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Stock trading tips

Whether you are learning to trade using a virtual stock market game, or trading real stocks and shares, the following stock trading tips are equally valid, and are the ones that I teach to all my stock trading students. They are based on years of experience in trading stocks and shares across a variety of markets, but particularly the UK and US share markets, and apply to any stock exchange around the world. They are very simple rules and if you follow them faithfully, will provide a solid platform on which to build your stock trading education. So let’s start with the first of my stock trading tips.

Stock trading tip 1

Only buy stocks which are trending higher. Do not try to pick tops and bottoms or to day trade. Successful stock trading is buying into long term trends and remember the old adage from the great stock trader Jesse Livermore – no stock price is ever too high or too low – there is just the market price, and the market is always right. So whenever you look at a stock price chart, forget about the price. If a stock is trending higher, then the chances are good that it will continue to trend in that direction, with the same applying to a stock that is falling. Try  to ‘catch a falling knife’ by picking a bottom, and you will fail, so don’t – always follow the trend. Below is a typical trending stock that would certainly be on my watch list , particularly as the 20 day moving average is providing excellent support to the move higher, always a good sign, so we could buy this stock with some confidence that the move will continue.

stock market trading game chart

Stock trending higher

Stock trading tip 2

Always trade both sides of the market and by this I mean you have to look for stocks which are trending lower, as well as those that are trending higher, so you need to understand how to sell a stock to make money as well as how to buy. Your virtual stock game account will allow you to trade to the downside, but will certainly be simpler than in the real world, which is far more complex, and requires something called a margin account. However, while you are learning to trade, just ensure you practice trading sell orders as well as buy orders, and as for buying stocks, always look for stocks which are trending lower, rather than trying to pick a top or turning point. Below is another good example of a long term trend lower, and note the 20 day moving average once again which is providing a good barrier to any short term recovery, which again is a good signal.

stock trading game stock chart

Stock trading tip 3

Never trade without a stop loss. If you break this rule you only have yourself to blame when you lose all your trading capital, and please don’t think a stock never goes to zero – they do! The first one I ever bought did just that falling from £5.50 to close worthless at 2p. I gave my shares to charity at the end having traded in hope that the stock would turn. The stock in question was GEC Marconi, a blue chip company that went bust!

Stock trading tip 4

Never have more than 10% of your total worth invested in the stock market. So if you total assets are £200,000 including your house, then your maximum exposure should only be £20,000 as a maximum.

Stock trading tip 5

Never risk more than 1% of your total trading capital on any one trade. So if your trading capital is £20,000, the risk on any single trade should be a maximum of £200. In other words you could get 100 trades wrong before losing all your trading capital. In real trading terms what this means is that if you were trading 200 shares with a price of £5 then your stop loss should be set a maximum of £1 from your buy price, so that should you be stopped out on the trade, then your maximum loss would be 200 x £1. Whilst your exposure to the market on the trade is £1,000, the maximum risk is capped by your stop loss at £4.

Stock trading tip 6

Never have all your stocks in one sector. When you start your virtual stock trading simulator, you will find that stocks are grouped into sectors, and indeed these sectors also have their own charts which will give you further insight into the trends for each sector. So for example we might decide that mining sector has a well developed trend, which would reflect the underlying performance of the stocks in this sector. However, in order to spread our risk we need to ensure our portfolio, whether our virtual trading portfolio, or our real trading portfolio is spread between sectors, thus spreading our risk accordingly.

Stock trading tip 7

Always have a trading plan, no matter how simple, which defines your trading strategy and trading rules. This will include your long  term financial objectives, your % risk on each trade, stop loss positions, and money management as outlined above. In addition the plan should also include your signals for entering and exiting trades, as well as the indicators you propose to use on each trade.

Stock trading tip 8

Never day trade in stocks – it is a strategy that always fails in the long term. By all means try it in your virtual stock game, but I hope this will prove to you that is simply does not work.

Stock trading tip 9

Try to develop hedging strategies for your stock trading, and again this is something you should practice in your virtual stock trading account. The principle is very simple in that you look to trade two stock which correlate, which simply means that they tend to move in the same direction and at much the same speed. So for example suppose you decide that having studied the stock charts, BP and Shell seem to be trending in the same direction and at comparable speeds. Then to hedge the trade you would buy one stock and sell the other, and provided the trade is balanced correctly you will have a well hedged position. Naturally in order to benefit this needs to be placed when you feel that one company is likely to outperform the other, so an analysis of the fundamentals and any company news would be key in timing the trade. However, this is a very simply strategy and one you should test in your virtual stock game.

Stock trading tip 10

Always trade with money you can afford to lose, and never borrow money to start your trading career. If you don’t have enough at present, then spend more time practising in your online stock market game until you have sufficient to start for real.