Disciplined buying is a key skill to learn in order to build a profitable stock portfolio. A disciplined buyer resists the urge to chase a hot stock that is rapidly advancing. Patiently waiting will yield buying opportunities on normal pullbacks when the stock price has dipped below its price-trend levels.
Disciplined buying should also encompass \”stepping into\” your positions with small, one-third bites. Don’t toss the dice and leave it to chance by hoping you have the perfect timing. Something else that’s key to Understanding Stock Trading is knowing your tolerance for risk.
Understanding your risk tolerance is essential for successful stock trading. A higher degree of risk is associated with the companies with the most potential for growth. Large cap, blue chip costs offer a more steady performance, typically with a lower return. Investing that is consistent with your own risk tolerance will help you sleep at night. Stock charts showing past performance of a proposed investment will provide some indication of its volatility.
Understanding the many alternative investment vehicles is essential to fully understanding stock trading. For the average investor, it is wise to place a portion of the portfolio in other investments such as cash, mutual funds, bonds, options, and tangible assets.
A good strategy is to start by purchasing a third of the desired position. To ensure that the remaining shares will be able to be purchased at a reasonable price in an up trending market, place a 5-10% \”buy stop\” order that is \”good until canceled.\” This order will execute if the market breaks out, but you will be able to take advantage of any further dips in price.
If a holding experiences a 5-10% pullback from the initial entry price, it is often a good time to add another one-third of your investment capital to the position. At this point watch closely and invest the final third if the position moves to profitability. Conversely, a loss of 15% or more could indicate that it is time to sell the position to limit losses.
Stick to specific buy under prices to establish your positions to keep from paying too much and decide ahead of time how much you are comfortable losing. Too many investors are afraid of taking losses, but often that is the best way to preserve as much capital as possible if a position turns against you.
A consistently executed and disciplined trading plan is the key to success at stock trading. Learning patience and fully understanding your own risk tolerance are far more important than attempting to identify the next hottest stock offering on the market.
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