LESSON 1: Let your profits run and cut your losses short
It is our natural human tendency to hold onto a share (in the USA called a stock) whose price has dropped, hoping that soon it will go back up - but often it just keeps going down or sideways for a long time.
By following a simple step (as explained below) there is no reason why an investor should ever be in such a situation.
The opposite is true when our share goes up. A typical reaction once we have made a small profit is to want to sell the share, out of fear that we may lose that profit - although often by holding the share for longer we could make far more money.
LESSON 1 CONTINUED: How do we do it?
There is a very simple rule to check that you cut your losses short: As soon as you buy a share always place a sell stop order. For those of you who are new investors, what does this mean?
A sell stop is simply an automatic order that you give to your stock broker (a real person by telephone or through the internet online) to sell your shares if they ever drop below a certain level that you preset. By doing this you are minimising your losses should the share go down.
However if your share goes up in price (after doing your fundamental checks / basic chart reading as discussed in lessons 2 and 3, this will hopefully be the more likely scenario) your initial sell stop level won’t be reached.
The trick is that once you have started to make a profit on the trade, you need to move your sell stop up to a higher price – thereby locking in your profit. Ideally you need a precise method of knowing how much and when to move the sell stop up.
The details of how to do this are easiest to explain and understand with a live example and can be learnt at one of our free training courses.
LESSON 1 CONTINUED: Tips for more advanced traders
Never place a sell stop at a round price figure e.g. £3.00 or £5.00. Lots of people do this and so market makers are keen get these stops actioned.
If using a share price bottom to set your sell stop always place the stop slightly below the lowest point on the share price bottom - this will help prevent you being stopped out too soon.
LESSON 2: Find good quality companies for increased profits
In these next lessons there are two things that you would be wise to have a quick look at.
First is the company’s fundamentals:
By fundamentals we mean the company’s financial facts and figures. At the very least, check that the company’s yearly profits and sales growth figures are fairly healthy (i.e. positive and increasing)
LESSON 2 CONTINUED: How do we do it?
An easy way to do this is by going to the financial section of any big investment website and getting the data for the company that you are interested in.
At our free training courses we walk through exactly how to do this and explain two other important fundamentals.
In the past some companies with great fundamentals have produced outstanding returns and although this obviously isn’t always the case, good fundamentals do stack the odds on your side.
LESSON 3: Buy good quality companies at the right price
Before purchasing any shares it is important to look at the company’s share chart, as this can help you get your timing right.
If you see a share chart where the share price has formed a pattern that looks a bit similar to any of the three diagrams below, this is generally a good sign.
It means that the share price has more chance of going up than down (you can certainly get more advanced than this, but these will give you something to start with).
The charts are in order of their reliability, with the last chart pattern (the Cup) the most reliable – after you see the section marked on the chart, the share price is more likely to continue going up, than going down.
In 'real life' chart patterns rarely look as perfect as these, so you need to look for the general pattern.
These three chart patterns are examples of what are called reversal chart patterns: if the share price was coming down and then does one of these patterns, it is now more likely to reverse direction and go back up.
You can turn these patterns upside down and you have the same three chart patterns, but instead of bottoms, they are now tops. If you see a chart that looks like any of these, the share price is now more likely to go down.
The other main type of chart patterns that you need to know about are called continuation patterns – we’ll be going through some of these at our free live stock market training course, so book your place now...