My third stock trading for dummies tip, always use a stop loss.

One of the most difficult things for new traders to come to terms with is the ability to take a loss and be wrong on a trade. There’s going to be winning trades, yes, but there’s also going to be a whole bunch of losing trades!

Where does this struggle come from?

Well, it comes from our education system, because when we go to school we’re trained that by getting the right answer, by getting top marks in our tests, we’re going to get the positive feedback, we’re going to get the adoration of our parents and our teachers, and that’s the definition of success.

Now, unfortunately, when we translate that into the stock market, what happens is people have a tendency to hold on to their trades and hope that if they’re going down, they’re going to come back up so that they can get out even, i.e. be right on their trade and not actually have to be wrong and take a loss.

Unfortunately, the trouble with this is it leads to larger and larger losses, and it becomes very difficult to recover if we keep holding on and hoping that our trades will come back to even or profitability, because eventually we’re going to get into those trades and they’re going to keep going down and down and down, and we’re going to lose a bucket-load of money on trades that we don’t get out of.

Always place a stop loss just below your entry price and make sure that you get out with a small loss. A small loss is far easier to take than a big loss, and that having a loss of a few hundred dollars or a thousand dollars compared to ten or fifteen thousand dollars is so much more tollerable, not just for your stomach and your wallet but for your relationships and for your sense of self-worth and for how confidently you can continue to trade.

It is also important for the health of your account, because let’s face it, a couple of small losses of a few hundred dollars is far easier to recover from than a five or ten thousand dollar loss is ever going to be. Always place a stop loss under your trades so they get out if you’re wrong quickly.

 

Now for my fourth stock trading for dummies tip, on every single trade you need to make sure that the risk you take as a percentage of your total account is a very small amount.

Many educators count the 2% rule, which means only risk two percent of your account on each trade. My personal feeling is that for most traders and most systems, that’s far too aggressive! I’d encourage you to think about keeping your risk to 1% or less on each trade.

This means that each trade you lose has only a very tiny effect on your capital. If it’s only a small loss, it becomes easy to take. When losses are big, they’re much harder to stomach and more difficult to take.

 

It also means you can be wrong many times in a row and it doesn’t actually matter.

In stock trading, one of the big challenges we’ve got is that the bigger your drawdown, the higher the percentage return you’d have to make in order to get back to where you were.

If your account starts at a 100 and you have a drawdown that drops you to 50, you now have to make a 100% return on that 50 to get back to where you were at the beginning.

If your account starts at a 100 and just drops down to, say, 90 (a 10% drawdown) then you only have to make 11% to get from 90 back up to 100.

By risking a small amount of your account on each trade, you keep your drawdowns low, you can have multiple losses in a row, becomes much easier to exit small losing trades, and your drawdowns are much, much lower, dramatic assistance and surviving and improving your mindset, because no one trade really matters that much. You just focus on consistently executing your system.

 

 

My fifth stock trading for dummies tip is to increase your time frame. Day trading is a hugely popular pursuit out there right now and is marketed really heavily by the brokers. There’s a great reason for that, it’s because it makes them a ton of money.

Daytrading is not marketed by the industry because it makes the private trader a ton of money – IT DOESN’T! The more frequently you trade, the more brokerage you pay, and the richer your broker gets. By increasing your time frame you’re going to have paid less money to your broker and that’ll give you a greater chance of success.

Let’s face it, if you look at a stock chart, the size of a move that you can catch on any individual day is minuscule compared to the dramatic moves you can catch if you hold your trades for weeks or months in the stock market.

To increase your chances of success, hold your trades for longer, and that means you’re not competing against those hedge funds and investment banks and the prop trading firms that are trading in nanosecond time frames, ready to take your money in an instant as soon as you put your orders into the market.

Trading on longer time frame gives a private trader a dramatically improved chance of making money in the long run, and it has the added enlightened stock trading benefit of reducing the amount of work you have to do and improving your quality of life. This is because there’s nowhere near as much stress when you’re only making a small number of decisions as opposed to making many, many decisions within the one trading day.

My fifth stock trading tip for dummies is increase your time frame and don’t day trade.

 

My sixth stock trading for dummies tip is don’t fall in love with your stocks.

Now, I don’t care how great the story of the stock is, how amazing the CEO, how great the news reports are, or any of that. If your position is moving the wrong direction, against you, you need to get out. There’s nothing more certain than if it keeps going down, your wealth gets eroded.

Falling in love with your stocks and holding on to them because the story is great or because you’re expected to recover or all of those things is just totally contrary to profitable stock trading.

We’re going to have simple system to guide us (like I said in stock trading for dummies tip number 1), and that’s going to allow us to make the right decisions.

If something starts going in the wrong direction, our system says sell, we must sell. It doesn’t matter what the story is because the market doesn’t agree with it. If it’s going down, we’re going to get out, cut our losses, so don’t fall in love with your stocks. Follow the system. Follow the rules, and cut them when they start going in the wrong direction.

 

 

My seventh stock trading for dummies tip, is to have a written trading plan. When our emotions are running high and the markets are fluctuating or things are moving against us, human beings just don’t make good decisions.

I already talked about the flight or fight response, and this is what happens, when our emotion goes up or when we get stressed, our mind, the amygdala in our brain, puts adrenaline into our system. Adrenaline makes us ready for action. It gets us strong and gets our blood pumping and our muscles ready so that we can have a burst of energy to either fight or run to survive. This came from our Stone Age days when we’re coming face to face with predators that were going to kill us, and that was very helpful back then.

In the stock market and in our financial life, in the modern world, this is absolutely not helpful at all because it reduces our intelligence and decision making ability.

How do we combat this fight or flight response that we have when our stress levels go high? We do it by having a written trading plan, which we write down in advance of making our trades in the market, and by making our decisions in advance when we’re out of the market, when our mind is quiet, and we have the ability to think clearly and rationally, we can make good, quality financial decisions. That way we know exactly what we’re going to do no matter what happened in the market. Our decisions are going to be good and profitable and we don’t have to make silly decisions in the heat of the moment when we’re stressed and under pressure and our intelligence is down.

 

My eight and final stock trading for dummies tips is to minimize your brokerage. No matter what style of trading you do, brokerage is a huge cost to bear. The more frequently you trade the bigger a problem this is. Also, the smaller your average profit to trade the bigger a problem this is. No matter how you trade, no matter what instruments you trade, you must seek the lowest possible brokerage rates to improve your chances of profitability and success in the long run.