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Buying and Selling With Discipline

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  • Buying and Selling With Discipline

    Buying stocks appears fairly straightforward at first glance, however there are several points you should consider before blinding placing your first trade to buy or sell a stock. Following is a brief outline of points to consider.

    First and foremost, you need to understand that stocks are sold to you at one price and bought back at a slightly lower price. This difference is called "the spread". And while the spread has generally decreased over the years, you are still taking a hit when you purchase a stock (assuming you should want to turn around and sell right away). The bid price is the price the market will pay for a stock when you go to sell it, while the ask price is the price quoted to those who wish to purchase the stock from the market. Nothing says you cannot try to buy at the bid and sell at the ask, but this will generally delay your execution.

    On the topic of bid and ask prices, you should note that there is a corresponding "size" which relates to how deep the orders run on the bid and/or ask size at any given price. As an example, you may have 100 people trying to buy a stock at a specific price, while only 10 are trying to sell. This directly impacts how much stock is available at any given bid or ask price. Once the orders to buy or sell a stock at a given price are filled and/or canceled, the price adjusts according to the remaining orders - either at higher or lower prices. If there is a 'void' of orders at any given level in the market, a stock is said to "free fall" or "gap" to wherever there are buyers or sellers. Keep in mind as well, how this area of pricing is handled is sometimes dependent on where your stock trades. On the NYSE, for example, bid and ask sizes are displayed by a market specialist whose job it is to ensure an orderly market. However, on the Nasdaq, multiple market makers my line up at different prices advertising to the market to buy or sell at different levels. Detailed information regarding where a specific market maker (generally a large brokerage firm) will buy or sell a given stock is provided via Level II data.

    Next, you should understand there are several different types of orders that can be placed to buy or sell a stock. The most common is called a "market order". This means buy or sell at the market price. However, keep in mind once this type of order is placed, you are nearly powerless in your control of the price paid should the market make a sudden move. In a very active market, you can also run into situations where your confirmation (showing the price you paid for the stock) is delayed significantly. This makes it extremely difficult to judge what a "fair and accurate" price is and/or when your order should have been executed. It also opens you up to possible foul play when it comes to how your order is processed and/or handled. As such, unless you are dealing with a fairly orderly market, we suggest using what are called limit order.

    A limit order works just like you might think. It is an order with a limit price attached to its execution. When you place your order, you specify a limit to the price you'll pay. While limit orders are usually executed after market orders, they do provide a higher level of protection against over paying, etc. Additionally, we feel they are a fine method to use when trying to take up a position at a lower than the market price. You should keep in mind, however, there are two types of limit orders, a stop limit as well as a market limit. A stop limit order is an order which becomes a stop (such as a stop loss) once the price is reached. Keep in mind with this sort of order, the market can pass right by you, where as with a normal limit order (which basically turns into a market order once hit) you stand a better chance for not only execution, but seeing an improvement on your execution price. This is because once your market order is set, the market may move in your favor during execution, but you will never pay more than your limit. Limit, stop and market orders apply directly to both buying and selling of stocks.

    Sometimes being in cash gives you the best strategic position from which to trade, and this is often an overlooked fact of daytrading. Remember, you can't take advantage of market dips if you are already in the market! In my view, it's better to be out of the market more for day trading than in the market. This will allow you to get in and out with profits quickly and be on the sidelines should dips occur. It also drastically reduces the risk to your capital as compared to just sitting in stocks that aren't moving and/or holding trades for excessively long periods of time. Try to be out of the market more with your trades and in the market more with your investments (as long as they are good investments of course).
    Above all else one of the most important and most widely over looked aspects of being a successful day trader is working on your personal life and how you conduct yourself. Most of the personality traits required to be a successful trader are also the traits found in someone that is said to have "haracter."

    Rarely have I met a successful trader that I didn't like. I've found , almost without fault, that people who are successful at the stock market are also fairly successful at "life". These are people that show integrity in their lives, as well as consideration and honesty. They are people that deal with others in a generally polite and honest manner. As mentioned above, rarely have I run into a successful trader that will "point a finger" or blame others for their mistakes. Integrity, honor, character, fairness - these are all qualities that not only make up general character in a person, but also are the foundation of a successful trader.

    I've often said, if you aren't naturally "humble" that the stock market will do an excellent job of teaching you how to be. Always keep in mind that the stock market is nothing more than dealings between human beings - it's just people doing business. And how this business is done is a reflection of all involved, as well as you yourself.

    To be successful in the market, you must start by getting your house in order when it comes to yourself and how you deal with other people. If you are a dishonest person, or you blame others for your own mistakes or have a lack of integrity in your character, chances are high than this will come back to haunt you in the end - not only in life, but in the stock market.

    Discipline, fairness and honesty - those are all traits I have found in successful people and above and beyond all else, successful traders. My simple words of advice to people entering the stock market are these: "Take stock of yourself, before you take stock from anyone else"

    Good luck in the markets!

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    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."

    Good KARMA and positive energy abound.

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