What should I pay attention to when starting trading?
This question is one of the top questions we are asked time and time again. At the same time, it is a legitimate question, as it starts at the foundation - and doesn't bluntly ask which stocks to buy (nobody knows that for sure).
Especially as a beginner, you will likely encounter this situation:
- You have bought stocks, they hardly move, and your capital is tied up for what feels like an eternity.
- You bet on stocks that move against you, and you wait longer than expected to exit, as you hope until the last moment that they will move in your direction.
- Or you analyze and anticipate stock developments correctly, but you are too early and the stock takes off without you on board.
You are not alone. Many haves had these and similar problems. Including me when I started trading. That's why I will address the five most common mistakes in this blog post and tell you how to avoid them.
Trading Mistake 1: Buying slow-moving stocks
We want to trade stocks that move. It doesn't help us if we invest and the stock is still at the same price months later. The average daily range (ADR) helps with this. It indicates how much the stock moves on average from high to low per day.
In contrast to other indicators such as the well-known Average True Range (ATR), trading gaps are ignored, so only the actual movement range is measured. By measuring this value in percentage, we can quickly compare different stocks with each other and make clear statements about which ones move more and where our focus should be.
Remember: We can only make money when stocks move. The rule of thumb is: the higher the ADR, the better; but of course, you can limit this upwards if you don't like too volatile stocks. For a good selection, I recommend a minimum value of 4%.
Trading Mistake 2: Trading stocks with too little volume
The second mistake I see time and time again is a lack of liquidity in the selection of stocks. Many beginners trade stocks that have too little volume. Since the volume depends on the price of the stock, I recommend using the so-called dollar volume ($-volume) as a tip. Here, you simply calculate the price of the stock times the average volume of the stock. Go to sites like finviz.com and look at the average volume of the respective stock.
My rule of thumb for dollar volume: 50 million dollars.
Trading Mistake 3: Trading stocks with too little relative volume
What do I mean by this? Quite simply: too little relative volume. But first: what is relative volume?
Relative volume indicates how much volume, or how many shares, are traded and compares this number with a previous period. Let's assume that 20.4 million shares were traded for a stock on a given day. Normally, 30.1 million shares are traded for the same stock on average. This results in a relative volume of 0.65 for that day.
What is the point of all this? Imagine that you want to get into a stock ideally when the timing is perfect, and the stock is in high demand, with various investors buying. In this case, the relative volume will automatically be higher. If the relative volume is low, there will usually be no significant movement.
Important: Relative volume never indicates the direction. Therefore, it should be seen as more than just a fuel, but the direction of movement must be determined in other ways. My rule of thumb: only trade stocks with a relative volume greater than 2.
Trading Mistake 4: Trading stocks without a catalyst
Increased relative volume is often triggered by a catalyst. We call these catalysts because they can accelerate reactions, as in chemistry. These can be any kind of news. It is essential to note that while it is nice to know if a stock has news, you should also pay attention to the relative volume, as this shows in real-time whether the supposed news is as important as you think it is. News that can act as a catalyst includes quarterly figures, news about products, or similar.
Remember: News that comes from the company itself is more important than news that comes from analysts. Therefore, a change in a price target is not as important as news from a company that points to a problem with a product. Here, too, it is not primarily about which direction it goes but more about the fuel. Together with increased relative volume, we can, therefore, expect significant movements.
Trading Mistake 5: Poor timing
How often has it happened to you that you get in, and nothing happens, and the stock just doldrums sideways? This can be easily avoided if you implement the previous four points. We want to optimize the timing of entries. How do we do that? We use charts! We always want to trade only when we are outside the previous day. In technical jargon, this is called an Outside Play.
- Inside the previous day = bad
- Outside the previous day = always better
- Longer consolidations = even better
Summary
Therefore, in the end, a good stock selection can be broken down to internalizing the five points described here in the article and adapting your future selection accordingly. However, it should be noted once again that each point is not sufficient in itself as a clear indicator. It is the combination of the various points that takes stock selection to a higher level and thus takes you one step closer to sustainable success in trading.