Do not buy or sell stocks. Invest.
Think long term
The average holding period for common stocks was stated to be 6-10 years by Benjamin Graham. Less than 1% of all listed stocks accounted for net gains from 1926 through December 2009.
It isn’t easy to become a successful trader in today’s market without understanding the history and philosophy of trading written by those who came before us.
To trade successfully, you must first learn what it took others years to discover. Read everything you can get your hands on about investing, money management techniques, and how psychology affects trading performance.
Ignore most technical analysis books as they are generally useless for new investors/traders and only provide support for more significant losses.
A Note About Debt:
Debt is a double-edged sword. It can increase the return on your investments and costs money from your profits as interest payments.
Leverage or gearing can magnify both your gains and losses – hence significant risks must accompany large rewards if you want to earn a more substantial percentage of returns on your investments.
The majority should not use margin/debt/leverage even for long term investing.
Only experienced traders with proven successful investment strategies should consider using this technique as an extra part of their trading plan.
Never only as their sole method of moving forward because you are only borrowing other people’s money that they lend to you at interest so that you can bet against them in the markets.
Pick the companies you trade, not their stocks.
Look for solid management teams with track records of success, good returns on equity and assets, increasing free cash flow generation, and reasonable valuations.
Many people get caught up in either buying “cheap” stocks or “expensive” growth stocks.
Avoid this process by just picking the type of company to invest in that matches your investment criteria (e.g., large-cap stable value, mid to high capital growth, etc.).
This point is more important than it sounds because if you do not believe in what the company does/produces/sells, why would you own its stock?
If you cannot answer why you are buying a specific stock within 1 minute, it probably isn’t right.
Think in probabilities, not possibilities
There is always a “best” stock, but you cannot know which one it will be at any point in time since there are thousands to choose from and thousands of reasons why the price will change every second.
To make money in stocks, you must focus on probabilities rather than possibilities.
Two stocks should move together (in the opposite direction) by 5% than always finding the best individual investment (which can be rarely spotted).
Know what you don’t know and acknowledge when you’re wrong
Most people err on the side of overconfidence in investing/trading because they refuse to acknowledge their ignorance or inexperience in attempting to achieve success.
You cannot learn everything about every stock, strategy, or market in the world, so pick your battles wisely by choosing companies/systems that you understand correctly and do not pay too much attention to those which confuse you.
Do not be emotional when making decisions.
If possible, try to remove all emotion from your trading while keeping your greed and fear in check.
Make plans before entering trades and stick to these plans at all costs unless new information changes your opinion of the company for legitimate reasons, i.e., new products on the way or loss of key management team members.
Ask yourself what the worst thing is that could happen if you are wrong – this helps keep emotions in check because it removes denial (hope) and makes you focus on the reality of any given situation.
Cut losses quickly, let profits run.
After entering a trade, set up Stop-Losses 2-5% below your entry price (for large-cap companies, this can be lower) to prevent significant losses.
If your stock doubles in value, move the stop loss to break even where fluctuations will not affect you as much.
If it triples or quadruples, then moves to stop again to give some money back – you mustn’t let winners turn into losers by hoping they will come back (because they likely won’t).
Letting profits run is also essential because many traders/investors are looking for these stocks, so why sell them early?
Set targets for 20-100% in gains in line with your plan and stick to these targets.
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