For some people, trading stocks seems to be a quick way in generating huge returns in a very short period of time if done right. But for others, trading is also the quickest way to lose all your invested capital. I had a chat with one of my readers on email who happens to be an active trader for 20 months and shared his insights about stock trading.
If you’re a stock trader, maybe you have a keen understanding of all the technical charts and can easily identify trading patterns even if your eyes are closed but the question is, do you have the proper mindset and discipline when it comes to stock trading?
One of Warren Buffet’s famous quotes is this;
Rule # 1: Never lose money. Rule # 2. Never forget rule # 1.
William O’Neal, founder of Investors Business Daily also said this;
The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.
I’m not saying that trading stocks isn’t a good idea. In fact, there are many investors who successfully pulled off this strategy. You just have to learn a basic mindset when trading.
No one can control how the market performs but you can control your money.
It’s basically saying that when you do stock trading, you have to truly understand the real risks involved. By understanding the risks, you formulate a money management strategy that applies to your risk profile. What this money management strategy do is to tell you how many stocks you should buy and how much money you are willing to lose on the trade if it doesn’t go in your favor. The key thing to always remember here is capital preservation. You don’t want to lose all your money in a single trade do you?
The goal of stock trading is simple; To have more winning trades than losing ones. So to preserve your capital, don’t think of how much money you can gain but think on how much money you can lose on that trade.
How would you do this? Well some traders define their risks at 2% – 3%. High risk takers may go as much as 5%. This is how much of their money they are willing to lose on their trades.
Let’s say you’re a conservative trader and you define your risk to be 1%. Now you buy a stock that’s worth 5 pesos for 1,000 shares. 1% of 5 pesos is 0.05 pesos multiplied by 1,000 is 50 pesos. If the stock drops to 4.95 pesos, you sell because you have reached your risk threshold. By defining such risk threshold, you effectively manage how much you lose and you become a disciplined trader.
Here’s an advice from one of my anonymous traders on the dangers of stock trading;
Trading stocks is one of the best ways to build wealth in a short span of time but it can also be one of the fastest ways to lose money. So invest in a lot of knowledge first before going into trading. If you’re not ready, then go long-term and as you progress and acquire knowledge, then shift to stock trading if you feel you’re confident enough to take on higher risks.
P.S. If you want to invest in the stock market and want an easy guide on what companies to buy, I suggest you join the TrulyRichClub now to guide you to become a smart investor and discover how it can teach you attain financial freedom.
P.S.S Do you want to learn short-term trading? Join PinoyInvestor for FREE to learn technical analysis and get Technicals Talk reports, Stock Rankings and Daily Market Outlook reports.