Editor’s note: Many regular readers of The Money Principle have probably noticed that lately I’ve been writing much more about earning money, making money and investing than about paying off debt and money management. This is not because I’ve forgotten about all my readers who are paying off debt; quite the opposite, I’m preparing a big surprise for you. I’ve been writing about making money and investing because this is what I’m working out.
‘Why is she bothering?’ – you may think. ‘She just needs to read some of the great books written on investing and go regularly to some of the investing websites.
Well, my dear reader, to this I’d say that I’m working it out because things have been changing, I believe. I won’t go into detail but some of one of the changes is that there are many self-investing platforms to choose from. Hence, two things have become important: to be able to select the one(s) that suit you and to be able to refocus your knowledge.
This is why, when I was approached by Gaspar d’Orey, CEO and co-founder of Zercatto, with an offer for a guest post I said ‘heck yeah’; I’d love you to write one.
This is the post Gaspar wrote for The Money Principle. It sets ten golden rules for investing and trading stocks and shares. I really like #9. Enjoy.
How do experts generate high returns? What differentiates the 5 percent that invest in the stockmarket and make money, from the 95 percent that don’t? And how can people new to the investment world start making money on their investments from day one?
If you’re looking for answers to these questions and want to invest successfully in the stockmarket, here are my ten golden rules you should follow to trade like an expert.
- Stack things in your favour
The stockmarket is not about luck, it’s about research – that might sound boring, but it’s the truth. If a stock takes your interest and you think it will rise, dig a little deeper before putting your money where your mouth is.
What’s the economy doing, and what’s happening in that particular industry? If everything is on the up and increasing over time, you’ve got a great prospect on your hands.
Put in the work before you part with the cash and you stand the best chance of making a profit on your investment.
- Cut your losses short and let your profits run
This is a common mistake made by investors new to the stockmarket. When you’ve made a bit of profit, it can be tempting to sell the stock as quickly as possible to secure your winnings.
But don’t! Let your profits increase and instead sell when you’re losing money. Establish stop orders (which you should never cancel, no matter how good an idea it seems at the time) and learn to use trailing stops so your profits can run and run.
- Have written rules and stick to them
To get ahead in the trading game, you need to have a strategy.
It should include three crucial elements at the very least: when to buy, when to sell at a profit and when to sell at a loss. And when you’ve established yours, stick to it. You’ll want to act on your gut instincts when you’re trading, but remaining consistent and logical is an absolute must.
- Let the market tip its hand
Whatever anyone says, no one knows all there is to know about the markets – not really.
But by sticking to a few simple rules, you can minimise the risk to your investments and come out on top. First, don’t invest when the market is going against you. Only put your money in when your chosen stocks have taken off in the way you want them to. Next, make your purchases on the breaks of the most recent peaks if you can. And to give yourself the best chance possible, wait for a breakout immediately followed by a pullback.
- Always let the price force your action
A simple one, but it needs to be said. Set targets for buying or selling prices and always stick to them. That way, you remain in control of your finances and have a predetermined strategy for when things go wrong (or right).
But never buy or sell just because the chart suggests it’s a good idea or the indicator gives you a signal to do so.
- Don’t be a sheep
Don’t follow the crowd, follow the experts. In all likelihood they’re only travelling in that direction because they saw someone else heading there and wanted to join the party. And it’s not going to be a profitable party, so don’t waste your time going.
The market gets into a state of panic fairly regularly, setting off a crazy period of selling simply because people tend to follow the crowd. As tempting as it might be to follow, do the opposite to everyone else – people are usually wrong when they make decisions in haste.
- Never add to a losing position
I’ve heard a lot of investors say that if the market isn’t working in your favour, you should try to cut your losses by following the “averaging down” rule which advises you to buy more stock when you’re in a losing position.
But this makes no sense. If the stock value keeps falling , you’re almost certainly going to lose even more money as it keeps dropping and will have heavier losses to bear in the long run so don’t do it!
- The market reaction to the news is more important than the news itself
Markets react based on what they expect to happen in the news, before that news is confirmed. They hedge their bets and wait, but they make mistakes.
The important thing is not to panic when you’re waiting for news. Let the market reaction guide your actions once the news is released. As Warren Buffett put it: “Be fearful when others are greedy, and be greedy when others are fearful.”
- Do not try to predict the future
Probably the most important point I want to make, and maybe one of the more obvious ones too. But you’d be surprised how often it’s ignored.
Whether you’re investigating an existing trade or researching the viability of a new one, there’s really no point trying to guess what the market will do next – you’ll just be wasting your time and energy.
If you want to develop a trading strategy to work towards in future, try thinking up different possible scenarios and what you’d do on each occasion.
- If the market doesn’t do what you think it should, get out
Sometimes investing feels like a David vs. Goliath-style battle. But the market doesn’t really have a weak spot – it’s too big to fight against. So if you’re in a situation that doesn’t make sense to you and you can’t reason with what the market is doing, then close the trade and get out.
Investment is no longer limited to those with millions in the bank; traditional wealth management systems are outdated and lack the transparency and fairness that the modern day investor deserves. With interest rates so low, now is the perfect time for individuals to find other ways to invest their money – by following these simple rules, it’s possible to take control of your own investments, trade like and expert and become part of that five percent that invest in the stockmarket and profit.
I invest for the long term . I try to make quality investing decisions and stick with it. Overall, I have done pretty well, but I can always do better. I like the concept of having rules before you invest and sticking to them.
These are all great tips! Actually, I’m still a newbie when it comes to investing and reading all your advice really help me a lot.
I’d add avoid over trading. The only person that gets rich from you buying/selling is your broker. Avoid ‘trading’ and stick to ‘investing’. If you don’t know the difference then leave your money in the bank.
We try to do dollar cost averaging and invest no matter what the markets are doing. We do keep some cash in our brokerage account for drops in the market, so we can pick up more shares then, but overall we just stick to our investing plan no natter what.
#6 and #8 are two that I’d like to highlight here.
For #6, your second paragraph notes that people often panic. I agree, and it definitely seems that panic can often be accompanied by a reversal back to the norm after a given period of time going forward.
For #8, the Buffett quote is often used but really underappreciated. I agree with it, and think that history bears out the success of that approach.
rules! rules! rules! You need them for investing, though mine are a little different, I don’t necessarily have rules for selling at a profit. I buy because I like certain aspects of a company, it’s business model, or it’s moat within the industry. So I don’t sell because they hit a certain price, I sell because some fundamental change in the company has shifted since I bought them and I no longer like where they are or I see that money put to better use elsewhere.