidelines?
While these suggestions are aimed at the so-called stock market for dummies category of newcomer to trading, actually they also often guide the decisions of some of the biggest, most successful, and most famous traders of all time. These guidelines, and many others, are discussed in greater detail in separate posts elsewhere on this website and can be found listed there by going to: Stock Market Basics Guide. The more experienced and expert trader can successfully break the rules and still make gains but for the beginner, such rules should be learned and adhered to.
Up or down markets
As a trader, you can make money in the stock market regardless of whether the market is moving up or down but the beginning trader is usually more comfortable trading when the market is primarily moving up over a period of time.
So from that comes a basic guideline:
- Don’t trade against the trend. Don’t buy stocks when the market is falling, if there are stocks that you believe are really worth more than their current price in a falling market then wait until they reach a “bottom” and turn around, once that is confirmed, they can be bought on the way back up. Do not “average down”.
- Cut losses early. Sometimes expectations for your stock don’t pan out, be alert, if the stock starts to decline, regardless of the reason (which may not be connected to the actual stock itself) be ready to sell. If the stock price falls by about 8% or so from its recent high, it’s time to exit the position. Take the money and move on.
- Let your profits run. When a stock does rise in price the objective is to capture as much of the potential gain as possible, without being too greedy and waiting too long of course and having to watch those gains evaporate. Remember, however much higher the price, you won’t book a profit until the winning stock is sold. It can be tricky sometimes. There is a trading routine called a “Stop Loss” that might be appropriate in this situation, explained elsewhere.
There are many more guidelines to become familiar with but I will just close with an often quoted rule attributed to the great Warren Buffet:
- Rule #1 Do not lose money
- Rule #2 Remember and follow Rule #1