We’ve all heard it before, CYA or “Cover Your a**” when it comes to documenting everything so that when the crap starts flying, it doesn’t hit you. It’s usually applied to work, or bitter divorces, but it can also apply to the stock market. In fact, it should apply to the stock market on every single trade. Think of it like insurance. We’re required by law to have insurance on our vehicles, on boats, motorcycles, and more. You should have insurance on your house, in case of emergencies, and life insurance for worst case scenarios. So why wouldn’t you want the same insurance strategy for your stock trades? It’s protecting your money, right?
CYA Trading involves research (if you haven’t noticed yet, we’re huge fans of researching a trade. So here are a quick 5 tips to make sure you are “Covering Your a**!”
Trends don’t lie- until they do. If you were going to hike up a mountain, would you follow a path or forge your own? The easiest way would be to follow a path. The same holds true in the market. Don’t argue with the tape. Always follow the line of least resistance and remember that the trend is your friend.
Don’t argue with the Truth – ever. The truth is that markets are never wrong, but traders and their opinions of stocks often are. Watch the trend, watch the directions and keep an eye on the headlines and an ear on the news to know which direction the market might take.
Set your stops before you set your order. This is rule number one of stock trading and limiting your losses. Place a stop loss order for each trade. This is the insurance policy that will keep you from losing your investment capital. You never want to lose more than ten percent of your investment. If you’re on the losing side of a trade, get out. It’s probably not going to turn around, and you could go broke waiting for it to come back. If the trend reverses, you can always get back in for the ride up.
Research history – Again we’re advocating research. Why? Good stock speculators aren’t in the market part time. It’s almost more than a job, it’s a teachable gift and a calling. If you want to become a very successful trader, you have to constantly learn about the market and the thing you must learn is that history repeats itself. Market trends repeat in readily identifiable patterns, and the reason for this is because the market is played by humans, and humans are creatures of habit. We react out of base emotion, and base emotion controls the market. If you learn to read long term charts, you will identify trading patterns. If you learn to read how the markets react to earnings announcements, and you can see that pattern in a chart, you can create profitable stock trades.
If you are a lazy trader, you will fail. It’s a clear and simple rule. Sure you may luck out on a trade or two, you may even make a little money, but long term trading success will be elusive. You won’t learn to follow market trends, you’ll leave money on the table, and you’ll stay in a position too long and deplete your capital- if you won’t do the legwork to be a trader, just stick to investing. The long term outlook of the stock market may feel bleak at moment, but history reveals that it will reverse. If you can’t stand the roller coaster ride, if you won’t put in the time and effort to be successful, then pick your five companies, one in each industry, and invest in the companies for long term growth.
There you have it. Five Tips to CYA in Stock Trading that will keep your portfolio growing, your knowledge expanding and will make you an advanced trader like the giants of the industry.
