When I began trading, no one had ever heard of such a thing as "swing trading." Swing trading, as I recall, began when more and more people had the ability to day trade from a PC.
In this issue of Chart Scan, I'm going to provide you with some swing trading help that you need when just starting out. If you follow these rules you will avoid a great majority of mistakes made by beginners.
Swing Trading Help - Things To Avoid
1. Do Not Trade Penny Stocks - Although it sounds attractive, penny stocks are worth almost nothing for a reason. Yes, there are stories about penny stocks making a fortune, but they are rare and far in between. You have better odds in Las Vegas then trading penny stocks and if you lose you at least get a free room.
2. Do Not Take Advice From Emails or Phone Solicitations That Offer Hot Tips To Invest In Unknown Companies - I get about 20 to 50 emails daily with stock tips and investment advice. The great majority of these companies are not worth the paper their stock is written on, avoid all hot tips for investments, and rely on your own analysis, and trading skills. Remember, no one can predict the future, if the stock or investment was so good, no one would be calling you and asking you to invest.
3. Do Not Over Leverage Yourself - Margin and leverage are tools for traders who know how to manage risk properly. When starting out your positions should be very small. Your goal should be to create profits, no matter how small. Once your method is profitable you can then increase your position size. Increasing position size is much easier than having to decrease large positions due to margin calls.
4. Do Not Trade Advanced Strategies - Remember there is no correlation between advanced strategies and profitability. I know several traders who trade simple strategies and have been doing so for over 30 years. They have good weeks and bad weeks but don't start believing that complex systems work better than simple ones. There's a great story about a trader from Florida who developed neural networks about 20 years ago. He claimed his system can predict the future price of the SP Futures Contract a few minutes ahead of time. The last time I heard from him, he was making horse racing software immediately prior to filing bankruptcy.
5. Do Not Add To Losing Positions - Don't put good money after bad money, a losing position is a losing position that needs to be liquidated. You will think clearer and more objectively after you liquidate a loser. No one makes money holding on to losing positions, don't go down with a sinking ship.
Swing Trading Help - Things To Do
1. Paper Trade Or Trade On A Simulator Before Risking Money - Trading is something your mind has to get used to, bid...offer.....long...short, all these terms have meanings and if you make a mistake you could be holding a position that you thought you liquidated days earlier. Paper trading will NOT teach you to be a good trader, but it will familiarize you with the basics so that when you do place real orders, you will be more familiar with what you're doing and this will help you prevent mistakes.
2. Balance Your Positions To Each Other - Unless you trade one market and one market only, your positions have to be equal to each other. That way you will get the same bang for your buck across your portfolio.
3. Use Stop Loss And Profit Targets - Although this advice appears in most swing trading help for beginner's books, I cannot emphasize it strongly enough, you must use stop-loss orders and profit target orders. It's best to place these orders at the same time you place your entry order. This way, you are less likely to avoid or forget doing it later. This is one of the top 3 reasons traders go belly up when first starting out.
4. Check Correlation - This is another biggie for beginners, many traders don't realize how important correlation between different stocks or markets can be. When you trade correlated or similar positions, you are increasing your risk the same degree that your position is correlated. What does this mean? If you trade AMD and INTEL stock together you are trading stocks that are trading similarly about 80 percent of the time. You might as well just buy more shares of one company. Trade stocks and futures markets that are as uncorrelated as possible: Avoid multiple tech stocks, avoid multiple oil commodities, avoid any markets that trade similarly.
5. Trade With Risk Capital - Being positive is great, but being realistic is more important. If you follow good advice your odds of success increase dramatically, but statistically, most beginners go through tough times when first starting out. It's like that when you begin anything in life, you need to be careful and use risk capital. You can always increase your positions, but if you have no money to trade with, you're out of the game. Don't cut your oxygen off early.
If you follow these swing trading help for beginner's tips, you will avoid the most common errors made by traders.
We want to hear from you, Joe Ross wants you to learn trading. Email us your questions or if you need additional information. Another great investment is private mentoring with Joe, our students find this very helpful and accelerates their trading successes.
Good advices. This is useful. Mainly, rely on own analysis has potential build confidence over time and force man to use his own brain. And correlations advice is what can helps me right now.