Lesson 2 – The Best 50 Trading Tips
Section two – Trading Rules
Tip 1 – Buy breakouts
No doubt some “experts” will dispute this method of entry but again I rely on experience and have total belief that being a “Breakout Trader” brings about the best and safest method of entering a stock. At very least if you buy breakouts you are at least buying a stock that is rising in price at that time. The trick here is to have a clear idea of the resistance required to put the odds in your favour of a successful breakout.
Tip 2 – Never pre-empt the breakout
Pre-empting the breakout is a two edged sword, great when it works and costly when it fails. The main issue when attempting to pre-empt the breakout is that often when the stock does not breakout the volume completely dries up and if you have a decent parcel it can be very difficult getting out. If you do pre-empt the breakout and the stock does break, then it can be very profitable and stress free.
You should never attempt pre-empting the break when you are a confident and successful trader.
Tip 3 – Study the “On-Balance-Volume” indicator
Any good stock market software will include computer indicators with some having up to three hundred. I have found most of these indicators to be of very little practical use. However I have also found the on-balance-volume indicator to be absolutely invaluable.
This indicator measures whether the buyers or the sellers are in control of the stock price.
Tip 4 – Look for profit taking target areas
Prior to entering a trade you should look for potential profit targets. These targets are best placed based on previous data points. These data points might be a gap in the data, a previous high or a clear area of resistance. Never set a target based on a dollar value or a percentage. If you set profit targets at say 15% you negate the potential for making huge gains.
Prior to entering a trade you should look for potential profit targets.
Tip 5 – Always have an exit strategy
In a Bull Market consider using a 34/55 day dual moving average crossover as your trailing stop loss method. Having been involved in several bull markets I have no doubt that the most consistently profitable method of trailing a stop loss is by the use of implementing a 34, 55 day moving average crossover.
Plan your exit at the same time as you plan your entry.
Section Three – Rules for trading a stock
Tip 1 – Buying a stock – Technical Factors
Ask yourself the following questions before you place any purchase orders:
- What is my buy signal? I have a “list” of recognized buy signals including Ascending triangles, Darvas Boxes, Higher High, Higher Low and 30 day breakout.
- Is this one of my recognized buy signals? (as above)
- What is my confirmation signal? I look at the on-balance-volume indicator with every trade.
- What is the market depth? Ensure that there are more buys than sellers, wanting more stock than that being offered.
- What price will I pay?
- How many will I buy?
- Where is my stop loss?
- How much am I risking?
- What is my breakeven point?
These issues are of key importance from the technical perspective. If you are satisfied with your answers to these questions you should also consider the following fundamental factors.
Tip 2 – What is the company’s primary industry?
Given the nature of companies in recent years it can be difficult to determine the activity of a company simply by its name. Companies change activity from Telco to uranium miner to gold prospector at the drop of a hat. Before investing in any company it would be prudent to check the company profile and perhaps its last news release. Just as you may have an aversion to investing in a particular sector you may have an aversion to investing in specific stocks.
A personal rule of mine is that I will never knowingly invest in airline companies.
Tip 3 – Check dividend dates
At some stage you will have a stop loss placed and a dividend will be declared, causing the price to fall to or below your stop loss level. To avoid being stopped out of a good dividend paying company unnecessarily you may need to adjust your stop by the amount of the dividend.
If you are placing a “stop loss” you must adjust that stop prior to the stock trading “ex-dividend.”
Tip 4 – What is the current trend?
Adjust your trading plan to suit the current market conditions. No one single trading plan can suit all market conditions. You might trade higher volume when the market is bullish and lower volumes in a bear market. If one sector in particular is strong, a larger portion of your investment dollars should be in that sector.
Back off in a bear market and full throttle in a bull market.
Tip 5 – Liquidity
Much is said about liquidity and it needs your attention. You may need to liquidate stock in a hurry but if you have no buyers you are in trouble. Of course liquidity in a stock may dry up after you have made your purchase.
My rule of thumb is to never buy more than 10% of the average volume of the last 10 days volume. If over the last ten days a stock has traded an average of 2 million shares then I will limit my purchase to 200,000 shares. Of course this is usually only applicable in small caps and micro caps.
Tip 6 – How do I intend exiting this stock?
Prior to purchasing a stock you need to give serious consideration to how you will sell the stock. A “trailing stop loss” is clearly the preferred method and is usually done by using moving averages to trail the price. I have mentioned using the 34/55 day dual moving average crossover as one method of utilizing a trailing stop. This is particularly useful in a bull market. My other preference is to use prominent data points, placing my stop loss a “tick” below the most recent prominent low.
Use a “prominent data point” as a place for a stop loss rather than computer indicators such as an ATR. (Average true range).
Tip 7 – Re-entry rules
The most frustrating aspect of trading is getting stopped out of a trade, then seeing the trend continue upwards. Usually when this happens, traders give up using a stop as they “clearly don’t work”. Get used to the fact that in this market, nothing works all the time. A stop is necessary in preserving your capital. This issue is not that you got stopped out, it is the fact that you did not get back into the stock when the trend resumed.
A re-entry rule should be part of your trading plan – it may be as simple as buying the break of a new high.
Tip 8 – Add to a winning trade
Trends in quality stocks tend to carry on for several years. In the early stages of your trading career you will be tempted to take quick profits when they present themselves. To take advantage of these trends you need to consider adding to a winning position rather than selling far too early. To add to a winning position you need to look for another buy signal such as a new high price. My preference is to purchase half as many as your first entry.
If your first entry is $10,000 then add another $5,000, if your first entry was 15,000 shares then purchase another 7,500.