So you wanna learn the tips on how to trade stocks online? The list of tips and ideas can be a long list. But the most important thing is that you know what are the core skills in order to become a successful trader and investor. Let me tell you that the secret of success in online trading can be summarized into 3 major techniques:
a.) Picking up the right stocks.
b.) Assessing profitability and risk as well as applying money management principles before investing.
c.) Discipline to stick to the trading rules or plan.
Let’s discuss more about the importance and objectives of those techniques:
1.) Picking up the right stocks = stock can either be classified according to the following:
a.) Price
b.) Reputation
c.) Sector
“Price” is simply what you might know as the stock price. It is often expressed as the amount of dollars per share. “Reputation” are the fundamentals behind that stock like how the company is performing overall or simply the reputation of the company in the sector it belongs. “Sector” are classification of stocks according to industry type, for example IT stocks, oil industry, food industry, etc.
If you are buying stocks which is traded at $10 per share and you would like to buy 500 shares for that stocks. You need to invest: $10 per share x 500 shares = $5000. Some stocks are priced cheap (less than $1 per share , sometimes called as “penny stocks” for less reputable stocks) some as priced high (reputable stocks such as Google). The good rule of thumb is to pickup cheap stocks which have higher chances of long term success. Reputation of the company is important. Remember that Microsoft did not actually started out as a penny stock. It’s stock price on the end of its first day was around $28.
Of course to profit from your investment; you need to buy cheap and sell it at a higher price. The only challenge is how you will be able to pickup cheap stocks that will have higher chances of increasing it’s value over time? You need to read this guide on stock picking strategies. Once you are ready, you can start buying stocks online provided you have read the other techniques below.
2.) Assessing Profitability and Risk- Money Management aspect = This is often the most important aspect. Picking up the right stocks does not guarantee long term success. What is equally important is to apply risk and money management. An important tip that you should do before investing real money in stocks is to do paper trading. This is simulation trading that lets you test your risk management and money management skills along with your trading plan. Since losses in trading are inevitable; below are some golden rules:
-Cut your losses short and let your profits run. – you can implement trailing stop techniques This will let you cut your losses immediately while maximizing profits.
-Diversification – some stocks belonging to a certain industry sector might not perform well due to some recent bad news, if you do not diversify then your overall net profit will also be affected. By diversification, you can minimize this risk by having stocks in your portfolio belonging to different industry sectors. Putting all your eggs in one basket is risky.
-Risk management- Be knowledgeable behind the math of stock risk management and portfolio risk management, these are helpful in reducing the risk of any stock investments. If you are trading options, this type of investment is considered to be riskier than trading ordinary stocks, futures or forex. You need more than a simple risk management tool to successfully trade options. For example, you need to refine your strategy with options tools available at TD Ameritrade. You should also consider the differences between investing in the forex market online and the traditional stock market. Trading in Forex requires a different strategy.
3.) Discipline to stick to the trading rules or plan = every online stock trader will have a unique method in his/her approach to trading. This method or plan should be formulated and tested in advance before trading real money. There are different ways you can come up with a plan:
a.) If you are a long term stock investor, you might want to take a look at dollar cost averaging method or lump sum method.
b.) If you are a high risk profile investor and aiming to maximize your profits in every move you will make, you might take a look at Kelly Criterion Investing strategy.
d.) If you are a short term investor, you might need to know the most important technical analysis method of stocks such as support and resistance trading and moving average. You need to stick to your rules while you trade. This will ensure that your results are consistent.