In today’s episode, you’ll discover the 7 best practices for newbie stock traders.
So tune in right now…
Hey, hey, what’s up my friend? In today’s episode, I want to talk about 7 best practices for beginner stock traders.
1. Trade with the long-term trend
Here’s the thing, the US stock market has been in a long-term uptrend over the last 30, 40 years. If you look through any chart, you can see that the US stock market is trending higher over time.
But just because it’s in a long-term uptrend doesn’t mean it’s going up every single day. There are times when we face bear markets, recessions, etc. You’ll want to trade in the direction of the long-term trend and look at what the broad market indices are doing like the S&P 500 or the Russell 3000.
Pro tip: Check if the index is above the 100-week moving average.
If the index is above the 100-week moving average, you can conclude it’s a long-term uptrend and you can look for buying opportunities in the stock market.
If the index is below the 100-week moving average, you can conclude that it’s a bear market or maybe even a recession, and you want to remain in cash.
2. Trade from an area of value
Just because a stock is trending higher, doesn’t mean you want to blindly hit the buy button because for discretionary traders, you want to be trading from an area of value, which could be a support level, the 50-day moving average, or an upward trendline.
These are areas of value that you can use to better time your entries and get a more favourable risk-to-reward on your trade.
3. Buy the strongest stocks out there
When you trade US stocks, there are thousands of stocks out there and you will be easily overwhelmed and spoilt for choice.
You can rank the stocks according to the rate of change over the last 50 weeks to find the strongest stocks. Rate of change measures how much a stock has increased in price over a given period. This is a tip that I got from Nick Radge.
Rate of change over the last 50 weeks measures how much a stock has increased in price over the last 50 weeks. Once you have ranked the stocks, then go with the stocks that have the highest rate of change value.
In other words, you’re picking the strongest stocks out there. And the reason for this is because stocks that outperformed the market over the last 6 to 12 months tend to continue to outperform the market in the near future.
This is why you want to focus on strong stocks, not weak stocks. And one way to define strong stocks is to rank them according to their rate of change.
4. Don’t use a fixed position size
Why is that and what do I mean by that? For example, let’s say you have a stock A that’s trading at $1,000 and stock B that’s trading at $10. If you blindly buy both stocks in equal quantities, you’ll end up buying 100 shares of stock A and 100 shares of stock B.
What’s going to happen is that you’ll be overweighted on stock A because you’ll be having like $100,000 worth of stock A in your portfolio, whereas stock B will be worth $1,000, a much smaller amount of money.
This is why you want to use proper position sizing when you trade stocks. It’s very simple. You can allocate your capital equally among different stocks. Let’s say you have $100,000 and you want to trade 10 different stocks.
This means that each stock should not be worth more than $10,000 in your portfolio. For example, if stock A is trading at $1,000, you’ll only buy 10 shares of stock A.
Let’s say stock B is trading at $100. You’ll take the $10,000 to be allocated, divided by $100 and you’ll get 100. This means you can buy 100 shares of stock B.
This way, your portfolio exposure is more evenly distributed among the different stocks out there instead of being heavily skewed towards certain stocks because their share price is much higher. Does that make sense?
5. Plan for your exit
When you buy stocks, you enter a trade only when there’s a valid trading setup according to your trading plan. Similarly, you’ll also want to plan your exit ahead of time.
Regardless of whether you’re exiting based on trailing stop loss, or based on a certain key level, or based on fundamental news, you want to plan all these ahead of time. Because if you don’t plan your exit, you’re going to be happy if a stock goes up higher but panic when the stock collapses and you’ll sell at the bottom right before a rally back up higher.
The key thing is to plan your exit ahead of time. If you’re going to go with a trailing stop loss, then define what trailing stop loss you’re going to use. If you’re going to capture a swing, then identify ahead of time which levels you will exit the trade at.
6. Wait for the price to close before exiting a trade
Based on my research and backtesting, I realized that for stocks, especially for those of you who trade on the daily timeframe or higher, it makes sense to wait for the closing price before you exit a trade.
For example, let’s say you have a stop loss at $100, you want to make sure that the stock price has closed below $100 for the day before you exit the trade. Because what happens often is that the stock price intraday could dip below $100 and then close above $100 for the day.
If you were to simply use a stop order to exit, you will get stopped out of the trade prematurely. My suggestion is to wait for the price to close below your stop loss level first before you exit the trade.
Based on my research, more often than not, the price will dip below your stop loss level and then bounce up higher and you would have remained in the trade.
7. Don’t get carried away
We’re experiencing a huge bull market since 2008, 2009, it’s a very long bull market. Along the way, we had dips and corrections, but over the last one or two years, it has been relatively smooth sailing.
The stock market is just grinding up higher consistently week after week, month after month with very minor corrections and it’s very easy to get carried away to think, “Oh, I’m a stock-picking genius and I’m good at trading, I’m good at stock trading.”
Trust me, you’re not. It’s just because the overall sentiment in the market is bullish and markets are hitting up higher smoothly over the last 12-18 months.
Don’t get carried away thinking you’re the next top shot trader because this happened to me early in my trading career when I started dabbling in stocks.
I remember that I was trading the local Singapore stock markets and I had about $20,000 and all my capital was used up to buy all the stocks. And the stock market was still going up higher and I had no more capital left to deploy.
What I did was I opened a margin account with my broker to get more money to buy stocks and I continue buying up to my margin limit. My broker even commented, “Man, Rayner, you have the Midas touch! Every every stock that you buy and is hitting higher!”
And I thought, “Wow, I’m good at this!” What happened next is that the correction came during the Euro debt crisis and all my open profits were wiped out. And not only that, the losses even ate into my initial capital.
I lost about five figures in open profits and it even hit my trading capital. I went into drawdown and I had to sell all my stocks out there.
At this point, I kind of realized that I shouldn’t have gotten carried away—I wasn’t good at stock picking, I just happened to be with the flow of the uptrend. When a correction came, I did not have proper risk management nor a proper exit plan.
I pretty much got stopped out of my position and I lost money that was a lot to me at that time.
That’s my last tip for you—don’t get carried away. Easy markets don’t mean that you’re a good trader. It’s just an easy market and almost everyone with both eyes closed can pretty much make money in the bull market, when the market is going up consistently.
Let’s do a quick recap for you.
- Trade with the long-term trend, you can use the 100-week moving average as a trend filter
- Trade from an area of value, like support, swing low, moving average, trendline
- Buy the strongest stocks out there, by ranking them according to their rate of change over the last 50 weeks
- Don’t use fixed position size because different stocks have different volatility and different value to it
- Plan for your exit number
- If possible, wait for the price to close below your stop loss level or trailing stop loss level before you exit a trade
- Don’t get carried away in a bull market
With that said, I wish you good luck and good trading. Stay safe and I will talk to you soon.