Investing in the stock or commodity markets can be challenging because prices can rise or fall suddenly. According to an article published by MarketWatch, market volatility is one of the biggest risks faced by every trader. In fact, most seasoned traders usually pay close attention to the CBOE Volatility Index (VIX). With that in mind, here are four tips for trading stocks:
Go for Long-Term Investments
Although there are many traders who make short-term investments, long-term plays are more sensible. This is because most short-term investments tend to be based on rumors, fears, speculation, and unsubstantiated news. These factors cause the volatility or “fear” index to rise significantly, which translates to increased likelihood of losing money. Over the long term, you are likely to make money because fundamentals such as earnings determine a stock’s price.
Identify an Investment Strategy and Stick with It
To succeed as a trader, you have to choose an investment strategy and stick with it. A good example is the Oracle of Omaha, Warren Buffet, who has parlayed his “value investing” strategy into a fortune worth billions of dollars. During the dotcom era, he resisted calls to invest in tech companies. The dotcom bust vindicated his view and investment approach. Mr. Buffet also once compared financial derivatives, which played in a big role in the subprime mortgage crisis, to weapons of mass destruction.
Expect a few losses along the way because it is virtually impossible to avoid losses. In fact, professional traders know this fact and take steps to minimize their losses. The rule of thumb is to use limit orders when buying or selling assets. Limit orders allow you to buy stocks or commodities slightly above the market price. Keith Ross, CEO of alternative trading system developer PDG Enterprises Inc., recommends this approach because it allows one to buy into instead of against a trend.
Enter Into Trading Positions at the Right Time
Successful traders know when to enter into trading positions. The best time of the day to execute a trade is between 1pm and 2:30pm EST. At this time, most of the people in the US have gone to work including the entire West Coast. In addition, traders and investors have had time to digest economic news and government statistics usually released in the morning. Another good time to enter into trading positions is around the 18th through the 22nd of the every month. During this period, cash flows from large investors such as pension funds tend to be at the lowest. As a result, prices also fall. Finally, markets tend to fall during the months of September and October. If you buy stocks during this period, sell in April or early May when markets tend to be high.
Overall, to succeed as a trader, you should go for long-term investments, enter into trading positions at the right time, identify an investment strategy and stick with it, and expect occasional losses.