Four Successful Strategies to Master Trading
Buying and selling stocks is an effective way to make money in both the short and long term.
Everyone has different approaches to trading. Some prefer foreign exchange trading, while others choose to play the long game with stocks and bonds.
Perhaps you have an interest in stocks, but you are not satisfied with taking a more protracted approach to investment. Maybe you want to day trade and are wondering about the best way to proceed.
Rather than going in blind and starting to invest money in stocks, you must have a plan of action. Being prepared ensures that you put your money in the best possible place and also know when to exit a trade.
Below are four successful strategies that will help you to master day trading.
1. Knowledge Helps
Understanding why the market is moving in a specific direction is the first step to accomplishing anything as a day trader. Knowing why events happen helps you predict what may happen in the future.
Read news stories, analyze the market over several weeks, understand why stocks are falling or rising, and look for news reports prior to those shifts that may explain why the company is seen so positively or negatively by investors.
People assume that trading is all about numbers and staring at spreadsheets. While that is an everyday activity for a trader, you cannot succeed at stocks without an understanding of interest rates, economic news, political news, and business events.
2. Set Aside Time
Day trading is not an automatic process that takes no time from your life. If you are looking for a more passive strategy, then you may want to invest in bonds or even market indexes. The S&P index has done very well over the past decades and can grow your funds over time.
If you are serious about trading each day, then you must set aside at least a few hours of your time. That includes reading the news, analyzing stock price movements, entering and exiting trades, and reading company financials.
Only when you become more accomplished at day trading can you somewhat lower your time commitment. Even then, you have to realize that day trading is similar to a part-time job.
3. Avoid Penny Stocks
When people first learn about penny stocks, they become tempted to invest a lot of money in these companies. The problem is that penny stocks are very illiquid, and the chances of a stock rising to a very high price are minimal.
There is always the possibility of hitting the jackpot, but you are not day trading to try and win the lottery. Stocks that sell for less than $5 a share are not even listed on major stock exchanges.
Unless you have some information that leads you to believe a company will shoot up in value in the next few months, stick to established stocks for your investing.
The idea of buying a stock for $5 and seeing its value reach $500 is far-fetched. While every company had to start somewhere, we have to imagine the thousands of companies that never made it beyond a low share price.
4. Cut Your Losses
There is no need to take unnecessary risks when you trade, especially as a beginner. You can use market orders or limit orders to enter and exit trades automatically, which limits your exposure in each trade.
Market orders execute at the best price available at a specific moment, which is helpful if you want to get out but don’t much care about the exact price you sell on.
In contrast, a limit order guarantees you a sale at a specific price but does not guarantee the execution of that sale. Limit orders are beneficial if you want to limit your exposure. For instance, a stock may experience a sharp decline, and as soon as it hits your limit order price, you will sell your shares.
The issue with limit orders is that sometimes a stock’s price can fall a lot but not quite reach your limit order price, which means your position is maintained.
Take a Cautious Approach
Day trading can lead a person to have a perilous approach to investing money in stocks. While taking risks is part of trading, as you are aiming to increase the value of your assets, you can limit the repercussions by taking precautions.
Set a strict budget for how much you are willing to invest, and only use the money you are not bothered about losing. As you become better at trading, learn the ropes, and begin to see profits most weeks, you can trade more significant sums.
