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| Jun 01, 2002 6:32 pm |
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The 7 Disciplines of StockBottom.com - The Bottom Line |
Guan Seng Khoo
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The Bottom Line: The Top 7 Trading Principles from StockBottom.com
We have done our best to whittle down all of our knowledge and trading experience into seven golden nuggets of wisdom. These are not the end all and be all of investing know-how but applying these seven principles can do nothing but help your trading results. There is a difference between trading and investing. One is passive and the other is aggressive. These are guidelines to help you in your trading endeavors. We have tailored these to help you benefit from your StockBottom.com subscription.
Our picks are based on technical analysis while being observant of overall market/sector conditions and company events. The individual investor is encouraged to complete the research needed on a company before making a trade. Investment strategies are very personal and can not be dictated through a website. The final decision is always left to the reader to make based on his or her own risk profile. These seven principles are here to tilt the odds in your favor as you journey to your own financial independence. Good luck!
Principle 1) PRESERVE YOUR CAPITAL.
You make money in the stock market by cutting losses rather than spending your time searching for the next Dell or Microsoft.
Principle 2) MONEY MANAGEMENT.
part A.
As the saying goes, "don't put all of your eggs into one basket". The same is true in successful trading. Don't put all of your money into one trade. If you do, there is a greater chance that you will fall victim to Murphy's Law and end up broke. For example, if you have a $2,000 trading account, put $1,000 into two plays, $5,000 into three, etc... One thing that we strongly recommend is never playing more than three to five positions at one time. Any more than that and they can be difficult to keep track of, particularly when the situation demands prompt action.
part B.
When you are entering a new play, do so by using a limit order. The limit order should be at or slightly above the current ask price. This will ensure a fill at your price, not the market makers price. If your order is not filled, do not worry, there will be other opportunities out there. DO NOT chase the price up! This can be a big mistake. If the price is more than 5% above our pick price you might want to just paper trade it for practice.
part C.
If you are relatively new to trading, we recommend paper trading to get into the swing of things. Paper Trading is simulated trading where actual money is not used. Prices of securities are tracked on a daily basis and fictional trades are made. There are even computer programs available for this. Paper trade until you are comfortable and successful making decisions. Just remember, reality is never as good as fantasy. The moment you put real money on the line, the game changes. Thus our liberal use of stop losses (more on this one later).
Principle 3) STOP LOSSES.
Once your buy order has been filled, immediately turn around and place your stop loss (a.k.a. Stop Loss Order). If the stock takes a dive, this stop loss will bail you out at a relatively smaller loss. This saves the trader a lot of agonizing over whether to exit a position that has turned seriously against him or her. Considering the unprecedented volatility we are experiencing in the market today, it would be foolish for traders not to use a protective stop loss. Remember that Capital Preservation is principle #1. One way to use stop losses is if once the stock advances a percent or two (or three), we recommend moving your stop loss order up to a BREAK-EVEN point. Thus, the trader inputs their stop loss at the same price they entered the play, which reduces their risk to almost zero. As the stock continues to go up, Protect your profits by raising your SELL STOP LOSS ORDER accordingly. This is called a TRAILING STOP order. This way, as long as the stock goes up, your order is ignored. As soon as the stock starts to back off, or on one of those days when the market goes wacky, your safety net triggers and you sell at a PROFIT which is what the business of trading is all about. Unfortunately, stop losses are not perfect. Sometimes stocks do gap up or down and your stop loss could immediately become a market order and fill you at a loss for more than you bargained for.
NOTE: The Placement of STOPS is a personal thing and should be set in accordance with a traders risk and comfort levels while trying to allow some room for normal price fluctuations. Our recommendations may be to tight for some and to loose for others. We like 9% to 11%. The secret to make money in the stock market is to limit your losses. Place your stop losses carefully.
! Never ever move a stop loss down once it is set (see rule # 1). THIS IS AN UNBREAKABLE RULE! You can always re-enter a trade again at a later date after the stock has bounced back.
Principle 4) DON'T FIGHT THE TREND.
You've heard it before. Just like every other trading maxim that has been around forever. If the semiconductor index just rolled over and broke through long term support, we don't recommend going long any semiconductor stocks. Same thing works on a bigger scale. If the overall market is heading South, going long may not be your best bet. Remember that the "trend is your friend". Don't worry about the "why" a market or sector is sinking, just get out of the way and look for any stockbottom's that might result of the downturn.
Principle 5) YOU DON'T TRADE IN A VACUUM.
A trader can get slaughtered by not paying attention to what's going on in the market or what's happening to his/her stock. Major economic reports, FOMC meetings, economic conditions overseas, even military actions can affect how our markets move and react. More specifically, traders need to know what important dates are upcoming for the company they are invested in. We do not recommend holding over an earnings report. Historically, the majority of stocks fall after an earnings report. There are always the rare few that really explode upward that everyone wants to be a part of. The sad truth is this market is priced for perfection and anything less than perfect could be disastrous to investor expectations. When that happens, investors leave and take their money with them. Even if earnings were inline with estimates, the momentum players are leaving to move on to the next stock that has earnings coming. The same effect occurs with stock splits. A lot of stocks go down after the split occurs. Thus, we don't recommend holding over the payable date of a split either since momentum players usually leave looking for the next event to play.
Principle 6) NEVER EVER TRADE ON EMOTION.
Easy to say hard to do. Emotion is your enemy, logic is your friend. Never trade on emotion. There is no such thing as "it has to go up", "it can't go down". The market does not care what you think or hope. It is ruthless and makes its own rules. You should say this 50 times a day, "past performance is not a guarantee of future results". Never buy on impulse. If you just heard the news, it is already to late. Plan your buys during non-market hours. Once the bell rings your mind is clouded, emotion takes over. Plan your strategy. Execute your plan. When in doubt, stay out.
Principle 7) DISCIPLINE.
We'd like to call this lucky number seven, but luck has nothing to do with it. Sure, sometimes you might get lucky, but more often than not, the market can turn and eat you alive. Why are we preaching discipline? Because FEAR and GREED can CANCEL principle #1. Either you have not cut your losses and now you are afraid to exit the play because you can't afford to lose the money you were trading with -or- you were merely being greedy and arrogance can be deadly when you're playing in the market
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