Editor’s Note: When you hear the word “trading,” you might think of unwise and undisciplined investments that completely ignore conventional wisdom.
But as Bryan Bottarelli explains below, that’s not the case at all. Successful traders are guided by many of the same time-tested principles that Chief Income Strategist Marc Lichtenfeld espouses here in Wealthy Retirement.
Whether you’re just getting started or you’ve been in the markets for decades, Bryan’s five tips below can help you become a better investor.
– James Ogletree, Managing Editor
Don’t look now, but the market is clawing its way back to all-time highs.
And that’s bound to draw a lot of interest from brand new retail traders.
But here’s the thing – most trading advice for beginners is backwards. They tell you to “start small” but never explain how to trade small accounts differently than big ones.
So I made a list of the same five tips I learned trading in the pit of the Chicago Board Options Exchange – except tailored for people starting with $1,000, not $500,000.
1. Trade what you already know.
I tell my softball buddies who are interested in trading to buy a stock like Anheuser-Busch (BUD). That way, when they notice more 21-to-25-year-olds drinking Bud Light Lime, they can learn how to turn those observations into profits.
Or, for all you ladies out there, imagine if you bought Lululemon (LULU) stock at the same time that you bought your first $100 pair of black yoga pants. Over the last 10 years, the stock has gone from $50 to $250. That’s a strong 400% gain.
When you’re starting out, invest in what you already know. The last thing you want is to get some money tied up in a complex technology that you know nothing about.
2. Position size like a seasoned Wall Street pro.
Here’s my general rule for a new small account: Only allocate 5% to 10% of your total account value for each new play.
No one wants to be that guy standing on the dock, holding a suitcase with a sad face. But at the same time, you also don’t want to be that guy who sits down at the poker table, sees one ace, gets all excited, and shoves all in. That sort of untamed aggression rarely pays off.
As odd as it may sound, position sizing will actually help you make more money with a much, much higher winning percentage.
3. Define your risk ahead of time… then don’t freak out.
Here’s a common mistake I see that scares a lot of people off. They make their first trade, and, inevitably, it goes down. They see their trading account in the red, and they get scared, freak out, sell at a loss, and then never try trading again.
I know the feeling. It happens to everyone. But if you define your risk ahead of time, you won’t freak out. Say you buy $500 worth of Nike. Right away, you should set your total downside risk at something you’re comfortable with – say, 20%. If your $500 worth of Nike goes down to $400, you’re out – no questions asked.
This tip eliminates making trading decisions based on emotion, which already puts you well ahead of every other new trader.
4. Never ever (ever, ever, ever) second-guess taking profits.
When it comes to taking profits, you’re always going to find yourself with an angel on one shoulder and a devil on the other shoulder, each talking in your ear. The angel is saying, “Don’t be greedy. Take your profit and be smart.” But the devil is saying, “You idiot! You’re leaving money on the table. Hold for more!”
Luckily for you, I have a solution. Whenever you find yourself with this dilemma, sell half. This locks in profits, and it still allows you to be in for any further possible upside. It’s the best of both worlds.
5. Find a trading community.
This is the very best way to learn how to make money day after day. I can tell you firsthand, for me, nothing was more powerful than a group of people all making money together.
Let’s face it – sometimes trading can be a pretty lonely game. If you’re at home trading the markets and you hit a big winner, all you can do is fist-bump yourself and then give air high-fives to your imaginary trading partners. That sucks the joy out of winning. But if you have a community of traders all winning together, it’s one of the most powerful feelings in the world.
Bottom line: Trading isn’t a sprint and it’s not a marathon either. It’s a game that never ends.
And these five rules help you stay in that game long enough to get good at it.