Understanding Stock Trading Means Knowing Your Tolerance
When you learn to trade stocks, the most important thing to building a profitable stock portfolio is disciplined buying. This means you can’t chase stocks that are exploding upward, but rather buy them as they gradually settle below their price-trend levels on normal pullbacks. Patience is the key to Understanding Stock Trading.
Patience is a key skill to develop when learning to trade stocks. A disciplined buyer steps into positions in small steps. Rather than hoping that the timing is perfect and leave it to chance, a disciplined buyer will break the purchases into thirds.
Companies that have the potential for explosive growth generally come with a higher degree of risk. Conversely, larger-cap stocks, also known as blue chip stocks, may offer steadier performance, but the returns are typically smaller. It’s important to have a portfolio that lets you sleep at night, though, and reviewing stock charts for past performance can give you an idea of how volatile a stock might be in the future.
A complete understanding of stock trading also entails an understanding of alternative investment options such as cash, mutual funds, bonds, options, and tangibles. It is important for the average investor to diversify by having a portion of his portfolio in these investment vehicles.
A good strategy is to start by purchasing a third of the desired position. To ensure that the remaining shares will be able to be purchased at a reasonable price in an up trending market, place a 5-10% \”buy stop\” order that is \”good until canceled.\” This order will execute if the market breaks out, but you will be able to take advantage of any further dips in price.
If a holding experiences a 5-10% pullback from the initial entry price, it is often a good time to add another one-third of your investment capital to the position. At this point watch closely and invest the final third if the position moves to profitability. Conversely, a loss of 15% or more could indicate that it is time to sell the position to limit losses.
Decide up front how much you are willing to pay and how much you can afford to lose if things do not go well. If the worst happens, it is important to preserve as much capital as possible. Remember that this may require that you overcome the desire to avoid loss.
When learning stock trading, forget about trying to find strategies to uncover the next hottest stock. Successful stock trading is much more dependent upon a full understanding of your own risk tolerance and the consistent execution of disciplined trading practices.
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