Master Architect, Tim Sykes, At Your Service
Dear Penny Stock Millionaire,
Every trader has to start somewhere right? So even if you don’t know the first thing about trading, that’s ok! As a teacher, it’s often easier to start teaching someone who knows nothing, than someone who has learned a bunch of stuff wrong.
It’s like an architect building a foundation.
If the ground is already cleared, it much easier to lay a foundation. If there is a crumbling, badly built structure from another builder who never finished the project, the architect has to tear down the other building first, before they can start creating something new.
I’m going to start at the very beginning. You’re going to have to do the hard work of putting aside the things that you’ve learned before that are wrong.
Let’s get started.
#1 Risk and Mental Control Is a Must
This is so important that it has to be number one. Without knowing your risk tolerance and without knowing how to exercise mental control, you could lose big time.
You could do everything else right and at the last second cross your risk boundary and have it all go down the tube!
Let’s start with risk. In any stock market play, the risk-to-reward ratio is the level of risk you’re willing to take, compared to the possible rewards. I teach students to set a risk level before they enter a trade. Once you set your level of risk, you have to maintain mental control. If you set a target and the trade is going well, once the target is met, close your position. Why? Because this is exercising mental discipline.
The same goes for trades gone wrong. Once you hit your loss limit, close your position. Don’t hope the trade will turn back around!
Doing this will mean that you might leave money on the table sometimes when the stock keeps going up after your limit is met.
Don’t get greedy. Be happy with the gains you made, and not upset that you could have made more. You’ll win more, and lose less in the long run if you play it safe than if you gamble.
A great way to keep track of risk and mental control is by using a trading journal. You seriously need to do this.
#2 Choose the Right Broker for You
The broker you choose has a lot to do with your investing or trading strategy. Other things to consider are fees and commissions.
There are a ton of brokers out there. As a trader, I look for brokers to meet very specific needs. Over the years I’ve been through dozens of brokers. I’ve pretty much tried them all.
Different brokers have different rules and different minimums. Depending on where you live there might be different rules as well. Say you’re learning how to trade the stock market in India. Well, the brokers and stock market basics rules there might be different.
#3 Get to Know Key Stock Market Terms
Bull market, bear market, earnings releases, dividends, volatility … the list goes waaaay on.
The stock market has its own language. You must know key stock market basics terms. Here’s a short ‘scratch the surface’ list of definitions to start with now. Learn them. Study them. Every day. You’ve gotta know this lingo like the back of your hand.
When major indexes drop 20% or more from recent highs, it’s a sign of a bear market
When major indexes rise 20% or more from recent lows, it’s a sign of a bull market. We’ve been in one of the longest bull markets in history recently. Some pundits think it’s about to end. We’ll see.
When a stock breaks below the previous lows. This could be daily, weekly or even 52-week levels. Breakdowns tend to keep going lower because, theoretically, there’s bad news about the stock.
A breakout happens when a stock breaks above previous highs. Again, this could apply to daily, weekly, monthly, or 52-week levels. Breakouts tend to keep going higher for the same reason breakdowns tend to keep going lower: news.
When the major indexes drop 10% from recent highs, it’s a correction. It’s often considered positive because it gives time for a period of consolidation and prepares the market for the next advance.
Quarterly earnings release
This is important for both traders and long-term investors. When a company releases its quarterly revenue and earnings per share you can tell how the company is doing. Earnings can be a strong catalyst for big price jumps. As a trader, that’s highly valuable information.
Some companies pay dividends to shareholders. Others invest profits back into the company. This creates two categories of stock: dividend stocks and growth stocks. More established companies sometimes pay their shareholders dividends on a regular basis.
As I explained yesterday, ask is the price a seller wants for their shares. Bid is the price a buyer is willing to pay. The spread is the difference.
You know the phrase ‘don’t sell yourself short’? Well, that doesn’t necessarily apply to penny stocks. Short selling is my all-time favorite trading strategy. Going short means you bet on a stock going lower.
Going long means you bet on the stock price going higher. Breakouts tend to keep going higher because, theoretically, there is good news.
Technically, this isn’t a ‘stock market’ term. I included it because without a trading platform you can’t trade.
I’ll get more into this tomorrow, but for now, volatility is the difference in price between a low and a high for a stock within a given period (usually a day). In other words, it’s the amount of price swing. I like volatility. It allows me to look for certain set-ups and patterns I know can be profitable.
#4 Stock Patterns Repeat Themselves
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One of the things I learned early in my stock trading career is this: Patterns repeat themselves in the stock market. Patterns that were happening 20 years ago are still happening!
Sometimes things shift based on market sentiment and the economy, so you’ll have to adapt your style to the types of trades available. But you keep the knowledge of what you’ve been doing because it will likely come back at some point.
An example of this is my experience back in 2000. I had been trading for around two years when suddenly the type of trades I was playing stopped. The tech bubble was about to burst and the setups I was using simply weren’t appearing.
What did I do? Did I try to force trades? Hell no!
I took a step back and started studying again so I could figure out a new strategy. I looked for new patterns. You don’t have to learn them all at once. As a matter of fact, I recommend you only use a few at first.
The Bottom Line
So based on this post, what foundation should you have now?
Mental stops, and a trading plan are absolutely crucial to your success as a trader.
You’ll need to choose a broker, and fund a brokerage account.
Know your lingo. If you want to be a trader you need to speak the language. Take time to memorize the terms until you don’t have to think about it when you’re doing stock analysis (I’ll talk more about how to do that tomorrow).
Patterns repeat themselves. If you know what to look for you can use them to inform your trades to give you a leg up on traders who invest based on emotion, half assed research, and listening to some self proclaimed ‘guru’
Tomorrow, I’ll cover 7 more steps you’ll need to take if you want to play the markets, believe me you won’t wanna miss it.
Editor, Penny Stock Millionaires