Most people understand the concept that work brings financial rewards. This is no different for professional traders; day traders and high-volume traders know that hard work pays off, and multi-million pound profits can only be realised with hours of painstaking work and financial analysis.
For private traders and investors, the rules are different. Nobody ever lost money by keeping it in a safe place, and impulse trading is one of the biggest risks to capital. People are hard-wired to work hard, so it’s easy to think that making money means that you should always be trading.
Broadly speaking, trading involves two stages: buying, then selling at a profit. This is where many traders make a fatal mistake: they place too much emphasis, on selling when buying is by far the most important part of the process. Before you buy a stock, currency pair or commodity, ask yourself: why am I buying this? If you can’t answer this question, stop. If you don’t know why you would want to own this investment, you also have no idea why you would be able to sell it at a profit.
No-one should buy because they like an instrument; trading should never be a love affair. However, there should always be one reason for buying: the stock, currency or commodity is undervalued, and there are factors that will lead to future growth.
A common rookie mistake while trading is to chase performance; this means jumping on a stock that’s performing well. However, if it’s currently high, the time to buy has passed. When people are already praising the profitability, it’s time to sell.
“The trend is your friend” is one of the worst bits of investment advice ever. No-one ever became rich by following the herd. With around 60 percent of retail trading accounts losing money, following like sheep into the wrong pen is a stupid idea. Buying at a high point will result in limited profits at best, at worst, a loss.
Understanding the intrinsic value of an investment is key. A company with a low stock value that has undergone a positive reorganisation may well be a good investment. A safe haven commodity such as gold is just that: it may not make money over the short-term, but it will always have value and will be profitable when other forms of investment prove unreliable. A currency that has devalued due to an overstated threat may well bounce back.
A key takeaway point is that your capital is always invested wherever it is. Money in the bank will probably make interest, so gambling on an impulse investment may not improve on this. Investing means yielding capital into a receptive fieldwhere it will add value. Investing for the sake of it shows a lack of prior planning, and if there’s a positive result, it’s probably just dumb luck. If you don’t know what you’re doing, do nothing and wait for a real opportunity.Tags: economy, education, investor tips, trading