Top 5 Trading Methods To Protect Your Capital


By Imelda Garcia

Stock traders have to continuously change to a uncertain market. Learning to hit winning stock trades is a never ending endeavor. The most famous investors who have ever lived all have something in common: techniques that they use over and over again. Here is some of my favorite stock trading techniques that I have learned over the years.

RSI under 30: The best technical indicator for timing your entry into a stock is the RSI. The RSI oscillates between zero and 100. When a stock has an RSI below 30 it is oversold. When it has an RSI above 70 it is overbought. Chasing a stock after it has already had a big move is a recipe for disaster. A good rule of thumb is to never chase stocks. Only enter a stock if the RSI is below 30. If you control your emotions and learn to master this technique, you will greatly improve your entries and your profits on a winning trade.

Know thyself: Knowing what type of trader you are will carry into all facets of your trading. Some people have little patience and want to actively trade in and out of stocks. For someone like this, trying to execute a long term buy and hold strategy is nearly impossible. This type of person will sell for a loss because he grew impatient waiting for a stock that seemingly was going no where. On the opposite side, some people hate trading in and out of stocks because it means they have to watch their investments constantly. They may have a day job, family obligations, or simply not like to sit in front of a computer screen staring at a chart for hours a day. For people like this, a buy and hold strategy where they can check on a stock every few days is something that will work better. Know yourself. See what is best for your lifestyle and then seek to master that trading style.

High beta: Look for stocks with a beta score greater than 1. The greater the beta score the better. How much a stock moves when the larger market moves is what beta tells you. Stocks that can really move are what you want for swing trading. It is unlikely that you will be able to buy a stock like Microsoft or Google and experience a 50% move or more in the stock over a 6 month period. Stocks with a lower beta score are great for defensive, buy and hold investing. But for day trading or swing trading, lower beta stocks do not move enough for you to make a lot of money trading in and out of them.

More volume: We have all bought a stock at one time or another only to find out later that we can not sell out of it at the price we want. If the volume is too low in a stock, there are not enough sellers for you to execute a buy or enough buyers for you to execute a sell. Lower volume stocks require limit orders and patience to move in and out of them. When the market plunges lower, low volume stocks will trap you in the trade. You want a minimum of 400,000 shares traded per day. The more volume the better. Volume is a measure of liquidity in a stock and how easily you can trade in and out of it at the price you want.

Know the yearly trends: There are yearly trends that occur almost every year. The best and worst 6 months of the year are some of the more important yearly trends that you should learn. November through April is the best 6 months of the year. The worst 6 months of the year is from May to October. When the market hits a yearly low sometime between September and November, you want to starting buying stocks. When the market hits a high sometime between April and May, you want to sell your stocks and move to the sidelines and the safety of cash. It would be great if this pattern happened every year but it does not. Nothing is absolute in stock trading. We can only deal in likely outcomes. The best 6 months and the worst 6 months happens more often than not and so we seek to go with the greater probability. Between April and September, you should trade more defensively.

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Tags: Finance, Investing, money, Personal Finance, stock market, stock trading



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