PATIENCE - If there is one thing you must learn, it's patience. Good things come
to those who wait, be it low buy prices or high sell prices. Sometimes if you
had only waited, you could have sold higher or bought lower. Have patience, it's
without a doubt one of the golden keys to making money in the stock market.
REVERSE PSYCHOLOGY - If patience if the golden key to trading, then
the silver key is doing things opposite from the rest of the market. You want to
buy when the average investor is selling and driving the price down. And when
wonderful news is driving a stocks price higher, you want to sell your shares
at the over inflated price. Buying when stocks are falling and selling when they
are moving into higher ground is one of the hardest things to learn [and do] when you
first start trading. We don't have the luxury of holding our stocks for years to
help iron out the little highs and lows. We live off the little highs and lows.
Buy when there is blood in the streets!
EMOTIONS - The stock market is very good at playing on your emotions. In order
to be a good trader, you must look at the market in a cold, hard way. When the masses
are selling in a panic, you must stand fast or step up and buy. Remember that the market
is made up of emotional sheep buying and selling in waves - you must be the cold, cunning
and calculating wolf looking over the heard for your kill. Don't panic sell and don't
buy on hysteria.
BID/ASK - If you aren't aware that stocks are sold to you at one price and bought
back at a slightly lower price, the difference being the spread, then you may be in
for a very big surprise when you go to make your first trade! Trade on stocks with
small relative spreads, and spreads that are well controlled (such as on the NYSE
board).
MARKET ORDERS - Don't use them unless you have to, and DON'T EVER place a market
order for a stock at the opening of the market, or when a stock is making new ground fast (such
as during a positive mention on CNBC). Putting in a market order in the first 10 minutes
of the market is a sure way of paying the highest possible price for your stock, because
as all the built up orders from the previous day go through, it lifts the stock prices
for a few minutes. You can be pretty sure that you order will go off at the high of the
day this way (but keep in mind it's sometimes handy to sell during this time).
STOP LOSSES - These are almost as bad as market orders. Stop losses are a sure
way of selling at a loss. We only recommend using them when you are "in the money" and
would normally sell your stock, but want to retain a slight possibility that it might
continue to go higher. Stops can also be used to sell your stock a little quicker in
volatile markets, as stops seem to taken a little more seriously than market and limit
orders when bid prices are being changed rapidly.
BUYING LOW - Sometimes the best way to buy low is to put in a limit order for a
stock at "a price you'd love to own the stock at". Let's assume for a moment that
the stock you want is trading at 20 dollars, try putting in an order at 18
1/2 and wait it out, what do you have to loose? You never know when you might hit the low for the day that
way. It's far better than putting your limit order at 19 7/8, only to find it
crashed past that, filled your order and continued down to 18 3/8. You'd be
surprised what an effective way this can be to both buy and sell. When you get
your "dream" price, it's a great feeling.
SELLING - Selling is actually harder than buying in many ways. If you are
trading a stock, then decide what price you want to sell your stock at as soon as you
buy it, so when that price does come along, you'll be ready to move. Using a GTC order (
good till cancel) is also a good way to sell stocks once you own them, since many times
a stock will move up for just seconds - not even enough time to get to the phone, let alone
place your order. But if it's "on the books" when the stock makes a quick run up, you'll
be right there selling it. A good way to calculate your sale price is based on how much
you'd like to make for the day. $500, $1000, $5000, etc. Then calculate back the price
you need to sell at and stick to it.
FREE LUNCH - If there is a free lunch in day trading, it's picking stocks that are
making new [medium trend] highs to trade with. That way if you do get in at the wrong
point, there's a much better chance that your high buy will turn into the next low buy as
the stock moves higher in its overall trend. This is one of the only safety nets you
have in day trading, when combined with patience and some extra cash reserves.
IF YOU ARE WRONG - then you are wrong. Don't try to justify a bad trade by convincing
yourself it will turn into a good trade. If you buy on the high side, then sell at break even
and buy back in on the low side. Talking yourself into believing that your mistakes are
actually wise moves in disguise is very costly. Be professional enough to spot your mistakes
and move on - think of it as day trader insurance.
PROFITS AREN'T AS IMPORTANT - as your capital. If you miss out on some profits,
that's okay, you can always find another stock to buy. However, if you lose
a big chunk of your trading money then the game is over. Protecting your trading capital
is your number one mission, followed, of course by increasing it.
DON'T GET GREEDY - Greed and fear drive the markets and for the most part drive
the average investor to making mistakes. Sell with good profits, but don't get too
greedy. A savvy trader once said, "Pigs get fat, hogs get slaughtered".
BIG SWINGS - Big moves up are sometimes followed by big moves down and visa versa. Sell on abnormally
large moves to the upside and buy on abnormally moves to the down side. They are
generally out of character of the stock and can many times be followed by a "snap back"
on the stock. Knowing your stock's trading habits can be very helpful.
HOT STOCKS - Stocks that are hot move great, but nothing lasts for ever. If you
buy a stock for a big, quick gain and find that the stock has "lost its heat", don't
allow your money to be dead (unless you are looking for an investment). Sell and move
on, don't justify your mistakes - it tends to be a costly justification process in the
long run. Others in the stock for the hot ride will start to bail out when as
the stock cools off and looks like it's not capable of making "hot moves".
JUSTIFICATION IS COSTLY - Don't hold a losing stock to justify your original
purchase. If you make an incorrect buy or end up with a stock that is falling when you
thought it would climb, handle those mistakes quickly - do not be tolerant of stocks
that are costing you time and money - get rid of them!
SUDDEN MOVES UP - Be very careful buying stocks that have just made sudden moves
up. Many times they are following very closely with sudden profit taking.
TIME TO BUY - One of the best times to buy is when a stock is going down on
low volume (with no news) as compared to recent increases on higher volume. This suggests that
the selling is lighter and that the holders of the stock that are going to sell have
finished selling and the rest are holding. The sellers of the stocks then may come
back into the market when they see the price stabilize. It's also not a bad idea
to sell on high volume on the way up, as this usually creates abnormally high
prices that cannot be maintained very long.
SIDELINES - Remember, you can't take advantage of market dips if you are
already in the market. It's better to be out of the market more for day trading
than in the market. This will allow you to get in and out with profits fast and be
on the sidelines should dips occur. Try to be out of the market more with your
trades and in the market more with you investments (as long as they are good ones).
DAILY VOLUME - Do not day trade in thinly traded markets, or on stocks that have
very low volume. You may find you can't get out of the market as timely as you think.
IPO - More IPO's trade down from their initial offering than go up. Buying IPO on
their initial (or close to their) offerings is very risky. Watch them and try to
buy them when they trade below their original slated offering prices (not the price they
come to market at). When the IPO is good and gets hit with heavy profit taking, it can be
a great buy and return to normal levels quickly.
More to come...
Using bollinger bands in day trading
paying too much for spreads
Relative strength
CNBC and the market
Over reaction
Buy when there is blood in the streets - a lot of blood!
Buy stocks that are in the news a lot
Do not try to day trade stocks with small daily moves
The more money you have the less movement you need - don't get greedy
Saving your capital is more important than making money
Deciding your selling point is more important than you buying point
There is no down side to taking profits - you miss gains in 1000's of stocks every day.
Do not short
Do not use stop losses as protection
Buy with limit orders with no restriction
Check market cap and look for reverse splits
Call the company when possible
All news you hear is in the price of the stock in most cases
Learn technical analysis of charts
Return to TOAD 101