As a trader, it’s vital to establish a firm set of rules before buying or selling shares. Once you know your limits and your criteria for choosing stocks, your decision-making process becomes simpler and easier. You’ll rarely feel torn about where to place your money. And if, say, a risky stock that you pass up skyrockets, you probably won’t feel as bad. You may even feel proud of yourself for sticking to your principles.
Factors in Investment Limitations
Setting day trading rules isn’t merely important for psychological reasons. It’s also an effective route to building a portfolio that will earn you a significant amount of money over time. When you have limits, you know exactly when to sell a stock; you’ll cash it in when its price reaches a certain upper limit or bail when it falls to a certain lower limit. Thus, most of your stocks should prove profitable, and none of your picks will devastate your savings.
You might set daily limits as well. That is, as soon as you earn a set quantity of money in one day, you’ll immediately pull out for the day. Similarly, once you lose a specified amount in a single day, you’ll cease your investing activities. That way, you’re less likely to fall victim to a sharp, sudden downturn.
Your trading rules must deal with more than dollar amounts, however. You should also keep up with market news and know which events would compel you to buy or sell. For instance, if a mega-investor started buying up a hefty percentage of a company in which you owned stock, that event might trigger you to sell those stocks right away. Additionally, earnings reports often induce investors to act.
Putting Your Plan Together
So how do you go about crafting those limits? As with almost everything in life, knowledge is fundamental. Give yourself a few months to learn everything you possibly can about the industries and companies in which you might invest. Attend courses, seminars, and conferences. Read books, trade journals, relevant periodicals, and charts. Quiz experts. Eventually, you’ll develop keen, insightful expectations for various stocks.
Some trial and error may be necessary as well. Thus, you might set aside a modest amount of money with which to experiment. You can then test various rules to see which pay off the most for you.
Don’t be afraid to modify your rules on occasion. Keep reviewing the performance of your investments. Keep educating yourself on the market. And then make alterations as necessary. Once you have a portfolio that consistently performs well, you’ll know that you’ve instituted a winning set of restrictions
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