Everyone thinks they know how to invest in the stock market but more than 80% of the people who invest lose their money. This is mainly because they do not know how to invest money in the right way. They focus on the stock market as a game of chance and but actually it is not. Chance influences when we invest without preparation.
If we know the best way to invest money in the stock market, we can easily minimize the chances of losing our money. When we have a winning system, chance is always changed by probability. And probability is not the same as chance. The probability of winning can be on our side if we have a system that makes us earn 70% of the operations. With chance, there are neither rules nor strategy … and without a strategy, it is almost certain to lose your invested money in the long run.
Last week we have seen some American values that are doing very well at the beginning of the year. These values were not selected at random, but they meet some best treading strategies and guidelines to do so.
The guidelines on how to invest in the stock market:
Never invest in a stock without know how to set Stop-Loss
With the tips here poured will we always win? Of course not. Therefore, it is necessary whenever an investment strategy is considered; you must know how to set Stop-Loss. That level of Stop will allow us to exit with minimal losses in case the trading strategy fails. A common problem is you do not know how to apply a stop-loss strategy correctly. For this, you have this article where I tried to explain the basic rules of investing strategies.
There will be times that a stock value takes us out of the market by having to apply the Stop and a few days hit a high that leaves us with the face of bobos. This happens and it is normal. Why? Well, because the market plays against us and tries to take us out of the market when it intends to rise. This happened recently with Airbus.
Lots of investors had Invested in stock market with the false exit of Airbus. Do not worry when this happens. It’s happened a lot, but do not interpret it as a failure. You have been faithful to the strategy and remember that your strategy will not come out 100% of the time. Most of the time, when you skip a Stop it is because the value wants to keep falling. In addition, generally, when the value wants to rise, it will give new options to incorporate the value, as it happened in Airbus. Being a newbie, they often get stuck in this situation because they don’t know how to invest in the stock market properly at the beginning.
Do not invest more than 10-15% of your portfolio in a security
There are two causes why people almost never apply Stops even knowing how to do it.
- Applying Stop means that we have failed in our strategy. That makes you feel like a loser and you’re a Don (put your name here) and you never lose! So you decide to hold the operation open against all odds and tell everyone “that you are a long-term investor and you are not in a hurry”.
- You have invested a large percentage of your portfolio in a security because analyst Fulano of the radio said it was a clear investment. The strategy has gone so badly and you lose so much money that applying the Stop hurts too much. You prefer to think about “I hope one more day to see if it bounces and I go green”…. and you’re hooked.
Before the first point, there is nothing to do. Your problem with self-esteem will make you lose a lot of money. You have to change that attitude. Later we will talk about “Long Term Investments (LP)”.
The second point is more usual and has a solution without the need to go to the psychologist as in the first point. No matter how sure you are of your investment strategy, you will never know 100% if this investment will be a winner. Whenever you are willing to invest more than 10-15% of your portfolio in a single value, remember the last time you had a bad strategy … which made you earn a good hit and was also a safe value. If you make investments of little capital (10-15% of your portfolio), when you have to apply the stop it will mean little loss and you will be able to assume it. If the investment strategy goes well, you can let the value run and the profit will be even higher.
Diversifying is the key to investing in the stock market
Although at this point, it is directly related to the previous point, with diversification I also refer to companies in the same sector. If for example we have 15% of our portfolio by value, but our values are: Santander, BBVA, Bankia, Bankinter, Sabadell and CaixaBank … we are not really diversifying, since these values, although different we can move in the banking sector. If we see that the banking sector is pulling the Ibex (as is the case today), we must allocate a maximum 15% to the sector. In this case, the smart thing is to invest in the stock market with a value that has worked best and has better input signals, take the example: Bankinter.
Do not put all the eggs in the same basket
And why is it so important to diversify? Well, by pure mathematical probability. When you want to know the answer on how to invest in the stock market for seeking a good return, you must diversify your investment. Imagine this: We want to make sports bets. Since we do not like risk, we always bet on winning the big teams in Europe. If our bet were always all on the same team, we would run much more risk than if we diversified between six large teams in equal parts. If you lose our team we would lose everything, while if you lose one or two of the six teams, you would have two failures and four successes. So we would win mostly and rarely lose. The bookmakers are not stupid. The rate of profit in large teams will always be less than the loss rate. They are made for you to lose in the long run. However, this practice can be applied in the bag.
Always invest in bullish values, never in bearish
Well, we already know that we have to diversify and apply stops. Now the question is how to invest in the stock market? And in what values we should invest? The answer is quite simple: In bullish candle. Ok … and what is a bullish candle? For an example, pick the one that has been going up for three days…one week… one month. And here the answer is complicated: It depends on the risk you are willing to take. If a value started in the stock market at $ 120 and today quotes at $ 2, very bullish is not…. as much as it has risen from $ 0.75 to $ 2. These are the so-called bearish. Normally this type of companies has debts, bad administration, business in downtrend and move to the rhythm of news heaters.
“The easy money that the Bearish candle offer you … will end up catching you”
The worst thing can happen to you if you invest money in the bearish candle that goes right in the first time of your investment. Because it will give you the feeling that making money with a bearish candle is easy and in the long run you will end up losing everything. Avoid them at all costs and if at the end you do not do it, remember at least points 1 and 2.
If you decide to avoid bearish (well done), we have to ask again: What values are advisable? The most bullish possible, those that month after month continue beating historical high. These values will give us more guarantees that our investment ends in positive. To think that a value is not going to keep rising due to being at historical highs is the same mistake as thinking that a value cannot continue to fall by being worth $2 from the $ 120 where it began to quote. Now you know how to invest in the stock market for a good return.
Avoid investing money in time frames (LP, MP, CP)
We are used to talking about the time frame when we invest in a value. Above all, when we do not apply a Stop at the right time… it’s time to bring a change in our investment strategies. In this case, it is always said that it is “because the investment is long term”.
If it is already difficult to know what a value will be this week, how will we know what it will do in 2 years? The temporal frame will be defined by the temporality of the candles we use. If we use weekly or monthly candles in our strategy, it will take weeks or months to apply stop or collection of benefits. But if you use daily candles, you cannot take months (unless you are in a lateralized value, which does not make much sense). And much less, if the temporality of candles that you use is inferior…
Another thing is your investment strategy does not have an objective price to the upside and you limit yourself to go up the profit stop. For me, it is the right thing. But that does not mean you’re going long. It means that you have not yet had an exit sign and therefore you remain within the value.
In short, forget about time frames. You will not know when your target price will be reached. it can be in 3 days or in 3 months. And if you did not apply Stop, do not fool yourself by saying that “it is a value for the LP”. That’s the proper way to investing money in the stock. If you know how to invest in the stock market with the right strategy, there is no doubt you will be a winner.
Avoid investing money based on the news
Something very common is to invest money based on news. A value goes up 30% in a matter of days and suddenly positive news about that value comes out. That is the moment when the little fish begin to buy the value … and what does the value do in the coming days? Fall out.
And why does it fall? Because the sharks, which were within the value before that 30% increase, need to materialize the gain. And they do selling your shares to you 30% higher than a few days ago. That’s how most of us losing money constantly to run after this kind of news based investment.
There is a saying on the stock exchange that is “buy in the rumor and sell with the news” which is very effective.
Of course, the reverse also happens. Recently we saw it with Prosegur when on December 19, they announced a lack of agreements and strikes with the value close to record highs. What did the value do? Keep climbing.
But you have to avoid the news based investment at any costs. It extracts the grain from all the straw that circulates through the network. The news usually buys them to be published when it interests the sharks. Use your knowledge of technical analysis and study the fundamentals of the companies where you plan to invest your money.
Investing money in the stock is very risky when you don’t know how to invest in the stock market in the right strategic way. To avoid this kind of uncertainty, you must learn some knowledge before investing your money in this trading platform. Making money is quite easy and losing money also the same if you pick the wrong strategies. Those were the ideas that I thought will be very effective for a new investor who wants to come to this sector. Good luck pal! If you have any other ideas regarding this topic, feel free to share them in the comment sections.