Here are some key trading rules you’ll want to consider when buying any stock. With two key objectives — not losing money and locking in profits — here is my advice on how to set yourself up for success.
1. Always set up a stop loss or trailing stop.
It’s very easy to do, it costs nothing, and it’s a tool your brokerage company or advisor can help set up for every public company you buy. For large companies, I use a simple 10% trailing stop.
For smaller shares, like in the junior resource space, I recommend a 33% to 50% hard stop. You want to limit your losses when extreme volatility hits; a stock that is down 10% only needs an 11% move higher to break even. However, if you allow it to fall 90%, even if you see a 900% gain from there, the entire trade will be a wash.
2. Only buy individual stocks that are in sectors backed by an uptrend.
Don’t fall for value traps – sectors are like the tide: they rise and fall together. The fact is sectors, and even individual shares that make 52-week highs, go on to outpace others until the trend reverses, which could take years.
Don’t try and be the hero and buy the best stock in a sector that’s melting down – if the sector is ugly, just avoid it.
3. Always lock in profits, or at the very least, free-ride your investments after they double.
If a stock doubles, sell half and get your original investment back.
4. Do nothing.
Don’t ever feel obligated to have to re-deploy capital. Sit on your cash and wait for the right deal. Be patient for a great entry point.
5. Always use a limit order when buying or selling.
Set in the price you are willing to pay, and wait. If you don’t get it, then wait some more. I promise you this: if you feel that you’re about to “miss the boat” when making an investment, you’re probably about to lose money.
6. Don’t trade off of macro-economic news or flashy headlines.
If you’re reading about the next Google or Tesla on the homepage of CNBC, believe me, it’s way too late. Countless investors have chased marijuana stocks and others after a celebrity tweets or mentions them in the media. Look, you’re either the one making 100%-plus gains or you’re the guy cashing that person out.
Don’t buy stocks that are being hyped up by the media.
7. Volume moves stocks.
It’s not really a trading rule, but something you should be aware of: a lot of selling can crush a great business. A lot of buying can rally a bad one. Either way, in the end, it is going to be the volume that sets the direction of a share price.
Keep this in mind, especially when buying smaller stocks. If management doesn’t have a plan to attract new shareholders, avoid them completely.
I remember in 2012, there was a gold producer who had just announced commercial production, but the CEO didn’t believe in spending advertising dollars to cover his exceptional story. The stock at the time was at $1. Today, it’s about 7 cents.
Another company had rock in the ground, but was a group of sophisticated mining people who did believe in marketing. Their stock in 2012 was 50 cents. Today, they trade for over $2 and have built up an amazing company – a big win for all involved.
If a CEO ever tells you he believes in “if you build it they will come,” run!
Summary: when buying shares, you are buying fractional pieces of a business. Treat all of these investments just as you would with a private company: know the people, know the risks, and only invest money that you can afford to lose.