You heard about trading stocks and you’re intrigued. Maybe you have a friend that is doing it, or perhaps you have read about those few—lucky—folks who have made a bundle on penny stocks. Now, it’s time for you to get your feet wet. You have put aside a little cash to play with and you’re convinced that you can do this.
Time for a reality check. The notion of turning $500 into $100,000 is a pleasant one, to be sure. Don’t be seduced by stories of going from rags to riches, because they are ultimately outliers that are used as a marketing tool for websites and other services that want you to pay them for “golden” advice on how to navigate the penny stock world.
The truth is that the stock market is unforgiving, and life there can be cold, nasty, brutish and short. It doesn’t matter what you have heard or how confident you are, you are faced with uncertainty most of the time. But that’s part of the allure or trading. It’s a little dangerous, pretty cool, and can potentially turn you into a millionaire if you follow certain steps and never break your personal trading rules.
I’ve been fortunate enough to win at the stock market and it’s precisely because I stuck to the rules I set. And most importantly because I practiced patience. As Warren Buffet famously said, “The stock market is a device for transferring money from the impatient to the patient.”
You can also win at trading stocks if you are disciplined enough to follow certain rules and strategies. And if you’re capable of practicing patience like the Dalai Lama.
I’m here to help you along that path with a few pieces of advice. The lessons below were ones I learned the hard way. So, I’d like to share them with you in a soft way. I hope these important strategies and lessons will help you survive, and eventually thrive, in the stock market.
Lesson 1: Leave your emotions at the door
No amount of reading or research can fully prepare you for the emotional roller coaster that is the stock market. You’ll experience very unexpected emotions that will skew your thought process.
For example, you might find a stock that you’re positive will be the next Amazon… and you’ll fall in love with it. Trust me on this one—it happened to me—never fall in love with a stock. This is business, it’s not personal, so leave your emotions at the edge of the trading floor.
If you don’t, your emotions will bend your logic and thought process. You’ll start to rationalize the practicality of holding a plummeting stock because you “believe in it,” even though you’re down 50%. All the signs will point to the need to get out, but, because you have developed an affinity for this particular company, you will block out logic and let your emotions drive your actions. This brings us to our second lesson.
Lesson 2: Trust data and leave intuition out of the picture
It’s important to maintain self-awareness in the stock market. If you have done your due diligence (more on that below), you will have hard data on which to base your decisions. When you become intoxicated by your love or loyalty to a particular stock, you will find yourself on a dangerous road that no airbag can protect you from.
Read about the difference between technical and fundamental data analysis. Conduct lots of research and always look to data for guidance, regardless of what your gut tells you. Don’t rush into trading, first read a lot about it and stat to form your own strategy and trading rules.
Lesson 3: Define your strategy and rules… and stick to them
You’re just starting out. Are you going to swing trade, day trade, invest in long-term, low risk stocks, short stocks, or
There is a dizzying array of trading methods available to you. You should read up on each of them before you decide which one appeals to you most. Once you decide that, you need to nail down your strategy and set cold, hard rules that you will stick to as if your life depended on it.
For example, if you day trade, you might decide that you will always limit your losses to 5%, regardless of the circumstances. That is called a stop loss.
A stop loss stipulates that when a stock you bought drops below 5% of the price you paid for it, you will automatically sell and cut your losses. No exceptions. But you can only do that if you’re using one of the best stock trading apps.
You may think that stock will go back up and want to stick around to see because you don’t want to take a loss. But that only puts you at risk of losing more. It’s very important to put strict parameters around how you will trade and adhere to those. Doing so will keep you focused and disciplined. Eventually it will become second nature and you won’t even have to think about it.
Lesson 4: Watch your back: There are no friends in the stock
Like Tom Hanks said, there’s no crying in baseball! Or, well, the stock market. People don’t decide to play stocks because they have an altruistic inclination to help others. Everyone is in it for the same reason: to make money. And it’s ruthless.
You lost your life savings? I don’t care, pay me. You’re going to have to mortgage your house to pay your debt? I don’t care, pay me. Your child is going to lose health care? I don’t care, pay me.
It’s demoralizing, but it’s true. And the sooner you learn this, the better. Because no one has your back in the stock market—not your bank, not your friends, not your family–nobody. This all surely sounds harsh, but that’s the reality of the stock market.
It’s a dog-eat-dog world and it’s not a playground—you must enter with a very serious and focused mindset. The only person looking out for your best interests, is you.
Unless you decide to use a financial planner, in which case, this article doesn’t apply to you.