Five Things to Know Before Making Your First Stock Trade

10/19/2010 12:01 am EST

Focus: STRATEGIES

Timothy Sykes

Author, An American Hedge Fund

  1. 90% of traders lose money. This is an industry that eats those who don’t do their research ahead of time, so you must do everything possible to succeed or the odds will get you. Expect to make mistakes. The key to long-term success is cutting losses quickly.

  2. If you do happen to profit from the start, don’t let success go to your head. Trades based on your ego will bring you right back down to the 90% of losers out there.

  3. There’s no one “right” style or trading strategy, so find what works best for your personality/strengths and weaknesses. I’m cynical, so I’m a good short seller, but that’s just me!

  4. Don’t aim for home runs or you’ll probably strike out. I like to aim for 10%-20% gains within a few hours or days.

  5. Stick to stocks that are liquid and volatile, and don’t play random stocks with good stories that you hear about from friends/message boards/gurus, etc. Let the market tell you what’s hot. The market never lies; humans do.

Stock tips are for amateurs. Nobody knows exactly where stocks will end up on any given day/month/year except for the true market manipulators, who you probably don’t know and definitely don’t want to know.

The stock market is one big casino. Trust nobody, because everybody’s out to get your hard-earned money, even if you don’t realize it (especially when you don’t realize it!). Don’t even trust friends and family. While they might mean well, placing trust in others is dangerous. It’s ugly and it’s a battlefield, but the good news is if you learn combat strategy, you won’t just survive; you may actually flourish.

In charts I trust. Those who ignore technical analysis might do fine over the long-term—or not—but in the short term, the best guide is technical analysis, for trading purposes at least.

Penny stocks are the simplest, most derided market niche of all, and that’s why I love them. The people who play down here in the gutter are manipulators, sharks, and suckers. There’s plenty of room for someone like you or me, who’s not the smartest or richest person out there, but who is willing to research and the hard work necessary to figure out the truth behind each stock.

The key is finding ideal trading set-ups where you have an “edge” over others. Not an insider trading-type edge, but an edge where you think you’re in a stock for which the news or set-up is so good or exciting, you know once other people hear about it over the next few days or weeks, they’ll get excited too. Then it’s a self-fulfilling prophecy—possibly—and you’ll learn how to surf a wave of profits from others piggy-backing a great story.

By Timothy Sykes

Timothy Sykes is the #1 ranked trader out of 50,000 on Covestor, a blogger, and author of An American Hedge Fund. He can be found at www.TimothySykes.com.

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