Related Topics

I depends on who is doing the speculating.

If I go out and play the foreign exchange market with $5000, or day trade options or futures, I'm probably not going to hurt anyone besides myself if I lose my money. In fact, it is often argued that speculators or day-traders actually perform a service to the market by increasing liquidity, thus helping other investors get a fair price for their stocks or other securities.

Here are some tips Mate — good luck.

6 keys to successful stock speculation

6 keys to successful stock speculation

OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.

Mark Twain

Stock trading speculation is high risk and should only be undertaken if at all, with money a trader can afford to lose. Individuals should in all cases consult a professional financial adviser to determine if a particular investment is suitable for their financial circumstances prior to making any investment.

What are some of the characteristics that help make some speculators successful while others continue to fail?

1. Work hard

Stock speculation needs to be treated like a business and this commonly means to be successful a trader must work very hard.

It is common for new traders to come to the stock market and think that a great deal of learning is not needed to be a successful speculator. However, traders are dealing against others who devote a considerable component of their lives to stock trading and in most cases the harder these traders work the more successful they become.

The hard work in stock speculation involves constantly monitoring company announcements, assessing opportunities, and monitoring open positions and potential positions. All this takes a great deal of time, and diligence.

It also helps build for the trader a list of potential stock opportunities for trading that can be compared and contrasted, and thus sifted for the best opportunities.

Many inexperienced traders watch the TV news, or read newspapers to gain insight into stocks. However, this will not work if a trader wants to be successful in the competitive world of stock speculation.

By the time details of a stock have hit the mainstream news, it is often too late to capitalise on the opportunity.

Successful speculation in most cases involves arriving early at an opportunity, and by the time the opportunity is evident enough to be picked up by the mainstream media the opportunity is often over.

To increase the odds of success and to look for opportunities it is necessary for the trader to read each of the relevant company announcements in their specific and defined area of trading, be that resources, technology, or other stock sectors.

2. Define a catalyst

A stock is unlikely to change much in price, macro factors aside, unless there is a catalyst to change perceptions in regard to the value of the stock.

Every speculative position should have a defined high probability catalyst with the potential to change the stock price in the future. These catalysts can take many forms, in biotech stocks it could be a coming FDA approval decision, in metal or oil stocks it could be a drilling campaign, or results of drilling.

The important point for the speculator is the need to have a clearly defined catalyst and therefore a point in time when the stock price has potential to move positively in their favour.

3. Constantly look at the risk reward ratio

If the speculator puts in the work they should build a list of stocks that could potentially be purchased. These stocks should be defined down to only those with the best risk to reward ratio.

The good speculator will always be assessing a stock's market capitalisation against the potential for a defined future catalyst to move the stock's price. It is a significant skill in speculation, but the trader needs to assess the risk to reward. Is the market capitalisation of the stock already too high, and thus the catalyst's potential impact already factored into the market?

The good speculator is always looking for high probability catalysts available at a market discounted price.

In order for these opportunities to be found the trader will need to assess many opportunities, the capital value of the stock, liquidity risks, and be a good judge of the catalyst's potential impact on the stock price.

Additionally if the catalyst turns out to be negative they need to be prepared to cut their loss quickly and exit the position.

4. Keep position size small

Probably the biggest error inexperienced speculators make is that they trade with positions that are too large.

It only takes a couple of errors and significant losses are made. Speculation should be undertaken with very small position sizes.

The other problem with large position size is related to liquidity. If a stock is illiquid if may be very difficult to exit the stock quickly if things start to go wrong. This adds significantly to the risk of a trade. Many small market capitalisation stocks are illiquid, particularly when things start to turn bad.

Remember if a trader loses half of their trading capital they have to make a 100% return on the remaining capital to get back to even. That is a big task, so trade small positions and quit quickly if things turn negative.

5. Know your edge

Most good speculators have a trading edge. Speculators are in effect competing against other speculators in a very competitive field. Developing a trading edge and knowing what that edge is can be vital.

For instance it makes no sense for an expert in Cloud technology to be trading resources stocks, or an expert geologist to be trading Cloud technology stocks.

Additionally, a trader’s edge can come through a good match of psychology with trading style. For example, a trader mentally suited to long term investing should not be day trading.

It is vital that the trader’s psychology matches their trading style like a glove.

6. Quit when everyone’s buying

In the majority of cases speculative positions should commonly be at least partially cut when a market is exploding on the upside and every man and his dog has started to buy the stock. Once the market is on to the opportunity the valuation gap closes and the stock becomes no longer of interest to the speculator.

It is strangely common in a very fast spiking price move for the stock price to move back down approximately 50% of the spiking move. Given this is often the case, the speculator needs to ask themselves if they are willing to give up this much of the move, in the hope that the price will lift even further in the future?

Finally, be careful about falling in love with a stock or the stock's story. Often this clouds the trader to the reality of the potential of the stock.

By Andrew Quin

Improve your financial future — Stock Portfolio Management.

Research Strategy Coordinator & Private Client Adviser for one of Australia's largest stock broking firms with over $12 billion in accounts & 19 offices in Australia.

Qualifications: MSc(Min. Econ.). RG146. Superannuation Accredited Tier 1. Prof. Dip. Stockbroking.

Author: Investing on Wall Street.

All clients large and small welcomed. Contact: Email

You may also like: