Wednesday, March 29, 2017

10 Truths Newbie Stock Traders Should Know

2017 marks my 10th year trading in the Philippine Stock Market. Looking back, I'm glad that I didn't quit and lost hope on the market when my portfolio went down by more than 50% during the 2008 global financial crisis, which is considered by many economists as the worst financial crisis since the Great Depression of the 1930s. In the past 10 years, I've learned a lot from books, online resources (articles, e-books, market reports from brokers, etc.), stock trading forums, and stock trading EBs / meet-ups. I've also had a lot of realizations when it comes to stock trading based on actual experience. These things helped in my portfolio recovery and enabled me to beat PSEi and index fund performance consistently since 2012 without having to trade actively.

In this article, I will be listing some of the lessons and realizations I've had for newbie traders and for those planning to enter the stock market. I hope that with this, I can give you a better idea of what to expect from the Philippine Stock Market, as well as clarify some misconceptions about it.

1. Stock trading is simple, but it's not easy

It may appear that stock trading is simple: buy low, sell high, right?

The truth is, earning from the stock market is not easy. You can study all you want before plunging into the market and still find yourself in a string of losing trades. Even buying a fundamentally good stock doesn't guarantee a gain.

There are just so many factors that affect the market. Aside from political and economic issues in and out of the country, you also have to look at personal issues that can make you lose money: fear, greed, hope, ignorance, dependence on others, and dependence on luck.

You need time and experience to be a consistently profitable trader. Sometimes, you can be lucky and win big on highly speculative plays. But if you want to stay long in the market, you must not rely on luck alone.

Study, plan your trading strategy, check the results, then re-assess your strategy. These are the things that you need to do in order to improve your trading skills. These will also help you determine which strategy works for you.

2. Manage your expectations

Many traders enter the market thinking that they can easily double or triple their portfolio in a short span of time (say, less than a year).

The truth is, that target is very difficult to achieve. Even experienced professional traders will have a hard time achieving that. Just look at the performance of pooled funds, which are managed by supposedly very good fund managers.

I won't say that the target is not achievable. If you were able to buy Double Dragon (DD) around ₱24 at the start of 2016 and sell it at the high of ₱80 in June of the same year, that's around 230% gain in a span of 6 months.

The more realistic target is around 10% portfolio gain per year. Unfortunately, most newbie traders end up with a negative portfolio on their first few years due to haphazard trades.

3. Your trading strategy should depend on how much you can monitor the market

When you join stock trading forums and FB groups, most likely, you'll be able to read some traders disclosing several buy and sell trades within the day involving the same stock.

A newbie's tendency is to buy the same stock and hope that he/she can also profit from that stock. But sometimes, if you have a day job, you won't be able to monitor the price action. And when this happens, disaster usually strikes. More often than not, you'll find yourself ipit on that stock.

The truth is, intra-day trading is not for everyone. If you can't really monitor the price action, especially for highly speculative stocks, don't do it. It would be much better to stick to blue chips while you're still learning the ropes.

4. Stock analysts are not always right

While stock analysts from your broker can help you in planning your trades, don't simply bet your house or go all in on their recommendations.

Truth is, they are people too. They can make mistakes in their research, assumptions, computations, and targets. The uncertainty of what's going to happen in the next couple of days, weeks or months can also make or break their stock recommendation. You win some, you lose some. That's just how it goes.

5. Be careful in believing online forum posts

Joining a stock trading forum and/or FB group has its benefits. You'll be informed of news, as well as rumors, on different stocks. You'll also get to see different analysis based on the company's fundamentals and charts.

Truth is, some people use stock trading forums / FB groups to spread fabricated information and rumors, which they use to hype a particular stock. Some of them even send private messages to newbies to further gather support for the particular stock. Usually, when newbies decide to bet on the "tip", they end up holding the bag while veterans take profit.

With regards to the analysis being shared, be careful also on the recommendations being given. Some of them come from fellow newbies who are practicing their TA skills, and just like to share the patterns they see (valid or invalid), which may lead you to losing trades. Instead of always asking what stock to buy or simply accepting the recommendation of others, take the time to study so you can make your own analysis. Stock market is not for the lazy.

6. There will always be retracements/corrections

It's always nice to trade in a bullish market. Anyone, including newbies, can feel like a genius because almost all of the trades he/she get into bring in big profits. It often gives traders the wrong impression that they are already doing a fine job.

Truth is, you can't expect the market to always be up. There will always be minor corrections and there will be major corrections as well, that will make you doubt your skills or even make you regret that you entered the market. So before entering a trade, determine whether you'll go short term or long term on the stock you want to buy. Plan you entry price, target price and cut loss price. If your target entry price is still far from the current price, just be patient, or better yet, look for other stocks to buy.

7. Buy on rumors, sell on news

Rumors are part of the stock trading game. They can come from stock trading forums, FB groups, newspaper columns, or private message from a friend with a "reliable source". Sometimes it can be true, oftentimes, it's just a trap. Rumors can make stocks hit the ceiling price multiple times.

Truth is, while rumors still persist, more traders get in and speculate on the stock. Experienced traders don't mind paying a high price, as long as there are other traders willing to buy at a higher price (unfortunately, gullible newbies buy when the play is about to end).  Once an announcement confirming the rumor has been made, more often than not, the stock price starts to drop. This is after traders realize that they paid too much for that stock, and so they scramble to sell the stock to a willing buyer, even at a much lower price.

8. Not all IPOs are profitable

Double Dragon's IPO (Initial Public Offering) in 2014 made IPOs interesting again after gaining 93% on its first 2 days of listing. Because of this, succeeding IPOs attracted a lot of new traders, believing that it will also perform like DD.

Xurpas (X), Crown Chemicals (CROWN), SBS Philippines Corporation (SBS), and Golden Haven (HVN) are some of the IPOs that hit the ceiling price on the first day, then gained some more on the succeeding days. Many of those who subscribed should have earned at least 100% in the first two days of listing. In the last 2 years, I can say that there's an IPO craze in the PSE. I've witnessed (and even became part of) the long queue of traders who fell in line for 3 hours just to buy IPO shares through the LSIP (Local Small Investor Program). IPOs were so hot that even PSE security guards lined up to buy shares!

But newbies, beware. Truth is, not all IPOs are profitable. I have my share of experience in IPO flops wherein I ended up selling my shares at a loss (some stocks immediately fell below the IPO price on the first trading day). Actually, I don't have to go through old listings to look for an example. Just look at the case of PSPC, which got listed in 2014. Fundamentally, it's good, but it never really got the support from traders (and even from its underwriter), reason for it to go down below the IPO price on its second day of listing. As of writing, PSPC is still trading way below its IPO price (IPO Price: 3.15, Current Price: 1.85).

9. ₱5,000 initial investment is too small for a stock trading capital

In the stock market, capital matters. Yes, you can start investing with a ₱5,000 capital, but don't expect to earn ₱5,000, ₱10,000, or ₱20,000 with it alone.

Truth is, you need big money to earn big money in the stock market. It's fine to start with a ₱5,000 capital, but if you want to earn more, you need to add funds to your portfolio. Adding funds regularly, depending on your financial capacity, is highly encouraged.

10. It's inevitable to have losing trades

In case you lose money on a trade, cry if you want to, but don't forget to move on. Losing is part of the game so try to minimize your losses by setting a "cut-loss" price for each trade. Ending with a net gain on your portfolio is what truly matters.

I know some people who lost interest in the stock market after incurring losses. I feel bad that they immediately quit instead of learning from their mistakes and applying the lessons to future trades.

Truth is, regardless of a person's trading skill level, he/she is bound to experience a losing trade at some point since we are all just speculating on the stock price movement. There's always a 50-50 chance on winning and losing, whether you're a newbie, intermediate or expert trader. Only the market knows where the price will go. What separates an expert trader from a newbie trader is that the former quickly cuts his/her losses on bad trades and lets the profit run, while adding volume, on winning trades.

In case you always find yourself at the losing end of the trade, improve your skills by reading books and/or attending stock trading seminars. Just continue trading, your skills will eventually improve as you gain more experience.

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