Section 2.5

When to Buy & Sell

 

Caveats

In this section, we will cover several different stock market strategies.  Many of these are nothing more than gambling.  We cover these topics because you need to know the terminology surrounding them, how they are purported to work, and why they are generally a bad idea.  Remember, not all ideas included in this book are to be recommended or even sane.  Please take care not to take information out of context and always be sure you know what you are doing before you invest real money.  If you have doubts, then do not do it.

 

There are many different strategies to stock trading and investing.  Some people seek to capitalize on often very small fluctuations in a stock’s price as it rises and falls on any given day.  They usually do this using computer software and technical charts.  Because they open and close a position several times in the same day, these folks are known as day traders.  It sounds fun, and a handful of investors have made fortunes doing it.  That stellar success has lured many, many people into the world of day trading only to be wiped out completely.

If you want to go down this road, expect to spend years of intensive study before it will become profitable (if you ever do).  The internet is full of day trade experts that will sell you their system of let you join their exclusive club for a hefty fee.  There may be a legitimate one out there, but I’ve yet to find one.  Some day traders hang out in chat rooms and trade tips and advice; look into the free ones if you want to skip the casino and try your hand at day trading.  I actually have a few traders that I follow on Twitter because they know a lot more than me about a particular sector.  My biotech person, for example, is a pharmacist.  We are both in it for the love of the game, and we help each other out sometimes.  Neither of us profits from the other in the arrangement.  Not everything about investing is greed driven!

You must always ask yourself this question:  If this person is making a killing day trading, why is he trying to sell me a subscription to his “trade room?”  Another reason that you do not want to day trade is what you have to have $25,000 in your account just to get access from your broker to day trade.  There is a tyrannical organization funded by the federal government known as FINRA that will not let you make more than three “round trips” in a single five-day period.  A round trip is a purchase and subsequent sale of the same security on the same day.  If you go over Big Brother’s arbitrary number, your broker will lock your account for 90 days.  If you have a bad day and drop below the $25K threshold, you are no longer a day trader.

Options traders are subjected to these same rules, even though these instruments are valued based on time and holding them overnight costs you money.  This rule doesn’t apply to so-called “binary options” where you can place your bets on what the Japanese Yen will sell for in the next five minutes (Seriously, that is not an exaggeration.  This is legal gambling under the guise of investing).  That, apparently, is something that responsible investors do.  Big Brother does allow you those three per week so you can fix mistakes you make, such as buying calls when you wanted to buy puts.  If you want to use your “freebies” to dabble in day trades, be sure to save the third one for fixing stupid mistakes that can cost you dearly if you don’t correct them quickly.

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