Each stock or ETF may have different prices and behaviors, but there are things you should consider before making any stock trade. Asking and answering these five questions before you place a stock trade will help simplify your decisions and avoid costly mistakes.
1. Is there a fundamental reason to take the trade?
If you make a stock trade from a fundamental perspective, you should have a clear set of reasons for taking the trade. It will make it much easier to:
- Create the rationale for leaving
- Determining if the trade might go wrong
- Knowing when the trade might be over.
2. Is there a technical reason to take the trade?
The same concept used to enter trades from a fundamental perspective holds for using technicals. A clear set of reasons to make the trade should come before the proposed trade entry. Understanding these reasons and sticking by them will allow for more obvious decisions when you enter and exit the trade.
3. Have clear levels of support and resistance been established?
Without identifying proper support and resistance price levels, clean trades with defined risk cannot be established. Support and resistance levels will provide proper stops for the trade.
4. Have clear exit points been identified prior to entry?
Having identified proper support and resistance levels, obedience to stops allows you to create a trading plan that will keep you out of the red over time.
5. Does the stock have any impending news or earnings that might adversely affect the direction of your trade?
Being conscious of conference calls, stockholder meetings or company events of this kind is very important to keeping exposure to unforeseen events at a minimum.
ETF (Exchange Traded Fund),
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