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Trading Education: The Best of Both
Worlds!
By Harald Anderson
I made my very first investment in the stock market when I was ten years
old. Ever since then I have been hooked! Now I check out hundreds of trades
each year with the same excitement andenthusiasm, and each time try to find
that one market at the right time that could dramatically create wealth.
If you would've been fortunate enough to invest $1,000 in Microsoft when it
first came public, that initial investment
would be worth close to $300,000 today. In the last 10 years America Online
has been up 12,000% and it has come creashing lower as well! Although
statistics like this are advocated regularly by journalists and brokers the
majority of investors have a very difficult time staying in an investment
for that long of a period of time even though they know they are in a good
company The financial markets are a never ending source of temptation trying
to lure you into a new position with each passing second. The belief that
the grass is always greener in another market is a distraction that every
investor eventually has to contend with. Even if you are a MUTUAL FUND
investor the fact is that you are always looking for the BEST return
available.
Years ago when I worked as a broker I was confronted with this dilemma. One
of my clients told me that he knew the BIG MONEY was made in holding on for
the LONG TERM but that he liked trading the short term swings. He asked my
advice and I had to think long and hard for several days before I could
respond.
Eventually, I presented him with the following strategy that literally
combines the best of the TRADER and INVESTOR worlds. Traders are looking for
the quick hit and run. Investors seek their advantage by looking at the long
term. Long term
investors quite often benefit from allowing dividends to be reinvested into
purchasing more stock in the company and the
very real possibility of the stock splitting in the future. If you combine
both of these apparently opposite perspectives you
end up with a very unique viewpoint that eliminates a lot of stress
associated with decision making. This strategy will
bring home the perspective that within every seed that you plant in the
financial markets lies the promise of ten thousand
forests. I refer to it as my FOREST STRATEGY! It is another way to make your
short term efforts as a trader pay you
dividends by also recognizing the importance and significance of long term
investing.
Let's say that your initial investing capital is $10,000. 1) Find a company,
preferably in the Standard and Poors 500
Index that you understand and are familiar with. If you want to narrow down
your group you can select companies that are in
the Dow Jones Industrial Average which include only 30 stocks. These are
established companies with long financial histories that can be researched
to your hearts delight.
2) Study the companies Price Earnings Ratio. Where is the Price Earnings
ratio now? What has been The highest and lowest points of the price earnings
ratio over the last five years? Look to buy a company with a historically
low price earnings ratio that is a leader in its industry. Use the Price
Earnings Ratio as a guide. Don't try to pick bottoms.
3) Look at a chart of prices to see what has happened recently and to
determine where a good buy point is.
4) Place your trade with the intention of a 10% profit objective. Once you
reach your profit objective, sell enough
shares in the company to remove your initial $10,000 investment and only
leave your $1,000 profit in that stock.
5) Repeat steps 1-3 as you search for another company to trade for a 10%
profit and plant the Remainder for the long term.
6) Repeat, Repeat, Repeat.
The drawback on this type of trading is that when you are with a great
company you do give up a lot of upside. However, if you look at the
PROBABILITIES how many IBM's, Aol's, Yahoos! Or Microsofts are there out
there in relation to the entire
universe of stocks? What I personally like about this style of trading is
that it eliminates the GREED factor that most
investors have of trying to hold on for the top tick. Secondly it also
allows you to build a nice diversified portfolio.
Thirdly, trading becomes a very fun game with potentially lucrative long
term implications. It is very possible to trade
this way once a month planting a seed in a quality company that can easily
become a Forest of Wealth for you.
Some trades might take the better part of a year to pan out. Some trades
might achieve your profit objective in a matter of
weeks or days if you are really fortunate.. Keep in mind that you still have
to manage your risk on each and every trade. Let me be perfectly blunt, if
you don't manage your downside there will not be an UPSIDE... It is
acceptable to use any of the RISK Management Techniques that I advocate by
doing Partial Covered Calls and other Option Selling Techniques. When done
correctly those techniques can dramatically accelerate your returns.
I must admit that I truly enjoy this type of trading. (My broker likes it as
well as it generates many more commissions
for him.) However, part of the reason that this method sits well with me is
that I hardly pay any attention at all to my
profits after I take them. It becomes very stress free to know that you have
increased your wealth 10% and are just interested in planting seeds all over
the financial landscape in companies that meet your criteria. I must however
stress the point that you make sure that you are aware of the downside. This
method is by no means RISK FREE....but for the individual who likes to trade
and invest simultaneously it truly is ideal.
Guard your investment principal at all costs and let your profits run. Just
one more way to look at the bigger picture. Kind of like a Johnny Appleseed
meets the financial markets. Many extremely successful investors do this
with Initial Public Offerings as well. Study away.and remember,let's be
careful out there.
Dowjonesfully-
Harald Anderson
http://www.eOptionsTrader.com
Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a
leading online resource of
Options Trading Information. He writes regularly for financial publications
on Risk Management and Trading Strategies. His goal in life is to become the
kind of person that his dog already thinks he is. http://www.eOptionsTrader.com.
Article Source: http://EzineArticles.com/
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