Understanding how the stock market works and having a trading strategy is only useful if you stick to it. If you invest in a stock market lesson to learn some good stock market strategies then you need to keep to the plan if you want to succeed. However many stock market investors let their emotions take hold of them and they forget the strategies they learnt from the stock market lessons that they have paid good money for. They become emotionally engrossed in a trade, so they ignore all the rules and warning signs.
Many investors forget their plans and strategies and either simply watch as their portfolio values drop and they will still hold their positions or then in a moment of panic decide to sell at the lowest point in the market realising the largest possible loss. Or they may fear missing out on a big gain, or be so deep in loss that they could not possibly sell at that point. Even if you believe that all positions will recover from their losses, and the truth is that not all of them will, this is a terrible way to trade. It shows a lack of understanding about how the stock market works and it does not matter what stock market lessons you subscribe to. If you do not have the right investing psychology, you are going to continually make donations to the market.
Any stock market lesson should teach you that when you first form your plan for a trade, you should consider what stock price you think it is likely to reach. Often this is called a target price, which often gives the beginner investor the wrong impression. A target price is not necessarily the stock price that has to be reached. Depending on your strategy often a stock price does not have to do anything. If you treat your target price as a goal, it can lead to many problems. Your target price should only be used as a guideline. In a strategy like the share renting strategy it can actually can be advantageous for the stock price not to move much.
The target price helps you figure out your risk to reward ratio, and it gives you an exit signal in your trade. Many advise that setting a 30% profit and 20% loss is the point where a trade should be exited. At the least, it should give you a point where you should reassess the ability of the trade to continue following a particular trend. Remember your trade may never reach your target price. Many factors can interfere with the stock market and a stock price, and you may have set your target higher than you should have.
A good stock market lesson is to understand that there are a number of factors that can influence a stock price and force you to close your position sooner than you may have planned. Your stock market lesson education should cover all of these possibilities, but here are some reasons that should always prompt you to close or reassess a position:
1. The end of a trend. Remember that the trend is your friend and all trends end some time, and you should be prepared for this.
2. The stock price upward movement has slowed or been abruptly broken, ending its momentum.
3. The stock price is approaching a major psychological or historical price barrier. For example when the stock price is getting close to a rounded number like, $50 or $60. This should been anticipated in your plan and it may be wise to set a sell order just below these prices to ensure you order is filled first. So you may set the sell order for $49.99 and your order be filled before the stock price hits $50 and triggering many more buy or sell orders from other “average” stock market investors.
4. The stock is about to reach a resistance level it has been unable to break through before. This technical barrier should also have been anticipated in your plan.
5. A sudden widespread stock market decline, or the threat of one or some other serious uncertainty which leads to unsafe market conditions.
It is important to fully appreciate how the stock market works and your chosen strategies that you have learnt from any stock market lesson you have invested in. The stock market can be a fantastic wealth creation vehicle but you need to be able to control your emotions of fear and greed to be consistently successful.