Even the world’s best and most experienced investors have made at least one mistake in their portfolio that could have been avoided. Sharing expert market advice is, I believe, one of the keys to routinely making successful investment decisions, and when I speak to inexperienced investors they all want to know one thing: how do the experts invest successfully and consistently generate high returns?
- Stack things in your favour
When you’re interested in a stock and expect it to go up in value, research its background before investing. Look into the wider economy, the market, and industry trends to see if they are also on the up. Make sure the stock’s chart demonstrates a positive pattern, and that the indicators suggest a movement in the direction you want. And check your interest is justified by confirming the stock’s price is trending upwards over time. If your stock passes all of these tests, you stand the best chance of making a profit on your investment.
- Cut your losses short and let your profits run
A lot of new investors make the mistake of inverting this rule, letting their losses grow larger in the hope of a quick turnaround while selling quickly when they start to make a profit. But you need to do the exact opposite. To help you avoid this, whenever you set a trade, set a stop order at the same time and stick to it. Never cancel these stop orders once you’ve established them, and learn to use trailing stops to help you cut your losses and let your profits run.
- Have written rules and follow them
Set out your trading strategy in writing, including when to buy, when to sell at a profit and, most crucially, when to sell at a loss. And then stick to it. It’s inevitable that when you’re trading you’ll want to follow your gut instincts rather than what’s most logical, but consistency in your strategy is a must.
- Let the market tip its hand
No one knows everything about the financial markets. But there are a few basic concepts you can take on board to help you minimise the risk to your investments. First of all, don’t invest when the stock or the market is going against you. Wait for it to take off in the direction you want before putting your money in. Then, try to make your purchase on the break of the most recent peak. And give yourself the best chance of winning by waiting for a breakout immediately followed by a pullback.
- Always let the price force your action
This is simple: Always buy or sell when the price exceeds your target price (when you enter a position) or your stop (when you exit a position). But never buy or sell just because the chart suggests it’s a good idea or the indicator gives you a signal to do so.
- Don’t be a sheep
Don’t follow the crowd; follow the experts. When the market panics and a frenzied period of selling begins, do the opposite to everyone else – people are usually wrong when they make hasty decisions.
- Never add to a losing position
A lot of investors believe that if the market is going against you, you should try to reduce your cost by following the “averaging down” rule, which advises you to buy more stock when you’re in a losing position. This clearly goes against common sense: if the stock value keeps falling you will have even heavier losses to bear.
- The markets’ reaction to the news is more important than the news itself
Remember that markets react based on what they expect to happen in the news, before that news is confirmed. Markets hedge their bets and wait, but it’s not uncommon for them to make mistakes. Don’t panic if expected news impacts your trading; let the market reaction guide your actions once the news is released. As Warren Buffett put it: “Be fearful when others are greedy, and be greedy when others are fearful.”
- Do not try to predict the future
This is perhaps the most important point I want to make. Whether you’re investigating an existing trade or looking into the viability of a new one, it’s a waste of your time to second guess future market movements. Instead, try visualising possible scenarios depending on different courses of action, and work these into your trading strategy.
- If the market doesn’t do what you think it should, get out
The market mirrors the real world; it’s too big to fight against. So if it doesn’t make sense to you and if you can’t reason with what the market is doing, then close the trade and get out.