7 Key Tips for Successful Trading

stock ticker

With many people being forced to stay inside over the past few months, and many people not making as much income as they were, a new (old) trend has emerged – day trading stocks. 

Individuals put their life savings on the line in hopes of the massive return, like the trader who made over a million in two days.

The stock market has been ripping to all-time highs, leaving new traders with a type of euphoria that keeps them coming back day after day. 

Many people can trade stocks, but are they actually money? 

Successful trading is an art. Keep reading to learn seven essential day trading tips that will help you actually make money and get on the right side of trades.

1. Keep Your Bias in Check

Keeping your bias in check is an extremely difficult thing to do for amateur day traders. Part of the reason why is because of the ease of information in this technological age – with instant access to information, some people get hung up on one particular economic event and forget to consider the rest. 

Take, for example, when the pandemic hit the United States in March, the stock market dropped by over 30 percent, many investors assumed a bearish stance. But, as time went on, the stock market climbed it’s way back to all-time highs leaving the bears in the dust. 

So, was everyone wrong about being bearish? Not necessarily, and here’s why:

As a stock trader, your mission is to make the best-educated decision – taking into account all the information at that moment. The most crucial part is “at that moment,” because information can change in a matter of seconds, and you need to have the ability to digest that information and adjust your bias accordingly. 

As more information came to fruition regarding the state of the economy and leading stock market indicators began to turn positive, most trading pros and news sources were still holding a negative bias. 

The same holds true with individual stocks. Look at what happened with Tesla, the luxury electric car maker. For years some investors were screaming, “they will go bankrupt,” and “they have no market.” These types of investors never changed their bias, even as Tesla’s financial situation began to turn, and they were selling more cars than ever – leading them to lose millions short selling the stock.

2. Stick to the Plan

It is a normal human quality to feel the urge to follow the masses when making a decision. The “herd mentality” has been researched for hundreds of years. One of the first examples of this can be seen with Adam Smith’s “The Theory of Moral Sentiments” from 1759. 

In the book, Adam Smith references “motor mimicry,” which is best described when people cringe when someone else gets injured – it’s a type of shared emotion. 

Bandwagon, cascading, herding, whatever you want to call it, people like to follow other humans when making a decision – this is especially true when it comes to the financial markets. 

When new traders see others lining up to buy apple in premarket, they are most likely to follow based on the reasoning behind the other traders. They are not fully comprehending why they are buying the stock, they just know everyone else is. This type of mentality has led many investors to lose money. 

So should you short Apple instead? Not unless it fits the criteria you outlined in your plan. You plan should consist of:

  • An entry point
  • An exit point
  • and a stop loss

Having a plan keeps you disciplined. Discipline is one of the most challenging things to learn, but it is what separates the trading pros from the amateurs. 

Beware of FOMO, or fear of missing out, when it comes to day trading – many times, it is a “herd trap.”

3. Manage Risk

Managing risk is one of the best day trading tips out there. It doesn’t mean to buy a few puts here and there, or maybe short a stock to diversify your portfolio.

No – managing risk needs to be aggressive and done on every single trade. Because as a day trader, your main goal is not to lose money. Making money is easy in the stock market, not losing it is another story. 

Protecting your capital in the financial markets is vital. A bad week can completely wipe out your account if you are not prepared for it. 

You can think of stock market corrections like a hurricane – there may be signs that one could hit, but you don’t know until it does. Hurricanes are especially damaging to those who are not prepared for it – the same theory applies to those who don’t manage risk in the market. 

Managing risk becomes second nature after you see the positive effects it has on your portfolio.

Part of managing risk also comes from the research or due diligence you put in before executing a trade. You should feel confident knowing the company you are investing in because you researched every aspect of the company to understand what has been driving the stock, and what will continue to drive it in the future. 

4. Never Stop Learning

This isn’t just a lesson for trading the stock market. You can apply this to everyday life –

Never.

Stop.

Learning. 

As Socrates once said, “To know, is to know that you know nothing. That is the meaning of true knowledge.” 

There is always going more to learn when it comes to the financial markets. They are some of the most advanced systems in the world that encompasses so much information like:

  • Inflation
  • Gross Domestic Product
  • Currencies
  • Earnings
  • Future Earnings
  • Cash Flow
  • Consumer Spending
  • Supply & Demand
  • Unemployment 
  • Economic growth 
  • Government Policies
  • Imports & Exports
  • Sentiment
  • Technical Factors
  • Fundamental Factors

These are some of the more significant factors that affect the financial markets. However, there is a lot more involved than meets the eye. One news event can change the sentiment of a market in a matter of seconds. 

The fact that there is so much information being absorbed by the markets that influence the prices makes learning every day a must. 

Warren Buffet, one of the most successful, if not the most successful, investor of all time, says he spends up to 80 percent of his day reading and learning new things.

5. Don’t Skip Your Due Diligence

Doing your due diligence (DD) consists of researching all the aspects of a company before making a buying decision. Failing to do your DD on a stock could cost you a lot of money.

A few items you should take a look at while researching include:

  • Financial Reports
    • Income statement
    • Balance sheet 
    • Cash flow
  • Management
  • Valuations
  • Competition
  • Strengths & Weaknesses
  • Threats & Opportunities 
  • The Industry
  • Stock History
  • Expectations
  • Recent News

These are all very important to comprehend as they will give you a better understanding of the company and what is driving the price.

Increasing revenues can be a good indicator of a growing company – It’s even better if they are increasing profit margins and lowing operating expenses along with it. These are signs of not only a growing company but one that’s becoming more efficient.

6. Cut the Losers

The truth is, not every stock you pick is going to do exactly as you predicted – that’s just part of the process.

Nobody knows precisely where the stock market is headed, and if they say they do – that’s not anyone you should be listening to. Everyone wants to think they only pick the winners, but that’s just not the case. You will save a lot of time and money learning to cut the losers and ride with the winners. 

Keeping a tight stop loss is an effective strategy for successful day trading. This way, when the stock drops past the stop-loss price that you set, it will automatically sell it for you. Having stop losses set is critical when day trading because it will give you peace of mind knowing you won’t lose it all and allows you to focus on making money.

7. Utilize Technology

Financial technology (Fintech) has come a long way in the past few years, allowing users to gain access to information in ways that were not accessible before. 

  • Instant access to news 
  • Digital trading 
  • Copy-trading
  • Artificial intelligence
  • Machine learning 
  • Options scanners

These are just a few of the technologies that have been developed in the last few years that are making significant changes to the financial markets landscape. 

Having instant access to the news keeps everyone on a level playing field. Keep in mind though some sources are more reliable than others. 

Many investors are utilizing copy trading now as well, which involves copying the strategy of a professional stock trader. It involves entrusting your money to the pro trader and allowing them to do the work for you – your buying and selling will mirror theirs just in different amounts.

For example, say you choose to participate with $5,000. The pro is trading with $50,000 and decides to invest $1,000 into Apple stock – this means you would also be investing in Apple stock, but instead of investing $1,000, it would be $100.

Want to Learn More About What Succesful Trading Takes?

There is too much information and analysis out there on the stock market these days – making it hard to decide for yourself. Developing a plan and sticking to it is the best piece of advice for successful trading. It takes time to learn how the financial markets work and create a trading style that works for you.

For more information on stock trading, check out the rest of our website! 

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