3 Tips for Bigger Trading Gains

Last week, we took a look at three simple rules that could help shovel bigger gains into your portfolio on every single trade you make. Today, I’d like to show you three more critical trading rules. Each one can give you bigger gains on every trade you make. Put all three together, and you stand to earn an edge in this market.

Here’s what you need to know:

Rule 1. Write Your Own Risk Level

Understanding risk is one of the most important elements of investing in anything — from penny stocks and options to commodities to currencies — no matter what, you need to enter each trade knowing exactly what’s at stake when you trigger your trades.#-ad_banner-#

Risk is inherent in all investments (don’t believe anyone who tells you otherwise). But risk isn’t necessarily bad.

You see, risk and reward are interrelated. Higher-risk investments, like penny stocks, obviously come with greater chance of loss, but they also have the potential for much larger gains if trades go our way. The trick to successful trading is managing risk intelligently…

So, how do you reign in risk? I always set mental stop loss levels and potential target prices before I trade any stock. To do that, you need to add some basic technical analysis to your investment strategy.

Stops can be very useful when they’re placed under a stock’s support level (the price level that a stock has trouble falling below). That’s because to a trader, a price level below support generally means that the stock could be breaking out much lower. Essentially, you’ll want to place stops just under where you’re likely to find a glut of demand for shares.

To avoid exceeding your comfort zone on a loss, think of your “maximum pain threshold” as a dollar amount rather than a percentage. Then, size your position so that you’re stopped out before your losses exceed that level. Trailing stops, which are typically used to lock in gains, can be used a little bit more arbitrarily.

Ultimately, your risk tolerance is up to you. But regardless of how aggressively you opt to trade, there’s a potentially lucrative option available to you…

Rule 2. Don’t Chase Trades

Sometimes, you won’t be able to act on a trade in time. Maybe you’re on vacation and away from a computer when a nice setup pops up. Maybe you’re stuck in a meeting. Whatever the case, if you miss out on a trade, it’s essential not to chase it.

Trading is exciting. Part of what draws traders to playing the market is the thrill of executing a trade and cashing in on gains — it’s that adrenaline rush that keeps things interesting.

But on the flip side, it’s all too easy to get into a trade at a bad time just because of the excitement of seeing a stock start to run up. When a trade triggers, it’s crucial not to buy into the frenzy that often comes with a breakout. Instead, set you maximum buy price ahead of time, when you’re weighing the risk/reward tradeoff of a particular setup. Sometimes that’s a tough edict to swallow — especially when hindsight shows you what would have been a winning trade. But emotion has no place for traders. Don’t fall for the irrational exuberance of a late trading opportunity.

Rule 3. Buy the Right Number of Shares

Do you know how many shares of a stock you should buy? Don’t guess — the number of shares you buy has everything to do with how much profit you take home…

With (normally) flat costs like commissions taking a bite out of your trading profits, you need to make sure that the position sizes you’re taking are enough to make up for your commission fees. If you buy a $100 stake in a small-cap stock, with a $10 commission each way (when you buy and when you sell), your break-even gain becomes 20%. That is, you’ll need 20% gains just to avoid posting a loss. That’s a sizable challenge.

If you buy a $500 stake, however, your break-even gain drops to a much more manageable 4%. If your commissions are only $5 per trade, then your break-even tumbles even further down, to 2%.

Always know what kind of gains you need to see to profit from a trade before you place an order with your broker. Again, this ties back into our first rule, writing your own risk level. By focusing on low-risk trades, you can afford to take on larger positions while maintaining the same level of risk – and as a result, you’ll take home bigger gains every single time.

I’d recommend you save this message. Then, before you click the “buy” button on your brokerage account, keep these three rules in mind. Follow them, and you’ll guarantee yourself bigger gains…