Wealth

Part 23 - Trading Strategies

 

Avoid buying a stock that has had a huge increase and then selling when it falls sharply. If you miss a selling opportunity and have a large loss, before you sell, make sure that the stock is not about to bounce back. Some investor like a stock and only buy when it falls in price and then patiently wait until it recovers. Most stocks tend to recover but some will just go sideways for a long time.

You can lose money on individual stocks but you can reduce the risk of losses by;- learning as much as you can about a stock or ETF before you buy. Your broker's web site will provide a lot of information and you can get more from many other sites. 

For example,  https://stockcharts.com/ provides information (you do not need to log in) on 50 and 200 day stock movements and compares these to daily prices to indicate whether a stock is rising or falling more rapidly than the moving average. 

If you have an account with TD Webbroker, you can compare any stock's price with other stocks in graphical form over various time period. So you can see at a glance which stocks are performing better than others.

Most web brokers allow you to practice trading without using money so that you can learn how the web site works and how to trade without losing (or making) money.

First thing. Forget what you paid for a stock! The market does not know, and does not care what you paid. 

Buy if you think a stock is going up and sell if it goes down; this is more difficult if you have lost money. But do not be too concerned if a stock drops a little if you are sure that the company is growing.

Be careful about sharp price movements on 'news.' Quite often, the news is put-out by people intent on manipulating the price to their advantage. Pump-and-dump schemes and short sellers are forever with us. But sometimes the news may be accurate and a stock price moves rapidly up or down. Either way, it will probably reverse course as it reverts to the mean.

Companies having a relatively low Price/Earnings (PE) ratio tend to be less risky. Canadian banks for example typically have PE's around 12 whereas some growth stocks (like SHOP) have very high or even no PE ratio meaning the company is not profitable but investors expect it to become profitable in future. This is quite normal for newly established companies that are growing rapidly.

 But, a low PE may be a sign that the company is not growing and investors have lost interest. Normally, avoid companies with a low PE because that may mean the company is in trouble. Check the earning and compare this with the dividend payout and any large debt.

Strong companies typically have dividend yield of 3 to 5% because investors believe the stock is growing. A long run, winning strategy is to buy companies with a track record of increasing dividends each year.

Check to see if quarterly earning are increasing. Check historical price movement to judge volatility and trends. Keep a diversified portfolio of stocks either by holding ETF's or buying a variety of stocks in a variety of businesses.

Buy less volatile and less cyclical stocks, or trade on the swings. Generally use stop-loss, sell orders (sell stocks that drop more than 10 or 15% in price). Selling stocks at a loss is psychologically difficult but it is essential, if you are to make gains over the long term. Holding on to stocks that have lost the interest of investors is a sure way to lose money. Check the volume (number of shares sold per day or month or any other time period. Higher than average daily volume suggest more investor interest and low volumes indicate buyers are losing interest.