Effective Stock Trading - 10 Principles Investors Need to Master

Achieving success in stock trading is not solely based on theory. Professional traders always combine market trend monitoring with learning from the experiences of those who came before. This article summarizes 10 fundamental principles of stock trading that any new investor needs to understand clearly.

Step 1: Define Your Investment Roadmap

The stock market has two main approaches:

Short-term: Applying day trading strategies, relying on technical analysis to identify entry and exit points. Requires continuous price monitoring, high risk tolerance, often using leverage to increase profits.

Long-term: Applying buy-and-hold strategies, selecting stocks based on fundamental analysis of the company. Low risk tolerance, no need for frequent monitoring, moderate but stable returns.

Once you have clearly chosen your stock trading approach, strictly adhere to that strategy. This helps avoid wrong decisions influenced by emotions.

Principle 2: Diversify Risk Through a Varied Portfolio

This is valuable experience that seasoned investors always emphasize. Warren Buffett also advises that diversification helps minimize losses when risks materialize.

Diversification can be achieved by purchasing different stocks from various sectors or combining multiple asset classes such as stocks, cryptocurrencies, and forex. Stock indices like S&P 500 or VN30 are examples of diversified portfolios. During bear markets, these portfolios decline less compared to holding a single stock.

In bull markets, index investments may not rise as sharply as individual stocks. However, in the long run, returns from this approach are much higher than savings or bonds.

Principle 3: Choose Stocks Based on Fundamental Analysis

For long-term investors, selecting good stocks to hold is a decisive factor. You need to read financial reports, company development strategies, and assess market potential for future products.

Characteristics of quality stocks:

• Low debt ratio, with (Current Assets / Short-term Debt) over 1.5
• Revenue and profit steadily increasing over the past 5 years
• Profitability indicators like (Profit Margin, ROE, ROA) continuously improving
• Regular dividend payments to shareholders
• Management with a good reputation, no history of violations or concealment of information

Large Vietnamese companies like Vicostone, Vingroup, Vinamilk, Hòa Phát are examples of businesses with stocks that have surged over the past decade. Quality stocks often do not generate huge profits during hot markets but serve as good defensive assets when the market turns downward.

Principle 4: Adapt Your Portfolio to Market Trends

Over time, market demands change, and stock trading strategies need adjustment accordingly. Even long-term investors should periodically review portfolio performance and adjust weights appropriately.

For example, when COVID-19 broke out, central banks loosened monetary policies, lowering interest rates to stimulate consumption. Borrowing became easier with low costs, causing real estate demand to spike. However, in 2022, the government tightened real estate lending policies to curb soaring home prices. This change reduced demand, leading to weakening real estate sector stocks.

Although Warren Buffett is famous for long-term holding, his Berkshire portfolio’s weights are constantly adjusted. Effective investing experience is not just about holding long but knowing how to modify weights according to market conditions.

Principle 5: Risk Management Is a Top Priority

Especially with short-term strategies, controlling risk is crucial. Use stop (Stop Orders) and limit orders (Stop Limit) to protect capital and avoid significant losses if the market suddenly reverses.

Risk control tools:

• Sell Stop (: Sell stocks when the price drops to a predetermined level
• Buy Stop ): Buy stocks when the price rises to a specified level

An effective tactic is to set stop points 10% to 15% below the opening price. This helps manage risk, ensuring losses stay within tolerable limits.

Principle 6: Determine Optimal Buy/Sell Timing Using Technical Analysis

Experienced investors use technical analysis to find the best entry and exit points. The two most common indicators are:

RSI (Relative Strength Index): Measures volatility. RSI below 30 indicates oversold stocks, while above 70 signals approaching price peaks.

Stochastic: Measures trend strength to identify reversal points. Above 80 indicates overbought, below 20 indicates oversold and potential rebound.

If you are not proficient with these tools, you can follow signals from professional analysts to find suitable buy/sell points.

Principle 7: The Art of Bottom Fishing

Successfully catching the bottom can generate extraordinary profits. To identify bottoms, apply these technical signals:

• When prices continuously make new lows but momentum indicators like RSI and Stochastic are rising, it indicates selling pressure is weakening
• When prices form higher lows over time, it shows selling has decreased
• Large trading volumes during declines suggest investors are returning to buy the dip

However, catching falling knives is very risky. Use only a small portion of your capital to test, and avoid risking all assets. Do not buy speculative stocks or those trading below face value, as these tend to fall further.

Principle 8: Do Not Use Borrowed Capital for Investment

Never borrow money to trade stocks. Invest only with idle funds that, if lost, do not affect your long-term life. Currently, many platforms trap users with investment apps offering up to 1000% monthly interest.

Instead, you can use margin (borrowed funds from exchanges) to amplify profits. Margin maximizes earning potential while controlling risk. For example, with 1:20 leverage, (an initial capital can control a position worth $2,000. In the worst case, you only lose your entire )own capital without incurring debt.

Principle 9: Continuous Practice Is the Key to Success

Warren Buffett always emphasizes never losing money in investing. To do this, you must keep learning, analyze stocks, and practice trading to master both theory and practice.

The most effective way is to participate in real trading to accumulate knowledge and experience. You can start by taking courses, monitoring daily market movements, and gradually building your own investment strategy.

Principle 10: Maintain Composure in Stock Trading

The stock market is highly volatile; a position with large gains can turn into losses in just 1-2 days. Therefore, keep a stable mindset, analyze the reasons behind fluctuations, and decide whether to hold or cut losses accurately.

Don’t let emotions like panic or fear influence your decisions. Acting impulsively often leads to regret later.

Conclusion

How to trade stocks successfully? The answer lies in patience, discipline, and mental stability. Stock investing is a long journey that requires continuous learning from the experiences of others. With these 10 principles, I hope you will develop a solid strategy to grow your long-term investment portfolio.