Stock Trading For Dummies
Adrian Reid shares eight trading principles for retail traders: use a simple system, trade with the trend, always use stop losses, risk no more than 1% per trade, extend your timeframe, follow your plan not your emotions, write everything down, and cut costs. He explains why a 50% loss needs a 100% gain to recover, and how longer timeframes reduce stress.
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While thinking about stock Trading for Dummies, I came up with eight critical things that you absolutely have to do in order to not only make money in the market, but to improve your quality of life in the process. And that's what enlightened stock trading is all about. It's not just about making money in the markets. We're going to do that consistently. But I also want you to improve your quality of life, reduce your stress levels, and be able to live life to the full in the process. So if you follow these eight simple philosophies, your chances of success and profit are dramatically improved. But not only that, you'll do it with much lower stress levels and a much greater quality of life than you ever thought possible. So here are my top eight top Stock Trading for Dummies tips.
The first is to use a simple stock trading system to guide all of your decisions in the markets. This is important because when the markets move, our emotions and our stress levels go up. And when that happens, our body responds with a fight or flight response. Same as when we get emotional in our everyday lives, our ability to think rationally and make good quality decisions goes down. So in the markets, by operating with a simple, profitable stock trading system to guide each of our decisions in the market, we can make rational and good quality financial decisions when we're trading, regardless of what the market is doing. So. So a simple stock trading system is going to make all the difference.
The second Stock Trading for Dummies tip is to always trade with the trend. I know it's cliche, but it actually works. Let me tell you. I've lost track of how many new traders have come to me that I've coached who are holding a portfolio of stocks which are trending down. If you want your wealth to go up, you need to find stocks that are going up and hold onto those. And if you're holding onto stocks that are falling, you need to get rid of them, get them out of your portfolio and move them into things that are actually appreciating in value. Trading with the trend actually works and it's probably one of the biggest edges other than having a system to guide your decisions that a new trader can ever get in the markets and and it's very easy to do. So always trade with the trend is the number two stock Trading for Dummies tip. And my third stock Trading for Dummies tip.
Always use a stop loss. One of the most difficult things for new traders to come to terms with is, is the ability to take a loss and be Wrong on a trade, there's nothing surer than there's going to be some winning trades. Yes, but there's also going to be a whole bunch of losing trades. Now where does this struggle come from? Well, it comes from our education system because when we go to school we're trained that by getting the right answer, by getting top marks in our tests, we're going to get the positive feedback, we're going to get the adoration of our parents and our teachers. And that's the definition of success. Now unfortunately, when we translate that into the stock market, what happens is people have a tendency to hold onto their trades and hope that if they're going down, they're going to come back up so they can get out even, that is be right on their trade and not actually have to be wrong and take a loss. Unfortunately, the trouble with this is it leads to larger and larger losses and it becomes very difficult to recover if we keep holding on and hoping that, that our trades will come back to even or profitability. Because eventually we're going to get into those trades that are going to keep going down and down and down and we're going to lose a bucket load of money on trades that we don't get out of. So always place a stop loss just below your entry price and make sure that you get out with a small loss. Believe me, a small loss is far easier to take than a big loss. And having a loss of a few hundred dollars or $1,000 compared to 10 or $15,000 is so much preferable not just for your stomach and your wallet, but for your relationships and for your sense of self worth and for how confidently you can continue to trade and also for the health of your account. Because let's face it, a couple of small losses of a few hundred dollars is far easier to recover from than a five or ten thousand dollar loss is ever going to be. So always place a stop loss under your trades so that you get out if you're wrong quickly. And now for my fourth stock Trading for Dummies tip.
On every single trade, you need to make sure that the risk you take as a percentage of your total account is very small amount. Now, many educators tout the 2% rule, which means only risk 2% of your account on each trade. Now my personal feeling is that for most traders and for most systems, that's far too aggressive. I'd encourage you to think about keeping your risk to 1% or less on each trade. And what that will do for you is means that each trade you lose has only a very tiny effect on your capital. And if it's only small loss, it becomes easy to take. When losses are big, they're much harder to stomach and more difficult to take. It also means that you can be wrong many times in a row and it doesn't actually matter. Now, in trading, one of the big challenges we've got is that the bigger your drawdown, the higher the percentage return you have to make in order to get back to where you were. If your account starts at 100 and you have a drawdown that drops you to 50, you now have to make 100% return on that 50 to get back to where you were at the beginning. But if your account starts starts at 100 and just drops down to, say, 90, a 10% drawdown, then you only have to make 11% to get from 90 back up to 100. So by risking a small amount of your account on each trade, you keep your drawdowns low, you can have multiple losses in a row, becomes much easier to exit small losing trades, and your drawdowns are much, much lower. Dramatic assistance in surviving and improving your mindset. Because no one trade really matters that much, you, you just focus on consistently executing your system. My fifth Stock Trading for Dummies tip.
A fifth stock Training for Dummies tip is to increase your time frame. Now, day trading is a hugely popular pursuit out there right now, and it's marketed really heavily by the brokers. And there's a great reason for that. It's because it makes them a ton of money. It's not at all because it makes the private trader a ton of money, because the more frequently you trade, the more brokerage you pay and the richer your broker gets. So by increasing your time frame, you're going to have paid less money to your broker, and that will give you a greater chance of success. And let's face it, if you look at a stock chart, the size of a move that you can catch on any individual day is minuscule compared to the dramatic moves you can catch if you hold your trades for weeks or months in the stock market. So to increase your chances of success, hold your trades for longer. And that means you're not competing against those hedge funds and investment banks and prop trading firms that are trading on nanosecond timeframes, ready to take your money in an instant as soon as you put your orders into the market. Trading on a longer time frame gives the private trader a dramatically improved chance of making money in the long run. And it has the added enlightened stock trader benefit of reducing the amount of work you have to do and improving your quality of life. Because there's nowhere near as much stress when you're only making a small number of decisions as opposed to making many, many decisions within the one trading day. So my fifth stock trading tip for Dummies is increase your time frame and don't day trade. My six stock trading for Dummies tip.
My sixth tip for dummy stock traders is don't fall in love with your stocks. They now, I don't care how great the story of the stock is, how amazing the CEO, how great the news reports are, or any of that. If your position is moving in the wrong direction against you, you need to get out because there's nothing more certain than if it keeps going down, your wealth gets eroded. Now, falling in love with your stocks and holding onto them because the story is great or because you expect it to recover, or all of those things is just totally contrary to profitable stock trading. We're going to have a simple system to guide us, like I said in point number one, and that's going to allow us to make our decisions if something starts going in the wrong direction. Our system says sell, we must sell. It doesn't matter what the story is because the market doesn't agree with it. If it's going down, we're going to get out, cut our losses. So don't fall in love with your stocks. Follow the system, follow the rules and cut them when they start going in the wrong direction. My seventh stock Trading for Dummies tips.
Is to have a written trading plan. Now, when our emotions are running high and the markets are fluctuating or things are moving against us, human beings just don't make good decisions. I already talked about the flight or fight response. The and this is what happens when our emotion goes up or when we get stressed. Our mind, the amygdala in our brain, puts adrenaline into our system. Adrenaline makes us ready for action and gets us strong and gets our blood pumping and our muscles ready so that we can have a burst of energy to either fight or run to survive. And this came from our stone age days when we were coming face to face with predators that were going to kill us. And that was very helpful back then. But in the stock market and in our financial life in the modern world, the this is absolutely not helpful at all. So how do we combat this fight or flight response that we have when our stress levels go high? We do it by having a written trading plan, which we do, which we write down in advance of making our trades in the market. And by making those decisions in advance when we're out of the market, when our mind is quiet and we have the ability to think clearly and rationally, we can make good, quality financial decisions. So that way we know exactly what we're going to do no matter what happens in the market. So our decisions are going to be good and profitable, and we don't have to make silly decisions in the heat of the moment when we're stressed and under pressure and our intelligence is down.
My eighth and final Stock Trading for Dummies tips is to minimize your brokerage.
No matter what style of trading you do, brokerage is a huge cost to bear. And the more frequently you trade, the bigger a problem this is. Also the smaller your average profit per trade, the bigger a problem this is. So no matter how you trade, no matter what instruments you trade, you must seek the lowest possible brokerage rates to improve your chances of profitability and success in the long run. So these are my top eight Stock Trading for Dummies tips. And if you want to learn more about how to improve your stock trading or how to get started the right way, enter your name and email in the box below and I'll send you my top 10 lessons I learned by reading 150 trading books. If you do that, you'll no longer be Stock Trading for Dummies. Instead, you'll be well on your way to stock trading to win instead. So enter your name and email in the box below and I'll see you on the other side.
