1) Always Have Written Trading Rules and STICK TO IT!
A lot of people out there set many rules and find themselves to disobey them! It sounds ridiculous but it is true! So, avoid impulsive buying or panic selling so as you are not emotionally-attached to your decision making. Set realistic and practical rules. Rule like winning 50% for each trade just sounds too good to be true. Have a trading record and write down the practical reasons of buying and selling the stocks for each transaction. For an instance, you buy Microsoft shares because the company is fundamentally sound and earning money consistently. You only sell it if the profit of the company turns lower or some major events take place that change the company's financial health drastically. Or if the company faces stiff competition from the competitors until its profits sink and suffer losses. Simple, right?
2) NEVER Let a Profitable Trade Change to a Losing Trade
You can achieve this by setting cut loss and cut profit. Set a 5% cut loss point to prevent massive loss. Remember that every huge loss starts out as a small loss at the beginning. Always count your break even price which is your entry price add with brokerage fees. For example, if you buy 1000 shares of Microsoft stocks at US Dollar (USD) 1 each unit and the brokerage fees is 1 % of the total sum. Then, your break even price will become USD 1010, not USD 1000. Get it?
3) Let the Profits Run and Cut the Losses Short.
This is easier to say than done. To continue with the example just now, if the Microsoft shares that you bought fell to USD 0.80 and another shares in your possession rose from USD 1 to USD 2, keep the rising shares and and sell out the losing one especially when it hits your 5% target of cut loss mechanism. The earning from the rising shares will cover your losses in the market.
4) Buy In Partially and NOT One Lump Sum at a Time
Remember that wealth is accumulated, not created in overnight! You monitor the stocks for some time and buy in partially whenever the market consolidates or facing healthy correction. Consolidation here means the market is not facing a major crash! This strategy is only applicable for those companies with strong fundamental and they keep a good track of earning lustre for at least, the past 5 years. Avoid using this strategy for penny stocks (stock that has price less than USD 1 or RM 1 ) because penny stocks are normally more volatile in pricing. Hence, penny stocks are usually traded, not accumulated.
5) Diversify, but not Overly-Diversified
Don't put all your eggs in one basket, right? Thus, don't concentrate on one stock only but it is always better to take a few good stocks, and keep them in your pocket. Wait for the stocks to realize their real intrinsic values, then sell them off for good. Another hint is don't hold more than 5 stocks at one time. The reason is simple, when the market really crashes, you might not know which stock to cut off first. Holding too many stocks are over-diversified and beside lowering your risk, it might as well lowering your profits too. The optimum option should be holding 2-4 stocks, depending on how much capital you have in your hand. If you have USD 1,000,000 in your hand, then there won't be much problem for owning a mere 5-20 stocks at a time. Imagine if you only have USD 2,000 and you want to diversify it to 5 stocks? So, be flexible.
6) Never Add to a losing Position
Don't add to a losing position, unless that is your strategy. There is an accumulative method called "dollar cost averaging". This strategy uses a very simple method which is buy in a small portion of a particular stock or a few stocks whenever the stock price falls. However, there is a real danger in applying this lazy-man method. It is not suitable for investors with small or little capital and it is not eligible for penny stocks or companies which have fundamental problem. Back in year 2008, many people flock into buying Lehman's Brother bank when it dipped. Eventually, they all lost their hard earned wealth or pension. When this huge, third largest financial institution in the United States of America finally collapsed, it wiped out the wealth of many Americans.
7) Study The Pattern of the Stocks Before Buying.
Do your own research of the stocks because like human, every stock has its own characteristics too. At least, research whether the stock is on up trend, down trend or trading side way. Let say for the year 2012, Microsoft traded the highest price at USD 400 and the lowest at USD 300. Now, it is trading side way at the range of 350-360. Therefore, wait until the market consolidates and if the stock price is close to the historical high, most probably you want to sell half or all of it. So does vice versa. Again, buy and sell partially, not all.
8) Let the Market Shows You What To Do
If the market is in the bull or up trend, buy in whenever the market is in correction. If the market is in the bear or down trend, only buy in when the market stops falling and starts to rebound. What if the market is trading side way? Be flexible and buy in dividend stocks. Buy more when the market falls and sell some when the market goes up. Aim 20% of profit instead of 50% or 100%. Target the biggest company in the sector because when the market falls, they sustain but when the market comes up, they are the first to up and arise!
9) Avoid Trading When It Comes To Important Date or Earning Announcements.
Rumours normally fly around one or two weeks before the announcement of quarterly results. Check with your brokers or brokerage house websites. Avoid trading before the announcement of Quantitative Easing (better known as QE) or any polling dates.
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