I can think of four stages to divide a complete trade into.
1) Screening the list of potential stocks
There thousands or millions of stocks to choose from various markets. Which ones you filter out depend on what kinds of stocks you are looking for. Are you looking into a specific industry? Or maybe a particular technical trend that has been doing well for you. Some stocks are good for shorting others are not. Screening a list of stocks helps narrow down the playing field.
2) Entering the trade
If you get into a stock at $10.00 and it goes up to $11.00 versus getting in at $9.00, it makes a difference. Getting in at $9.00 per share makes you two dollars more profit per share. The right entry and the right timing can get you a cheap price for a stock. If you randomly enter the stock, your short term results ends up looking like a gamble.
3) Managing the trade
You need to know when you are going to exit a trade or scale in/ scale out. Scaling in means adding shares into your position because you believe the stock will go up. Scaling out means you are selling shares little by little, but not all at once. When you are in a position you need to monitor your trade in the event that it plummets or sky rockets. Personally, I don't like putting physical stops because a stock can fluctuate all over the place during the day. But at the end of the day the stock may end up higher than it opened. I am usually a weekly to monthly time frame trader, so the previously mentioned makes sense to me. Because I don't put physical stops, its crucial that I monitor it constantly to initial any of my mental stops.
4) Exiting the trade
This is where you make your money. When you exit a trade it closes the deal. You could have picked the right stock, entered corrected, and managed your trade well, but at the end of the day if you sell your shares at a loss you lose money. Where you exit is more important then where you enter per say. What I should say is the difference between where you exit and enter is most important. That is where you make your profit or take a loss. Exiting a trade goes hand in hand with managing a trade because when you manage a trade you are looking for a signal to exit or to continue to hold.
These steps take discipline and a lot of traders let their emotions get the best of them and they hold through situations they otherwise wouldn't have held had they not had such strong emotional attachments or greed.
Labels: Finances, Pro Stock Trading Tips