Top Three Questions to Ask Before Any Trade
No one was ever born a successful trader, but we all have the potential to become one.
The other week, we discussed the key reason why so many traders fail because they get caught up in doing what every one else is doing.
However, even if you’re successful at doing just that, there are other key elements of a trade, including planning out the trade and executing it properly. Unfortunately, all too often, we trade without a plan, without a safety net. And that’s the best way to lose money. Here are top five questions you should always ask yourself prior to a trade.
No. 1 – What Does the Company Do?
You’d be shocked at how many traders are poorly prepared for a trade. Some trade with the herd. Others trade on their neighbor’s hot stock tip. But are you really prepared just on that advice. Of course not…
Believe it or not, a very large amount of people who invest in the market are investing hard earned money (lots of it) on those very tips without any research.
Does that sound smart to you?
Instead, ask this simple question – what does the company do? If you can’t answer it, don’t invest in it. How does the stock in question fundamentally? What news recently impacted the way it’s trading? Understand the nuts and bolts of what’s under the hood.
How does the company do against its competition? No company operates in a vacuum. For every Coke (KO), there’s a Pepsi (PEP) trying to take market share. Understand the competitive threat especially with trades you plan to hold long-term.
If you don’t know these things, you will lose a lot of money.
No. 2 – How Much am I Prepared to Lose?
This is s a key question to ask prior to any trade. How much money can I reasonably afford to lose if the stock – all of a sudden went to zero? It’s not likely. But it’s something to be prepared for. Ask yourself what your risk tolerance level is? If you risk $5,000 on a trade, can you afford to lose it all? If not, cut it in half, in quarters, in tenths. Make your money work for you.
Plus, how much are you risking per trade? If you have a $50,000 portfolio, and you risk 10% or $5,000 per trade and your next 10 trades are duds, you just emptied your account. But if you risk 1% to 5% at least starting out, you’d have to lose dozens of trades in a row to lose it all. Do you even have a stop loss or trailing stop loss in place?
No. 3 – Is there a trend?
Whether you believe in technical analysis or not, look at the chart as backup. If your stock is challenging triple top resistance with reversing momentum indicators, should you really be buying stock ABC right now, or waiting until it pulls back to support? Technically, history has a tendency to repeat itself. Look for patterns.
Or, are you aware of what to do if a trend like is broken. While most of you do, there are many traders that just aren’t aware. For example, when the IBB broke down through its 50-day and 200-day moving averages from $400 to $240, some traders were unaware of the implications of what that failure meant and lost big money.
Without a plan in place, you have a plan to fail.
Never take advice from any one before buying a stock. Ask yourself these key questions before ever buying any stock, ETF or option. Or, you risk losing it all.