Looking for Great Stocks to Invest In? GO FISH!

“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

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.

2. 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.

3. 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.

4. 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 Manage Risk in the Stock Market

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

How to Play to Your Strengths in the Stock Market

Within our curriculum of Rich Dad Education Elite Trainings, we cover dozens of different option trading strategies.  When faced with this smorgasbord of choices, many traders wonder how to select the best one.  Perhaps you, too, have faced this dilemma.

Should the strategy match your personality?

Sure.

Should it fit your risk tolerance?

Definitely.

In the end, however, I suspect the best answer is to select the strategy that you know how to make money with.  After all, what good does it do to employ a fancy strategy if you’ve yet to figure out if you can make it work?

And how do you do that?  Why, with paper trading, of course.

For those otherwise unfamiliar with paper trading, a brief review is in order.  Sometimes called virtual trading, paper trading allows you to practice any strategy or technique with “Monopoly® money.”  Not only will paper trading help familiarize you with how to place trades in your brokerage account, it also helps you test drive a strategy to ensure you know how to make money with it before going live.

Keep in mind, virtual trading is but a step on your path to trading success.  Don’t bask in the sweet safety of the virtual realm for too long.  Once you’ve proven a strategy and have a good track record, transition to the real world to reap the rewards of your educational efforts.

In sizing up your strengths consider how well you do at forecasting direction.  Those with a knack for divining the future will naturally gravitate towards more directional strategies.  If you’re a chart reading rock star with a penchant for trend riding, then by all means, swing away with the different directional plays we teach such as stock trading, long calls and puts, or spreads like bull calls and puts.

If, on the other hand, the market’s next move along with quality setups continually elude you, then perhaps you should focus more on the bevy of high probability, non-directional strategies we teach like bull put spreads, bear call spreads, iron condors, and the like.

You don’t have to master every strategy.  Find what works for you, play to your strengths, and the profits will follow.

Tyler Craig, CMT
Rich Dad® Education Elite Training Instructor

 

Power Surge in Energy Stocks

Last week’s mention of the weakness in leading stocks like biotech prompted some insightful conversations in my recent Rich Dad® Education Trading Labs. Along with discussing potential adjustments to make in our trading we investigated which areas of the market may still be providing bullish opportunities. A brief survey of the major U.S. sectors found that energy stocks were sporting perhaps the most compelling setups.

Here’s a quick tip to save some time finding strong stock sectors. Rather than looking at the chart of each sector one after the other, use the sector rotation feature provided in the tools menu of the MachTrader software. After selecting “Tools”, hover your cursor over “Broad Markets” and a window will pop up that says “Sector Rotation: Sector SPDR PerfChart”.

When the interactive chart shows up change it to a histogram using the button on the bottom left (black arrow). Then, right click on the slider bar at the bottom right (blue arrow) and select “Past Week”. The standout in relative strength for the past week has been the energy sector besting the performance of the S&P 500 by 2.77% (red arrow).

The relative strength in the energy space is easily seen in the chart of the Energy Select Sector SPDR (XLE) which just broke out to a new multi-year high. Its recent consolidation has taken on the form of an inverted head and shoulders pattern provided further bullish implications for the budding sector.

Source:  MachTrader

With the broader market under pressure and many leading momentum stocks like Netflix (NFLX), Tesla (TSLA), Priceline (PCLN), and Solar City (SCTY) falling into downtrends, some may be wondering if they should even be considering new bullish trades at this juncture. The answer really depends on you. Some traders avoid entering any new bullish plays while the market is under pressure while others simply dial back both the amount and size of their bullish bets.

Here’s the key takeaway for me. Were I inclined to enter new bullish plays I would limit it to the best of setups in the areas of the market showing the most relative strength. If you’ve wondered where to look for stocks that are staying afloat amid the market’s recent swoon, wonder no longer. Take a gander at energy stocks.

Tyler Craig, CMT
Rich Dad® Education Elite Training Instructor