Top 3 Ways to Be Successful in the Stock Market
Being successful and making money in the stock market is quick and easy, right?
Wrong.
The stock market is among the most challenging things to master, but following these tips will certainly make you a better trader.
To be successful, you should be entering into every trade with a plan.
If you are not trading with a plan, then you may as well just head on down to your local casino and throw all your money on black.
Before entering a successful trade, you should already know the following:
- What direction will I play? Am I going long or short?
- What stock/option will I be trading? How many shares/contracts?
- How long will I be in the trade? Is it a scalp, day, or swing trade?
- What are the previous supports and resistances?
- Where will I buy and where will I sell?
- Where will I cut my position and take a loss?
By following these rules, you should have 1 of 4 outcomes.
- A large profit
- A small profit
- Breakeven
- A small loss
You should never hold a position until it turns into a large loss. If you are doing that, you need to revisit your trading plan and make sure you are sticking to it.
Cut your losses early and use a stop loss
Cutting losses is one of the hardest, yet most important, things a trader can do.
If you enter a trade and it immediately starts going the other way, get out. More often than not, it is best to cut at a small loss rather than hold it to “see what happens”.
Holding a losing position can and will ruin your account.
After entering a trade, the easiest way to manage your downside risk and to cut losses is by using a stop loss. If the price of the asset you are trading suddenly drops in value, your stop loss will be activated and your losses will be minimized.
Without a stop, you run the risk of the asset losing value and not being able to exit the position. Turning your small loss into a much larger one.
The final way to be successful in the market is to let your winners run
I recently came across a quote from Jesse Livermore.
“As long as the stock is acting right, and the market is acting right, do not be in a hurry to take profits.”
I thought that was very well said.
You enter a successful trade with your plan in place, and now you see the stock is rallying and showing great strength. Why sell for a small gain if there is potential for a large gain? This is when it is important to let your winners run.
The most common way to do this is to trim your position.
If you have a target price of $100 and the stock looks very bullish, instead of closing your entire position at $100, you can trim.
Let’s assume you have 5 shares/contracts. As the price hits $100, instead of selling all 5, you sell only 3 or 4. This leaves you with 1 or 2 “winners” to let run.
By selling those initial shares/contracts, you are securing profit and limiting your exposure to the market.
On the other hand, keeping 1 or 2 open will allow you to grab a little more profit as the asset increases in value. Just remember to raise your stop loss in the event the asset pulls back or flushes.
In conclusion…
The stock market is no easy task. It takes years to learn and even longer to master. However, following these 3 rules will help make successful trading easier for you:
- Enter every trade with a plan
- Cut your losses early and use a stop loss
- Let your winners run to maximize profit
Check back with us next week for some tips on where to place your stop loss to maximize your risk to reward ratio.
