Trade Within Your Comfort Level
Stock prices fall into two basic categories; penny stocks
(a.k.a. stocks trading under $1.00) and pretty much everything
else. To some degree, you can lump stocks under $5.00 into the
penny stock category as well. However, keep in mind that this
will not always be a fair representation.
Lower priced stocks have a very seductive allure. Not only can
you buy large numbers of shares, but also when the stock does
move, it typically moves in larger percentage steps. However,
that works both ways and there are additional risks with lower
prices stocks (typically they are lower volume and this can
negatively impact your trading).
Personally, I feel much more comfortable trading a stock that is
above $20 if at all possible. Generally, stocks that carry low
share prices tend to be more risky. They also tend to be lower
priced due to lack of interest from both the public as well as
professional investment community. This is not to suggest that
there are not good quality low priced stocks - certainly there
are. However, especially when you are first beginning, we feel
it's best to avoid stocks that trade under $5.00 unless you
really know what you are doing. In the end, you usually stand
about the same chance of seeing a higher priced stock move 10%
as you would seeing a lower priced stock move 10%. Since this is
usually (but not always) the case, there tends to be a little
more safety in trading in the higher dollar stocks. Penny stocks
can and do sometimes produce amazing short term gains, but
unless you really understand the risks associated with these
lower priced and often more thinly traded securities, we suggest
you stick to more "name brand" stocks which tend to trade at
higher per share prices.
Some people really enjoy owning Gold stocks or stocks related to
oil drilling or diamond mining. I personally do not. Stocks of
these types lack some of the inflation fighting components that
traditional businesses provide. As a general rule of thumb, if
the stock doesn't produce a product or provide a service, then
it's generally best to limit your trading in them, at least in
my opinion. Stick to companies that produce a product or provide
a service and you never have to worry about hitting a "dry hole"
or a sudden drop in the price of Gold or Silver.
It is important not to "chase" stocks. Stocks go up because
people (usually large numbers of people) are buying the stock.
As a trader, this is usually not a good time to also be buying.
As such, be very cautious about buying stocks that are rapidly
moving away from you; he true money in stocks is made by buying
stocks prior to a sudden move, not during a sudden move. The one
possible exception to this may be if there is some very positive
news that has caught the markets off guard and/or if the news is
so outstanding that there is a high probability that the stock
may benefit for multiple days. Keeping in mind, however, that a
sudden move in a stock is often quite different than a change in
the overall trend. Sudden moves tend to reverse and if you get
into the habit of chasing stocks that are moving up, more times
than not you'll end up paying overly high prices and/or getting
caught in a downward move shortly thereafter.
Again, generally people that buy late are buying on pure emotion
(greed and fear); greed that they may make a lot of money very
quickly and fear that they may miss out should they not "get on
board". Those are the two worst reasons to buy anything - not
just stocks. True you may miss out on the stock, however, in
most all cases, it's better to wait and find another stock, than
to pay too much. Patience in the stock market is very important;
usually you'll do better by avoiding the temptation to "jump"
when that impulse is largely a result of a move in the share
price alone.
Don't rush into any trade. This is along the lines of the above
comment. However, it is worth elaborating on. Often times stocks
will give you many chances to get into them at current (or
sometimes even lower) levels. Generally, there are few cases
that require sudden action if you are really careful in how you
trade. Sometimes the best trades are ones in which you wait
patiently for the stock to come to you. If you feel the need to
rush to order a stock, that's sometimes (not always, but
sometimes) a warning sign that you are acting not on a well laid
out plan for the trade, but an impulse to "get into a trade"
regardless of whether or not the stock is trading at what is
really an ideal price.
Keep in mind as well; it's often not a bad idea to take up
positions in a trade little by little. If you plan to own 1000
shares, consider buying 300 shares and then seeing how the stock
trades. Often times this will allow you to better judge the
market and take advantage of intraday weakness. If you do happen
to miss purchasing the additional shares, there is almost always
another trade you can put the cash to work in.
Do not let yourself get greedy. This spells danger. Two of the
biggest emotions a trader has to over come are fear and greed.
Many traders fall victim to greed once they see a trade become
profitable - simply by not having a firm exit point in mind.
It's generally best to decide at what levels you wish to sell
prior to entering into a trade to avoid this. If you feel
yourself trying to justify higher levels from the stock and/or
ignoring the current profit "as though it were nothing", you
probably need to stop and consider not only the value of your
profit, but the current risk to it by holding longer.
Often time's traders who are successful tend to lose respect for
the actual value of a dollar. Regardless of how much money you
have, you must not lose sight of what each trade produces and
the value of the returns in relation to the capital used to
produce those gains. An example might be someone with several
million dollars. If this person put $10,000 into a position and
saw it produce a gain of $2,000 they might not realize it's time
to take profits. While $2,000 is nothing when compared to
several million, a 20% gain should always sound alarm (i.e.
sell) bells in a trader's head. In fact, typically a gain of 10%
or perhaps even as little as 5% should do this as well. A common
method to help combat this is to look at your trades strictly
from a percentage standpoint of view, rather than a dollar
standpoint. This allows you to always calculate gains and losses
with consideration to the amount of capital at risk for any
given trade.
In the movies, "greed is good", but in trading it's generally an
emotion that does little more than get in the way of clear and
level headed thinking.
Good luck in the markets!
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links included. Questions and comments can be sent to Ray at
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