Trading is a psychologically and emotionally difficult task – with indicators, nonstop news, feeds, and billions of dollars flowing through the markets each and every minute of the day. There are several trading tips that can help you protect your investments, while maximizing each position.
Trading Tip #1: $.98 is better than $1
You would never expect to hear that $.98 is better than a full dollar, but in trading, this is very true. In any market, it is important to have the edge over the competition. When placing limit orders, selling at $20.98 is a much better position than a sell order at $21. Not only is the difference psychological, but nearly every $1 on a stock price is a support or resistance line.
In a day trading or swing trade position, the difference between $20.98 and $21 can mean that your position gets filled or it does not. You would hate to get stopped out on a position after missing your sell order by just a few pennies. Other people are setting their orders at even dollar amounts; setting yours a bit lower will mean that you get a quicker fill and avoid the effects of resistance.
Trading Tip #2: Limit orders are the best way to buy
While some brokerages might charge more for a limit order, it is a much better way to get in a position than a market order. A market order means that you’re willing to pay whatever the market – or more importantly the market maker – wants you to pay for a certain stock. A limit order takes all the guesswork out of the price and allows you to set the price that you’re willing to pay, rather than the price that the market wants you to pay.
Market orders might seem like the quickest and cheapest way to get in on the hot stock, but in the long run you’ll pay extra for it. Limit orders might take more time and a larger commission to execute, but they will save you money because you pay exactly what you want to pay. Limit orders also offer more flexibility; you can set the price that you are willing to pay for a certain stock and for how long you’re willing to wait. If you think Apple is a good buy at $140 but only for the next 4 weeks, you can set a limit order to follow those commands exactly.
Trading Tip #3: Avoid the news
For technical traders and short term investors, any news can be bad news. It is not necessarily a good strategy to take a position in a stock that is constantly making headlines. A whipsaw market usually accompanies a headline. Even if the news is positive, a stock can quickly turn negative as people start putting in their sell orders to sell into the buying spree. Some traders start dumping stock immediately after they expect a news release, not willing to hold a position through the release.
During release times, orders can take longer to fill, have higher spreads, and end up costing your portfolio substantial amounts of money. It is best to err on the side of caution and plan ahead of news events. For example, interest rate cuts can both hurt and help some banks, job losses hurt luxury items, and inflation hurts everyone.
Trading Tip #4: Volume is important
Stocks with low volume should be avoided. Over the long term, these stocks move violently because each order greatly affects the price of the stock. For stocks with a high daily volume, so much trading volume means that the small trades have little effect on the overall price of the stock. For low daily volume stocks, each trade impacts the market price much more than high volume stocks.
Avoid the low volume stocks in favor of more liquid investments. In a low volume situation, it is not uncommon to see stock prices slide dramatically before your order is executed. Make sure that you are not the only one pushing the value of the stock.