Regardless of experience investing in the stock market, novices and experts must follow certain investing rules. Some of these rules are almost inflexible while others are flexible. The decision to distinguish between the two often relies on your knowledge and following your gut.
Buy Low, Sell High
Nearly everyone has heard of this adage. Its fairly simple in principle. Find stocks that are selling at a discount relative to their fair value and sell them once they have realized their fair value. The process is simple, but you have to learn how to read financial statements in order to attach a correct ‘price tag’ to a stock. With experience, you will be able to figure out when a stock is ‘cheap’ and when it is too ‘expensive’.
Follow The Trend
No matter how good you are at investing, you shoud always be aware of the trend. The trend refers to the direction the stock market is going in the short-term (3-6 months and more). The three basic trends are upwards (rising stock index averages), downwards (falling averages) and sideways (no real direction – small ups and downs). Not only is the trend important to determine stock prices in the near future but it also helps you in figuring out which strategy to employ – going long, shorting or using options for more leverage.
Do Not Overanalyze The Market
To paraphrase a popular saying, ours is to invest and profit, not to ask questions and to reason why. The stock market will go up and down, whether you like it or not, which is why it is better to get an overall feel for the market rather than overanalyzing the causes. The market behaves the way it does, don’t question it. You must only care about the direction it is going and for how long it will go that way, and then you make your decisions based on those factors.
Also, it is important to understand that the intensity of the move in one direction will determine the intensity of the rebound in the opposite direction. If a stock moves down in an extreme manner, then you can expect it to move up in an extreme way, too. And if you see a large directional move coming, you must act before it does affect the market.
Formulate an Entry and Exit Plan
Many traders lose big money in the stock market because of their failure to stick to their entry and exit plan. Keep in mind that discipline in trading is a necessary requisite of success, not just a ‘nice-to-have’. Basically, you must cut your losses and let your profits run with your entry and exit plan. This way, the money you lose and earn during a day of trading are well within your own set of investment rules.
There are other pearls of stock market wisdom – its good to have a healthy skepticism about analysts and commentator recommendations. Be aware of your emotions because pretty often they will lead you down the wrong path and most importantly keep an investment journal to record your successes and losses.