Proper prior preparation often minimizes the risks of failure and it enhances the odds of success in any field of application. The most prepared traders and investors often have the best odds of success because success in the financial markets can’t be left to luck or chance. If you are depending on luck or chance to succeed as a trader or investor, you are simply gambling and you’d be better off taking your money to a casino in Las Vegas.
One way to prepare for trading and investing success is to know some basic laws and principles to follow. More importantly, you’ll need to know the most important laws that could make or mar your trading/investing success. This article provides insight into three tips for people who want to improve their odds of success as a traders or investors.
Think twice before day trading
The first tip is quite simple and you don’t need any effort to commit it to memory. Many people have fallen in love with the glamorous image that advertisers have built about day traders who made millions of dollars overnight. However, you should think twice before day trading. The tip advising you to think twice about day trading sounds counterintuitive; yet, the fact is that following this simple tip could save you from losing thousands of trading dollars.
Only two kinds of people make money from the stock market. The first sets of winners are the high-frequency traders who hold stocks for 1/1000th of a second. The second kind of people that make money from the stock market are those who scalp stocks and those who hold stock for years (investors). Day traders are somewhere in-between the two polar ends of the stock market and they make the least money in the long term.
You can’t really compete against high-frequency traders because they use powerful computers to complete their orders on their trading platform of choice. Investors have the leverage of knowing that a good business will always reward its investors even if its stock run into the occasional troubled waters.
Know your trading level
The second powerful tip on investing builds on the first tip and it submits that you should try to know your level of understanding of the market and trade accordingly. Some people are grandmasters of the investing game and they have the most impressive track record spanning years. They might make the occasional bad investment move but their predominant trend shows a consistency in booking gains. The grandmasters also have an army of researchers and analysts working with them to provide them with time and actionable information on market trends.
If you want to succeed as an investor or trader, you might want to consider taking the time to find and understudy these grandmasters. Warren Buffet is a notable grandmaster, Carl Icahn, David Einhorn, and Bill Ackman are some other grandmasters that you can follow. If you have timely information that the grandmasters are buying any stock, you’ll have better odds of booking gains if you also buy the stock than if you short the stock.
Be smart with a weighted portfolio
A weighted portfolio refers to the percentage of your trading/investment portfolio that you devote to any single asset. Many traders and investors have reported success with the 2% rule on a weighted portfolio. The 2% rule simply suggests that you should not put more than two percent of your net worth into a single stock. Hence, if your net worth is $100,000, you should not allocate more than $2000 on any single stock in your portfolio. Of course, you can buy many stocks in the same industry but none of the stocks should command more than 2% of your net worth.
Beginner traders should try as much as possible to apply the weighted rule on their portfolios. In fact, beginners might want to start by allocating 1% of their net worth into a stock and then add another 1% allocation when they see how the stock performs down the road. Experienced traders might amend the rule as they deem fit but the most important thing is to make a conscious decision to weigh your portfolio.