I would like to go though some of the basic stock trading strategies that have been proven to work for myself and many other investors. Most investors don’t have the capital to buy hundreds of stocks the way a mutual fund does. Therefore steps must be taken to minimize your risk and maximize your profit.
The first thing you must do is master your emotions! It is easier said than done. When you are thinking with a calm and rational mind you will make better trading decisions. It took me a while and several thousand dollars to learn this. Secondly, you must diversify what types of stocks you own in your portfolio. I don’t only mean the number of stocks, but diversifying the sectors you hold. Buying ten different solar stocks is not being diversified. Depending on your capital, it is generally accepted to have at least 10 different stocks in your portfolio.
Buy stocks that you know! This is especially true when you are starting out. The first stocks I purchase many years ago were Chrysler (when it was a good stock) and Mcdonalds. I bought both of these quality companies when they were going though some trouble of some sort. One of my best stock buys ever was Waste Management, they were going though some scrutiny by the government at the time that drove the stock price way down. We are not going to stop making garbage, so I figured correctly that the company was going to be fine in several years. And it was.
Another basic stock trading strategy is to know when to admit that you are wrong. This was very hard for me to do as I am a perfectionist. But it is a crucial lesson. If you keep holding a stock as it continues to go down and down, you may end up losing a substantial some of money. A basic principal is to cut your losses short and let your profits run.
Know when to sell a stock! This is a crucial point. Most everyone focuses on when to buy, but not when to exit a position. When you have a stock which is showing a good profit, make sure to place some stops below the current price. This is in case some big news comes out on your stock and you may lose all you profit. The exact placement of the stop depends somewhat on the price be it a $75 stock or a $25 stock. But it should be placed out of the range of the normal daily volatility in a stock. By that I mean for a $75 dollar stock, a good stop may be in the $68-70 range.
A final basic trading strategy would be to sell a portion (maybe half) of your holdings in a stock that you have a good profit in. That way you can lock in some profit. With proper money management and controlling your emotions, it is very possible to have good consistent profits in the stock market even if you are correct 50% of the time.