Here's
a great 'ten simple steps' stock trading strategy which you can use to maximize
your trading profits whilst at the same time minimizing risk to your trading
capital. If you already do your own trading and can set automatic buy/sell
orders then this strategy is perfect for you.
No
matter which stock trading strategy you read about or try, they all share one
fundamental principal that is to buy low and sell high. Sounds simple enough,
but then why do some 95% of traders manage to get in and out of the market at
the wrong time, over and over and over again?
What
over-powering force is in place which steers the 95% to do this? The answer is
human nature and the counter-intuitive manner in which the stock market
operates.
The
5% of traders who consistently make money in the stock market do so by buying
when the masses are selling, and selling when the masses are buying.
They
do this by following a dozen or so strategies, some simple, some more
complicated. It is not in the scope of this article to go into each and every
strategy, but here's one anyone can use.
The
links at the end of this article point to the web page where you can see this
strategy in the form of charts and graphs which make it much easier to
understand. Take a look if you're finding it difficult to picture it.
The
Ten Steps Strategy: CLICK HERE TO READ MORE
1.
Study the 12 month charts of several reasonably well known
companies and pick out stocks that have been in a steady UPWARD trend
throughout the period. There are always plenty of them, even in a falling
market. No stock is ever a sure thing, but gives you a head start by choosing
one which is going in the right direction! Fundamentals don't mean anything if
the price of your chosen stock is trending downwards. Don't care what the
company is or what it does. This is irrelevant; you are just here to make
money, period.
2.
Check out the trading volumes and eliminate any which lack
decent liquidity. Avoid stocks with not much liquidity (not a lot of
buyers/sellers) as you need to be able to get in and out easily and without affecting
the price yourself.
3.
Study the 3 month chart and check the recent levels of
resistance. These are points where the stock price has peaked and then pulled
back, before breaking new heights again.
4.
Place a mental note to buy at a price just above the most
recent top. Note you are not actually buying at this point, just making a
mental note to buy when it hits this price. The stock will need to reverse
upwards again and 'break through' that last resistance level to effectively
'buy you in'. If the stock price does not reverse but instead further drops
away, simply lower your 'mental buy order' to just above the resistance levels
going down and wait for the stock to turn back upwards again.
The
great part is the more it drops the better as you have still not bought in.
If
it is a well known company and there's temporary bad news surrounding it
(anything except impending closure) you can be sure this stock will eventually
bounce back and catch up with (or even temporarily over-take) its long term
trend.
When
it does it will catch up quickly, over a few weeks perhaps. Follow the next
steps and you will be sitting on it all the way up to next top. Gains as much
as 30% are common.
5.
When the stock price eventually reverses direction back up
and passes up through your buy order, immediately buy at market price.
6.
Now set your stop loss. Study the last couple of months of
the chart and check the rising levels of support. These are points where the
stock has resumed its upward direction following a pull back.
7.
Place a 'note to sell' at a price just below a recent support
level. Not too close but not more than 5-8% below your buying price. Your sell
order is now your stop-loss. I cannot stress more - you MUST use a stop loss.
Your stop loss will protect your capital if the stock unexpectedly reverses
down again. You can always get back in later when it recovers from a very deep
pull back (and make even more money in the process).
8.
As the stock price moves up, but as soon as reasonably
possible, move your stop loss (sell order) up to your buying price. Your stop
loss is now your break even. Don't do this too soon as the stock price may
possibly test the support level above your stop loss before heading up again.
Give it a few days to do that if it's going to.
9.
As the stock price continues up, keep trailing your sell
order up with it to just below the support levels going up.
10.
When the stock price reverses direction and passes down
through your sell order, immediately sell at market price. Your sell order is
now your stop gain.
On
a final note, one of the greatest obstacles to success will likely be you. One
of the hardest things to do is to actually sell when your stop is triggered.
There's always the voice in the back of your head telling you to hold on a bit
longer if the price moves against you. This could be the death Nell of your
trading because if the price continues to fall it will erode your trading
capital.
To
counteract this danger you should try to automate many of these processes. Set
your stops and if the stop is triggered you can find out why afterward.
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