How To Trade In Stocks

According to the past master in stock/commodities trading, Jesse Livermore, there are 3 strategies to note before you start to trade stocks in the market.

1. Timing

Adopt a top down approach. From looking the big market trend, then industry group trend, followed by tanden trading (sister stock) and finally the actual stock.

We trade along the line of least resistance - the trend.
We shall not argue with the trend.
We are looking for pivotal point to make a transaction for an opportunity to profit.

2. Money Management

Before we start trading, we shall maintain a cash reserve. Do not get ourselves fully exposed.

Look at the risk reward ratio - how much to gain for the capital we committed. Is the trade worth well our time and effort?

Implement a stop loss.
Keep in mind on how much we are prepare to lose in each trade and that will be our stop loss.
If things go wrong, we must exit before our capital can be wiped out.

Jesse recommended a stop loss of 10% while we may devise our own limit. But a stop loss is a MUST if we want to be a successful stock trader.

Break up our trade into stages. For example, if we are thinking to buy 1000 shares of a counter, we go in to buy 20% = 200 shares. If the outlook is clear and well, we go in to buy further 20% = 200 shares. Then another 20% and finally the remaining 40%.

This gives us a buffer of time to confirm we are making a right trade.
In an event of a trade goes wrong, we can exit and thus reduce the impact to our capital.

We shall never average losses, also known as average down. Instead, we shall average up. Stick with winners until a reason to sell.

If the share price goes against what we expected, this is enough reason to sell.
We do not put in any more good money after bad.

And one reminder about margin call - when the margin call reaches you, close your account - never meet a margin call.

3. Emotional Control

We have to control our sense of hope, greed and fear. We have to remain calm and rational with regards to stock market. We go into stock market for profits, not sentiments.

We can beat a horse race but we cannot beat the races.

We need to have patience and wait until the action of market itself confirms our opinion then we move in. Do not anticipate.

Also we do not to have to be in the market all the time.

Market is never wrong - opinions often are.

GOOD LUCK TO ALL.

NOTE: Ideas from the book "How To Trade In Stocks" by Jesse Livermore.