When it comes to commodity stock trading, some rules must be followed at all times. To help improve your chances of being a successful trader, here are the most important principles of trading:
- Ride out your losses: Always keep your losses in check. If the losses get too big, it can result in emotional devastation for the trader and also greatly deplete his or her trading capital. Many successful traders agree that this is the most important principle of trading.
- Maximize your profit: Often there are large periods of time when it becomes quite difficult to make a profit. In the instances when you do achieve a profit, you should aim to get the most out of the move in the stock. Some stocks take time to rise in prices, and it is better to wait until the high in the stock is achieved and then the decline in prices occurs before closing the position. When you see the decline, you know that the stock will not rise any higher, and the time is ripe to close the position.
- Go with the flow: Trends in the market should be your guide. If you try to determine the bottom of the stock or try to time your entry into the market accordingly, then you could be in for a rough ride. When a stock is trending – particularly in the downward direction – a great force and momentum is at work. Instead of trying to fight the flow of the market, be adaptable and go with it.
- Don’t force a trade: You should never trade just for the sake of trading. If you feel uncomfortable about a particular trade, it is better to not open a position. Deciding to skip these kinds of trades will save you from losses.
- Trust only YOUR judgment: More often than not many traders act on a tip that a stock will rise as high as the moon. When that does not happen, traders still keep on investing in that stock and forget to cut their losses in the hopes of that meteoric rise in stock prices. Instead of reacting to tips, have confidence in your own judgment.
- Always trade liquid stocks: Many traders are often stuck with stocks they want to sell, but can’t because of a lack of buyers. To avoid this you should always demand liquidity in your securities before trading them.
- Have a position sizing model: To be successful in long-term trading you need to understand and manage risk. One of the best ways to do that is by using a position sizing model. This will allow you to spread out your risks around several positions instead of allotting too much money to just one position.
- A cheap stock doesn’t necessarily mean a good stock: You should only consider stocks which are trading up. It is always better not to wait for a cheap stock to rise in prices, as it may not do so again.
Following these simple rules will help you make the right trades. As a result, you will get closer and closer to being a successful trader.