When you write for an investing site, you see them all the time. You hear from the subscribers who are looking for that one stock pick they can invest their $500 in that is going to make them rich. Or ones who say they have a foolproof investing system, only to find that their method only works when the market is bullish. Notice there aren't as many day trading or investing systems as there were back in the late 1990's?
What you never see enough of though are investors who have an investment plan. A clear set of rules dictating when they will buy, how long they will hold, and where their stop loss is. This is what separates the successful investors from the rest. The cost of this investment strategy? A few minutes!
Its not difficult to get caught up in the emotion of investing in the stock market. The joys of when our research pays off with a profit, and the anguish and despair when we have to go against our own logic, and place that sell order. We've all been there. Unfortunately, we've done that a lot.
Its key to remember that the best investing strategy is capital preservation. While it makes sense when you read it, how many times have you watched a $200 loss turn into a $500 loss just because you thought for sure it would move higher? How many times have you turned that $500 loss into something worse?
A 50% loss means you need to make a 100% gain just to break even. While the world of investing in penny stocks provides opportunities, not many of them will give you a 100%. In the world of medium to large caps, it takes a long time with a successful company to get that 100% return.
QUit turning your small losses into larger losses.
Lets look at what you should include in your investment plan:
a) Starting capital. Its key to know how much capital you are putting at risk today. Its possible that you may invest in a company, only to learn later on that day that its shares are being delisted. Just because you invest $10 000 at the start of the day, doesn't mean you will go home with that same amount. You need to set an amount that you are comfortable with. Capital preservation.
b) How much money are you prepared to lose per trade. Good traders ask themselves this question before they trade. If you are prepared to lose $500 today, establishing where to set your stop loss becomes easier.
c) Where is your stop loss? Are you basing your stop loss on share price? Are you basing your stop loss on the amount you are prepared to lose today? Are you basing your stop loss on a percentage of the trade or a percentage of your trading capital? What is your plan for a trailing stop loss?
d) Entry - where are you entering the trade? Is it based on a price? Are you trying to time the bottom? Are you placing a stop buy to take advantage of momentum? Was there news this morning?
d) How'd you sleep last night? If you are having one of those days where you wish you just stayed at home, then you should turn off the computer. Emotions will be running high, and you will make trading decisions based strictly on emotion, not your investment plan.
e) Duration of the trade. How long are you willing to stay in? If you are making a day trade, make it a day trade. Don't justify holding a position for the long term if the stock doesnt move in the direction you want it to.
There's the best investment advice that anyone can offer you. And it didnt cost you anything, but may save you thousands of dollars.
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