How to trade stocks effectively - 10 principles every investor must understand

Are you wondering how to trade stocks to maximize profits? Or have you just entered the trading world and need a clear roadmap? To succeed in stock trading, theoretical knowledge is just the first step. Traders must continuously monitor the market, learn from predecessors, and constantly improve their skills. Here are 10 core principles of stock trading that every investor needs to understand.

1. Risk Control - The Foundation of All Transactions

Before thinking about profits, you must prioritize capital protection. This is the number one lesson that effective investors must remember.

To control risk when trading stocks, use tools like stop-loss orders (Sell Stop) and stop-buy orders (Buy Stop). When the stock price hits a preset level, these orders will automatically execute, helping you avoid excessive losses.

An effective method is to set stop points 10-15% away from the opening position. This approach allows you to manage risk scientifically — even if you incur losses, they remain within control. Especially for short-term trading strategies, this is essential.

2. Define Your Investment Method

How you trade stocks depends on your personality and financial capacity. There are two main directions:

Short-term investing based on technical analysis — using charts and indicators to identify buy and sell points within the day. This method requires:

• Continuous monitoring of the trading board
• Deep knowledge of technical analysis
• High risk tolerance
• The ability to leverage to increase profits (but also increase risks)

Long-term investing based on fundamental analysis — analyzing company financials and growth potential. Requirements:

• Deep knowledge of specific industries and companies
• Ability to read and understand financial reports
• Lower risk tolerance
• Less frequent trading, minimal daily monitoring

Knowing which style suits you will give you a clear strategy and avoid wrong buy/sell decisions driven by emotions.

3. Diversify Your Portfolio - A Shield to Protect Assets

This is the mantra Warren Buffett always reminds us of. Never put all your eggs in one basket.

Diversifying your portfolio can be understood as:

• Owning multiple different stocks
• Buying stocks from different sectors
• Combining various asset types (stocks, forex, commodities)

The benefit is that during a bear market (bear market), a diversified portfolio will decline less than holding a single stock. Major stock indices like S&P 500 or VN30 are typical examples of diversified portfolios.

Warren Buffett advises that for long-term investors, index investing is both simple and effective. Although it may not rise as sharply as individual stocks during a bull market (bull market), the long-term returns are much higher than bonds or savings accounts.

4. Choosing Good Stocks - The Key to Long-term Investment

To succeed in long-term stock trading, selecting good stocks is a decisive step.

Characteristics of quality stocks:

• Short-term assets / Short-term debt ratio over 1.5 (low debt risk)
• Stable revenue and profit growth over the past 5 years
• Profitability indicators (ROE, ROA) increasing annually
• Regular dividend payments
• Reputable management team with no history of deception or concealment

In reality, the Vietnamese companies with the biggest gains over the past 10 years like Vicostone, Vingroup, Vinamilk, Hòa Phát, Bình Minh Plastic are all large companies with continuously recognized leadership.

Good stocks may not yield high returns during hot markets, but they are excellent defensive assets when the market turns. That’s why experienced investors often recommend adding quality stocks to long-term portfolios.

5. Technical Indicators - Market Reading Tools

Experienced traders use technical analysis to determine optimal buy and sell timings. The two most popular indicators are:

Relative Strength Index (RSI): Measures stock price volatility.

• RSI < 30: Oversold, potential buy signal
• RSI > 70: Approaching peak, caution advised

Stochastic Oscillator (Stochastic): Identifies reversal signals.

• Above 80: Overbought, potential price decline
• Below 20: Oversold, potential upward reversal

Understanding how to use these indicators will help you trade stocks with higher accuracy.

6. Catching the Bottom - A Strategy for Big Profits

Catching the stock bottom (mua khi giá chạm mức thấp nhất) helps optimize profits. To identify the bottom, rely on signals such as:

• Price forming a new bottom while momentum indicators (RSI, Stochastic) rise — signs of a price reversal
• Price forming higher lows after each bottom — selling pressure weakens
• Large trading volume during declines — investors are bottom-fishing

However, catching falling knives is very risky. Only allocate a small portion of your capital to this strategy, and avoid risking all assets. Also, do not try to bottom-fish penny stocks or extremely cheap stocks — these tend to fall sharply.

7. Adjust Your Portfolio According to the Market

The world changes, people’s needs change, and so does the stock market. Therefore, even long-term investors must periodically review portfolio performance and adjust allocations.

For example, during COVID-19, loose monetary policies and interest rate cuts spiked real estate demand, pushing property stocks higher. But in early 2022, when the State Bank tightened real estate lending, demand decreased, and sector stock prices declined.

A truly skilled investor is someone who can flexibly change portfolio weights. Even Warren Buffett, famous for long-term holding, often adjusts the proportions of stocks in the Berkshire portfolio based on market trends.

8. Avoid Borrowing to Trade Stocks

This is a valuable lesson: only invest with money you can afford to lose without affecting your long-term life. Never borrow money to invest.

Borrowing to trade stocks is very risky, especially in Vietnam where many companies “set traps” with investment apps offering interest rates up to 1000% per month.

Instead, invest with idle cash or savings. If you want to increase profitability, you can use margin (trading credit) responsibly through reputable trading platforms, but always ensure that maximum loss is limited to your initial capital, avoiding debt.

9. Continuous Practice - An Endless Learning Journey

A key lesson from Warren Buffett is never to lose money in investing. To do this, you must keep learning, analyzing stocks, and practicing trading.

The most effective way is to start with demo trading accounts on reputable platforms, where you can practice without risking real money. Gradually accumulating knowledge from theory to practice, you will better understand how to trade stocks effectively.

10. Maintain Psychological Stability - The Decisive Factor

The stock market is highly volatile. A large profit position can turn into a loss in 1-2 days. To succeed, you must keep your composure.

Avoid making stop-loss decisions out of panic or fear. Analyze the reasons behind market fluctuations before deciding whether to hold or sell. Emotional actions often lead to regret later.

Effective stock trading requires a combination of knowledge, discipline, and stable psychology. By applying these principles, you will have a solid foundation to step into the market with the expectation of improving your long-term investment performance.