Three Steps to Take Before You Execute Any Trade

Pen, coins, and a graph -- abstract investing image
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By Guido Petrelli, CEO of Merlin Investor

Investing in the stock market is like driving a car - before you start, you must get your driver’s license. If you don’t, you are at risk of crashing and facing challenges that you might not be ready to manage.

When looking to invest in the market, it’s critical for traders to educate themselves on trends and learn investment strategies to make more informed decisions. Here are three steps to take before you decide to execute any trade:

1. Retrieve market data

In the past there was not much else for investors to rely on outside of market news, analyst opinions, financial advisors, and advice from family and friends. However, access to financial information has never been so easy and widely spread. Nowadays anyone can study assets and market trends from different sources of information.

With this widespread information came the rise of the retail trader, and a majority of these investors take advice from social media influencers on platforms like Twitter, YouTube, TikTok and Discord when researching ticker symbols or asset classes. Novice traders should study and listen to different opinions, but it will ultimately be up to individual investors to decide what information is most valuable in the decision process. Once this knowledge base is built, traders can form their own opinions on specific investments when building assets in their portfolio. Regardless of the outcome, researching and analyzing market data will help investors become the master of their financial future instead of blindly delegating that responsibility to others.

2. Create a diversified investment strategy

About 2,500 years ago, Chinese military strategist Sun Tzu wrote The Art of War. In it, he said: “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.

This adage still applies today to the investing world as there is no bigger risk than executing a trade without having developed a comprehensive and balanced strategy first. A comprehensive strategy enables investors to diversify risk allocation between asset type, sector, market, currency and more. It is extremely difficult, if not impossible, to be right on every investment you make, so it’s important to focus on the overall performance of your strategy, which will be the sum of both good and bad decisions.

Mistakes happen, but a diversified investment strategy limits these risks. A balanced approach will help alleviate some pain during the markets’ hard times and to profit during the good ones. Also remember that sustainable wealth is not created from day to night a majority of the time, but through step-by-step profits over a long-term horizon.

3. Set a time frame and stop profit/loss

Volatility, to any extent, is the name of the game when investing. It makes it easy to buy when the market is skyrocketing but also makes it hard to hold on when the market is crashing. In order to limit the challenge of managing emotional intelligence, investors must set a timeframe and a stop profit/loss for their investment strategy. This will help to clearly define the best and worst case scenarios, meaning how much you are willing to gain or lose within a specific timeframe.

Even if it depends on your personal risk attitude, it is a good practice to set your maximum acceptable loss to a level which would not substantially affect your everyday life. Never forget the hard work put in to have money that you can now invest, and that excessive or reckless risk-taking without limiting potential consequences could quickly translate into a catastrophic turnaround.

Following these three steps before executing any trade will draw the difference between professional investing and gambling. Without these tools, your chance of success would probably be similar to going to Vegas. In Vegas, the house always wins; with investing, you are responsible for building your own house. Make sure you set the odds in your favor.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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