The Two All-Important Secrets of Online Trading and Investing

1000s of individual investors have pulled their money out of full-service brokerage accounts and are actually trading and managing their stock market investments online. They'd do well to keep in mind both great secrets of success in stock market investing: cutting losses early and riding together with your winners for as long as possible-up to the stage where they turn risky.

Secret One: Cutting losses early
In a classic essay on investing, "The Loser's Game," author Charles D. Ellis compared investing to playing tennis. Tennis pros, Ellis observed, possess qualities that most amateurs don't-like superior speed, strength, athleticism and shot-making skill. The typical amateur doesn't win a match the way in which that pros do-by making breathtaking shots. Instead, they often win by simply not losing. They keep carefully the ball in play long enough to let their opponent make the very first mistake. In other words, amateur tennis games aren't really won by anybody so much since they are lost by the weaker player. Average players are generally their own worst enemies, defeating themselves by attempting difficult shots when they'd be better off playing for the safe, sure thing.

Buying stocks has a great many similarities binary options. Way too many investors become their own worst enemies by ignoring what ought to be obvious. They fall deeply in love with an investment they own and then fail to recognize when it's time to sell. They fall deeply in love with an investment because it's an iconic name like Apple or Berkshire Hathaway, or they become infatuated because of all time, effort and ego they committed to picking the stock in the very first place.

Secret Two: Riding Winners Longer
The other trick to maximizing profits is to stick with a well-performing stock for as long as possible-up to the stage where owning it becomes risky. True, you won't lose money taking profits prematurely, but neither will you make much money. Legendary trader William Eckhardt puts it in this way: "Amateurs go broke by taking large losses; professionals go broke by taking small profits."

Even the pros are likely to offer their winners too early. As Eckhardt explains, that's because it's actually against human nature to operate in ways that maximizes gains. This is a vitally important point. Instinct tells us to do something in methods maximize our chances for gain, but that's different from maximizing the gains in total. We instinctively want to increase our number of winning trades (and to minimize our number of losing trades). What we really ought to focus on, however, is something else-the overall extent of gains and losses, which are what really matter.

How do you avoid falling deeply in love with an investment and possessing it long after you will have sold it? And how do you know when a winning stock you possess is running out of steam? It's less difficult than you could think. Future articles in this series will elaborate upon the ABCs of developing and pursuing an objective investment methodology, utilising the expanding array of online stock market tools and data that now available to everyone at minimum cost.