Trading in a Nutshell.

Here is another great article from “Perdant” a regular poster at “TOPSTOCKS”.

This is typical of the sort of information you get at this site. I highly recommend you try a “Free Pro” account. They are still available at the moment. and you can go and see for yourself by clicking on the “Topstocks” link on the right hand side of this page.

Of all the sites that I visit daily this has been the most helpful and informative.

Enjoy the article given to this site by kind permission of “Perdant.”

I read somewhere when I first started out in shares that of five stocks purchased: one will perform as expected; one will pleasantly surprise; and three will disappoint. By definition therefore, I had a better than even money chance of being disappointed!

I consider myself lucky that my introduction to the market has been during a bull run, however, I wonder if I will be prepared when the bear comes? Time will tell.

So this is what I have learned so far:

You need a plan.

A plan is essential AND you need to stick to it! Haphazard choices may give short-term positive results but long-term success comes from consistent application of a proven plan.

Buy shares, make money, is not a plan. It is a fanciful, optimistic notion that does not provide you with the tools, strategies and rules you need to be successful.

A plan should achieve the goals that you set for you and should be monitored regularly to confirm its effectiveness. Set yourself realistic targets and don’t get greedy.

Find a mentor.

If you are lucky enough to find a GOOD one, learn as much as you can! If not, read as much AND as widely as you can. There is so much knowledge out there, you just have to look.

Research.

If the word ‘research’ conjures up thoughts of wasted time and missed opportunity, think again. Who, reading this, has not missed an opportunity?

The market has been here longer than all of us and will still be here long after we have gone. It is far better to pay a higher price for a share and understand its dynamics than it is to buy blindly and wonder is going on when the price drops 50%.

Think of incremental increases in price [if any] as the cost of understanding.

In the long run, this will be time and money well invested and who knows, it might even save you from making a bad investment decision.

Make decisions on investment based on sound, educated research – YOUR research. YOUR research will make it easier to know when to sell out or buy more of a company as only YOU will understand the reasons behind your investment choices.

Once you have committed to any stock, remember why.

You may have selected x stock on the basis of a, b, or c – these factors needs to be monitored. If any one changes, does this mean the stock is now any less viable now than it was before?

What else may have changed to compensate for these factors - the company direction, commodity prices, new markets, management?

If after careful research your company’s stock starts falling in price, is this related to some failure on your part to identify a significant factor or is it related to something more general.

At the end of the day, no matter how carefully you research and plan, it can all come undone because of something you least expected.

When you lose, don’t lose the lesson.

Something I read that might help put the importance of research into some perspective.

It was related to an internet company in the dot com era. When the company floated it stated in its prospectus that it had no intention of producing anything. Yes, that’s right, it was not going to do, make, buy, or sell anything.

The shares made it to $80 on the back of the dot com bubble alone, before the crash. Who would seriously have considered buying into this company in light of this?

Context.

Everybody’s financial needs are different. Therefore, advice, tips etc need to fit in with YOUR plan not somebody else’s.

For example, I might feel bullish about X stock at 6 cents going to 60 and pour $5K into them, but what is the size of my portfolio? What percentage have I risked and does it matter to me in the larger scheme of things if I am wrong?

As a large investor possibly not but it will probably almost certainly matter to a smaller investor.

Rampers.

Beware of people who make outrageous, unsubstantiated statements. If it sounds too good to be true, it probably is. Some of these individuals appear at predictable times, spending x minutes a day ramping their stocks at more than one site!

Also, beware of the sneaky ramper that puts a dud amongst known winners. The following site offers an article that might be good for newbies to read.

http://www.incrediblecharts.com/start_trading/pump_and_dump.htm

Tips and Advice.

Sorry, hot tips remind me of rampers. At the very least, a hot tip received from a broker or friend or read in an investment newsletter or magazine has probably come two months too late.

You are probably buying from smarties and lining their pockets with money. If you are lucky, you might make some yourself before they exit stage right.

Always remember that if making money in the market was all so easy, everybody would be doing it and nobody would need to work. This is clearly not the case.

I have found that newsletters and magazines that have large followings offer investment advice that becomes a self fulfilling prophecy.

When every body gets on board the price goes up and therefore they look like geniuses.

Maybe that can be used to your benefit, maybe not.

Always be willing to take advice, BUT, measure this against what you already know.

Stop Losses and Trailing Losses.

Many here will tell you that preservation of capital is paramount to long term success. Taking a loss is hard both psychologically and financially but you really need to learn how.

It is equally important to learn to take your profits…..before they disappear.

“Stop Losses are what I think are even more important than buying the right stock.

A stop loss in simple terms is a price you set on a stock, preferably before you Buy, at which you will sell should the trade turn bad (i.e. Share price goes down)

If the price hits a stop loss you SELL. No emotion no thought.

Same goes for trailing stop losses, take a decent profit. Even set you profit goal before you buy and sell when you planned. a Trailing stop loss protects profits and is basically a stop loss that has been moved up the price scale to ‘lock-in’ profits.

Consider this - a 50% loss on a trade takes a 100% gain to recover and I can tell you - a 50% loss is easy whilst a 100% gain is many times more difficult.”

Management of Trades.

The key to all of this is management of trades.

You can give 10 traders $50,000 and tell them to buy BHP with it.

After 3 weeks:

one of the 10 traders will have $75,000
two traders will have $65,000
two traders will have $52,000
three traders will have $48,000
two traders will have less than $42,000.

The difference is in approach and management. The trader with $75,000 might have bought and sold 5 times, at strategic (for him) times.”

Similarly for the $65,000 traders - they may have initially cut some losses, but re-entered on trend resumption.

The traders making losses may have bought at the top of a trend, but got out when the trend retraced 5%.They may have bought back in when they thought the trend was resuming, but it did not, and turned down once again. Now they are down 10%. They think this HAS to be the bottom, but yet again, get caught.

They decide to pull their money out, only to see BHP gap up 7% overnight.

Another trader might have just bought and held on - explaining the $52,000 positions.

Red Days are Good Days.

When I purchased my first bundle of shares I couldn’t stop looking at the trading screens. Rises were rejoiced, falls were abhorred. Green arrows meant happiness, red ones depression. Oh how this has all changed! I think I am finally seeing the forest!

Armed with my newly found understanding of trade management and profit taking I am keenly awaiting the next correction day.

There are several companies I am interested in picking up cheaply. I now understand how important it is to take advantage of these situations.

Rather than feeling depressed at my falling portfolio [and going back to my previous comments regarding research, if I purchased for the right reasons and nothing has changed, then really I should not be concerned]

I will now go about looking for some value or buy back some I had previously sold, after all, I did spend many hours researching the company in the first instance and perhaps I can take advantage of small term fluctuations again.

Rights Issues.

So your company is going to give you special rights or issues. Congratulations, what a satisfying feeling that is! A thought I will carry with me next time this happens is take up my entitlement but sell what I hold now! It comes back to taking profits.

The first time this happened to me I was offered a renouncable rights offer with AXD. Perhaps the fact it was renouncable made a difference, as it was [and still is] the only company in my short experience whose rights issue has not seen the share price fall back to the issue price.

I had often read this was the case but as with everything I measured new knowledge against what I already knew. At that time, this had not been my experience. I will remain mindful of this in the future.

All my left over bits.

There are a couple of other bits I wanted to add here but couldn’t find the right place to put them. I guess this is it.

There are many members here who have given me much to think about and I don’t mean to single out any member for fear of offending others.

Everything I know about the market has come originally from this site and so I am appreciative of every member’s contribution so I will randomly and anonymously list some of the more memorable:

“Don’t buy shares in a company with a falling price and think you have got a bargain”

“Emotion about a stock and shareholding are not compatible”

Options [the company issued type] can offer greater leverage and returns than fully paid shares.

If you buy shares in an ‘unloved’ company – be aware that in the event you need to sell, they are only worth what a buyer is willing to pay not what you think they are worth.

When you buy shares in a company that has experienced a downward trend, be aware that you will have to pass all the stale bulls on the way back up.

Impatience equals trade. “Bored punters are restless punters.”

Don’t try to pick the top or the bottom of a share or market, exit when your goals have been realised or stops have been reached.

Where to now

My next step is to learn more about market analysis. I realise there is much more to learn.

However, in keeping to my motto of doing just a couple of things well rather than a lot badly.

I will try to build on my knowledge slowly, mastering one before moving to the next.

Two things I have learnt so far are [generally] never buy anything on market open but wait till about 10:40 for it to settle.

And [generally] Fridays seem to offer one the opportunity to pick up shares cheaply.

Wait till 3:40 on Friday and place a silly bid for something you like, you never know!

There is also much maneuvering and game playing pre open.

I hope someone got something of use from this. If so, I have achieved my goal of giving something back. Thanks again for all the help everyone has given to me.

Kind regards,

Perdant.

PS. Oh one last thing, keep an eye on how much your brokerage can eat into your profits!


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