Investing in Shares

Have you raised the relevant question?

When someone asks me “How do I invest in shares?”, a lot of ideas come to mind….and a lot of the information can bog a trader down and simply make trading overly complicated. Investing or trading for an income, is not easy. I believe this is because people by nature do not like to be wrong. We tend towards trying to find comfort in strategies and Indicators that we believe will make trading decisions more precise or accurate. We get caught up in complicated technical indicators and market commentaries that tell us when to ‘buy’ or ‘sell’, when in reality, nobody knows exactly what will happen in the market next. To me, trading is a game of probability and a numbers game as even the best traders will be wrong a good percentage of the time. I believe the focus should be on having a trading strategy with a solid win rate (around 50%) and a good risk/reward ratio.

Profits Vs Risks

Trading involves understanding why a share price may move up or down and looking for areas where there is a high probability of the price moving in your direction. We aim to build a set of skills and implement them consistently with discipline. However, we have to also realise that our ‘perfect setup’ does not always ‘act perfectly’. So we need to accept that some trades will not work out and move on to the next trade. The key to this is ensuring you have good risk management and select trades with a good risk/reward ratio.  A good ratio is where your reward (the amount you expect to make on the trade) is at least 2 times your risk (being the amount you lose if your are wrong). The key to success is to maximise our profits when we are right and reduce the risk when we are wrong.

Do your research!

When looking to invest into a share, we assess the market structure on a chart and how it reacts at different levels. We look for qualities in a chart that can consistently put the odds ( or have a higher probability ) of success in our favor. By looking at the technical price pattern on a chart, we can build a picture and look for an entry setup that meets our criteria and risk parameters. When we decide to buy a share, we want to see evidence of new buyers entering the market and accepting higher prices and therefore building our picture of ‘share price strength’. Also, buying in areas of uncertainty (ideally in contracting zones) before the ‘herd’ enters the stock, with setups of ‘high probability’, increases the odds of success.

Planning is Essential

Every time we enter into a share, we should know what we expect to happen. Planning out a trade is a big part of investing. We should always know what we want to see in our price action picture and under what conditions we will enter a trade. We have to quantify our risk level so that if the level is hit the trade premise is void and we exit. If the trade does not play out as expected (maybe an unexpected event happens or it just is not moving with any conviction therefore more sellers entering), we have to be able to manage a trade effectively.

Knowing what to expect with price action and anticipating price targets is also important.  You need to know what your expected profit is likely to be, and what events or signals will be your trigger to exit your position to bank the profits on your winning trades.

Always have a plan for what you will do if the price goes up, the price goes down or the price moves sideways.