Rich Dad Stock Blog

Free Information to Help You Build Wealth in the Stock Market

Looking for Great Stocks to Invest In? GO FISH!

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Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”   – Chinese Proverb

In the past, stock tips were often shared via brother-in-laws, in the elevator or next to the water cooler. Person “A” would share their amazing stock tip and how they have been killing it with this particular investment or that they have heard that this stock is about to take off. Person “B” would anxiously listen and then perhaps go out and have their broker buy shares in that company.

While this level of amateur advice might be laughed at by some today, many of those same people get excited when they see a stock tip on the Internet.  Chat rooms, Twitter and blogs have become today’s new water cooler; and somehow, because individuals see stock tips on the Internet, they give the tip a higher level of credibility. They might have rolled their eyes at their brother-in-law; but if they stumbled across their brother-in-law’s blog, they’d promptly invest in his suggestions!

Why People are Interested in Stock Tips

Most people have very little expertise in the stock market and investments, yet most people are interested in making money. Thus, people are always looking for someone who can bridge the gap between their lack of knowledge and their desire to make more money.

Historically, the way most people addressed this gap was to hire/pay a professional to invest their money for them. Today, more and more people are becoming disillusioned with the professional investing community and are looking to make their own investment decisions.

So, many individuals begin the process of learning how to invest or trade on their own. They start by trying to find sources of information on the Internet that can guide them. As they begin searching, they are inundated with articles that do not teach them how to invest, but instead simply tell them what stocks they should invest in. The problem is that the novice investor has no experience or knowledge to process any of this information.

Worse yet, the novice investor is overwhelmed with banner ads telling them, “I have 65 straight winning picks” or “Click here to get today’s winning stock.” For a small fee, they can skip learning how to invest and simply follow someone else’s pick. After all, if they have 65 straight winning picks, how can the next pick go wrong?

Learning to Fish

In a sea of information where people are trying to give you fish, there are undoubtedly a few that can truly supply quality investment advice. The problem is for each of these individuals, there are likely 1,000 more offering only fish that stink. Without learning the principles of quality investments and trades, how can you evaluate whether somebody is giving you good advice?

At Rich Dad Education, we strive to teach students how to fish. It is crucial for our company to teach you the underlying principles, concepts and methods that go into identifying a quality trade. You are also taught what trading instruments, whether it’s stock or option strategies, can and should be used with the identified trade. Students learn how to properly execute and manage their own trades. What’s more, they can apply this knowledge long after they have left our training program.

When it comes to your desire to make more money, take the time to develop your own “fishing skills” as it can “feed you” for a lifetime.

By Mark Justice

Rich Dad® Education Elite Training Mentor 

Beginning Traders Blues: Common Trading Mistakes

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Here are a few common mistakes that beginning traders typically make in the early stages of their trading careers. If you are a new to the market, see if any of these apply to recent losing trades you may have made.

  1. Improper Reading of a Chart

Many technical concepts, like trends, support and resistance, are taught to new traders who then think they have a complete understanding of such concepts. Sometimes they think they should place a bullish breakout trade only to have improperly identified an uptrend and area of resistance. Nothing in trading is mastered overnight, and sometimes it takes experience to become adept at properly analyzing a chart.

  1. Overreliance on Indicators

Sometimes new traders become fascinated with certain technical indicators, for example the MACD or Stochastics indicator. When their preferred indicator produces a trading signal, some traders use that as the primary justification to make a trade. Technical indicators are wonderful tools, but a new trader should never rely on only one of these signals to enter a trade.

  1. Inserting Opinion

A trader can receive the proper education and have a solid understanding of technical analysis, but still ignore all of their training and knowledge and insert their personal opinion into a trade. When someone asks the trader why they entered this type of trade, the trader inevitably starts their reply with “I thought…”

  • “I thought the stock would not go any higher”
  • “I thought the company was too good a company to drop any further in price”
  • “I thought the market was due for the selloff”
  • “I thought they market would react differently to that news report”

Inevitably, you will develop certain opinions as you become engaged with the market. Always strive to make your trades on what the chart is telling you, not on guesswork or opinions on how you think the market will react.

  1. Missing Steps

Whether you are following a system trade or use a step-by-step method to identify directional trades, there is likely some routine or checklist you are supposed to follow. Too often in the rush to place a trade, new traders will miss/skip/forget steps to the trade through impatience or carelessness. If you have placed a few losing trades in a row, be sure to analyze the step you took to see if this has occurred to you. It is helpful in the early stages of your trading to take careful notes. These will help you review the trade afterward to see what went right and what went wrong. Evaluating Mistakes in Your Trading We all make mistakes; it is what makes us human. Traders are no different and even the most experienced trader can slip up from time to time. As with most things in life, the trader who is able to learn from their mistakes will have a better chance at achieving future success. The key is being able to recognize what went wrong in a losing trade and develop the discipline to make sure that these mistakes are minimized or eliminated in the future.

By Mark Justice

Rich Dad® Education Elite Training Mentor

How to Avoid Apocalyptic Mistakes in Trading

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All trading mistakes are not created equal. There are common mistakes in judgment, evaluation, and execution that can ruin your trading day. However, the effects of these mistakes are not long lasting if the trader takes the proper steps to fix what went wrong.

However, there are apocalyptic mistakes that some new and undisciplined traders make that can literally end a trading career before it gets started. The two most common apocalyptic mistakes are:

1)      Putting too much (or all!) of your trading capital on one trade.

It seems insane; but some new traders, in their rush to get rich quick, will sometimes put all or the majority of their trading capital into a single trade. Greed and impatience are the two most frequent villains behind this catastrophe in the making. You may have the best trading setup that mankind as ever seen, but you should still adhere to the rules and guidelines you established for the maximum amount of trading capital that can be placed on any one trade.

2)      Putting too much of your trading capital in directional trades at any given time.

You might put only 3% of your trading capital in one directional bullish trade; but if you also have an additional 10, 15 or 20 other bullish trades out in the market at the same time, you risk having the market turn against you and sustaining multiple losing trades. This can naturally be devastating to one’s trading account.

As long as these apocalyptic mistakes can be avoided (and should be with a minimal amount of discipline), you can begin the less stressful process of evaluating whether you are making common fixable mistakes in your trading. We’ll deal with those next time.

 

By Mark Justice

Rich Dad® Education Elite Training Mentor

Why Are Earnings Announcements So Risky?

Rich Dad Education Stock Success

Perhaps no other scheduled event has as much impact on a stock’s price as the earnings announcement.  It can instantly launch the stock into the stratosphere or sink it like a stone.  Given the lofty position of corporate profits amid the myriad factors that drive stock prices, companies that deliver can be handsomely rewarded, while those who dare to disappoint can be punished excessively.

While the date of every earnings announcement is broadcast to the public – MachTrader™ has a link to an earnings calendar in the tools menu – the eventual market reaction to the announcement remains a mystery.  It’s a true 50-50 shot – a high risk, high reward, coin flip that can gift shareholders with outsized gains or losses.

As a result of the random nature of these quarterly releases, most short-term traders elect to close their positions prior to the big event.  While they may occasionally miss out on large up gaps, they sidestep altogether any major down gaps.  The whole idea with short-term trading is to only enter positions when you have both an edge – i.e. the odds are in your favor – and a low risk, high reward opportunity.  With earnings you have neither, so why roll the dice?

Now, it’s fair to say not all stocks have the same earnings risk.  Holding into the quarterly release of a staid, predictable company like Wal-mart is less risky than holding into the announcement of a high flying, momentum stock.  The additional risk with these volatile stocks can be attributed to the fact that they are usually trading at high valuation levels, leaving little room for error.

Every earnings season, there are always a few stocks that get taken to the woodshed for failing to live up to expectations.  Of the stocks that I track, the poster child for earnings risk this season has to be Whole Foods Market (WFM) which dropped 18% overnight in response to earnings.

Rich Dad Education Stock Success

Source:  MachTrader™

If you’re a trader fretting the elevated uncertainty surrounding earnings, do yourself a favor – sell the stock beforehand and watch the drama unfold from the sidelines.

By Tyler Craig, CMT
Rich Dad® Education Elite Training Mentor

How to Manage Risk in the Stock Market

Rich Dad Education Stock Success

In the hierarchy of stock trading principles, none stands higher than risk management.  Without it, failure is all but guaranteed; success all but impossible.  Absent sound risk protocols, even the best trading strategy is doomed.  On the other hand, effective risk management can give even the worst trading strategy a fighting chance.

In crafting my own set of risk rules, I’ve found the following exercise helpful.  Suppose we select a random individual from the streets of any major U.S. city, plop them in front of a trading terminal, and let them trade in the stock market with $100,000.  Let’s say you are tasked with the responsibility of drafting a set of risk management rules, which they are required to abide by.  Your objective is to help them survive as long as possible, so that they can learn the art of trading through first-hand experience.

What kind of rules might you create?

The ideal approach, of course, is to structure a set of rules that makes it as difficult as possible to blow up the account while still leaving them open to accumulating profits.  The goal isn’t so much helping them capture large gains, as it is helping them survive.  After learning how to survive, they can modify their approach to being more aggressive and seeking larger gains.

Here are three rules worthy of inclusion:

1.  Risk a small percentage of the account, such as 1%, in each trade.  This protects against any one bad trade derailing your performance for the month.

2.  Stagger your entry into new trades over time.  This reduces the chances of incurring your max loss on multiple trades simultaneously.

3.  Employ weekly and monthly loss limits to cut your losing streaks short and allow you the opportunity to take a step back and resurvey the markets to gain clarity.

There are undoubtedly other risk management rules worth adding to the list.  The interesting part of this exercise is that it isn’t a game.  It’s real life for most traders and the objectives are the same.

First learn to survive, then you can up the ante and seek additional profits.

By Tyler Craig, CMT
Rich Dad® Education Elite Instructor

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