09 May 2014 From the horse’s mouth: 10 tips on trading online successfully
Anyone can make money on the stock exchange by trading online, but it is a never-ending learning curve and investors should be prepared to make mistakes – many of them. This is according to a 70-year-old client of online trading platform Sanlam iTrade, who has in the short space of two years seen a relatively small initial investment grow by more than 63%.
“I knew very little about online share trading when I started out – initially it was an attempt to supplement my retirement income,” says Willie Grobbelaar of Waterkloof, Pretoria. “But through trial and error, and not being afraid to take some risk, I have realised returns which far outstrip inflation. And if I can do it, anyone can,” he says.
Here are Grobbelaar’s top 10 tips for first-time online traders:
- Remember that you can make a lot of money very quickly through online trading, but you can lose just as much. It is important to decide whether you have the skill and personality for being:
- A day trader (buy in the morning and sell at the end of the day)
- A speculator (buy and keep from two days to six months)
- A long-term investor (keeping shares for longer than three years).
“I decided to split my portfolio into long-term shares (around 90%) and speculative shares (around 10%). Whatever profits I make from the speculative portion gets re-invested into the long-term portion. Personally, I don’t have the stomach for day trading, but others may be willing to give this a try,” says Grobbelaar.
- Be patient – don’t react to market ‘noise’ and don’t overtrade. “Try not to get emotional about daily share-price fluctuations. I lost quite a bit of money by selling and buying too quickly in the first few months of trading.”
- Don’t put all your eggs into one basket. “This is the common sense one – you have to invest in several stocks (and types of stocks) to spread your risk. I tend not to be invested in more than 10 stocks at a time – this is the maximum number I can follow on a daily basis with ease,” Grobbelaar advises.
- Buy only quality shares, in industries you know something about. These are mainly the JSE’s Top 40 shares, but could be extended to the Top 100. Profile’s Stock Exchange Handbook, published four times a year, provides a good overview of the quality of companies listed on the JSE Ltd.
- Only buy shares once you have done your homework and researched each share thoroughly. “I always look at price-earnings (PE) ratio – I like to buy stocks with a PE ratio of between 10 and 20. Anything with a PE ratio of below 5 is too risky, and above 30 is too high for my liking.”
- Watch the price movement of stocks carefully. As a long-term investor, Grobbelaar watches price movements of shares over periods of 13 weeks. He has written his own spreadsheet checking the daily rate of climb of stocks he is interested in. “I do this because my funds are limited, and it is no use having a good stock with a slow growth rate. By looking at my spreadsheet, I can move investments from slow to fast climbers.”
- Try to keep around 5% of your portfolio in cash. “You need to have some available money – if all your money is tied up in investments, you won’t be able to capitalise on opportunities when they arise,” he says.
- Keep an eye on global indicators and/or trends which could affect your investments. The two main indicators Grobbelaar watches are:
- The Chicago Board Options Exchange Market Volatility Index (known as the VIX or the ‘fear’ index), which gives an indication of when a stock market crash could be imminent
- The non-farm payroll statistics from the Bureau of Labor Statistics in the USA – published on the first Friday of every month – this is a good predictor of stock movements worldwide for the month ahead.
- Start on a small scale and gradually increase your investments as you become more confident. Long-term investors should not watch their portfolios more than once every three months, but beginners should do so on a daily basis, Grobbelaar advises. “I keep a daily log on a spreadsheet, which I update at the end of each day to track the movements of my investments. You must watch your log every day while you are still learning the ropes.”
- Follow a guru or a knowledgeable friend, but do not become dependent on tips. “At the end of the day, you must do your own thing and learn from your own mistakes.”
Lastly, Grobbelaar advises using a reputable online trading platform such as Sanlam iTrade. “It is a solid, stable platform with almost no downtime. All my queries are solved to my satisfaction. The system is bug free, and it is simple to use with very useful graphics, such as annualised returns graphs (with dividends reinvested) per company, and report cards for growth investors. Overall, it is an easy-to use platform both for those starting out in the world of online share trading and those who have been in the game for a longer period of time,” he concludes.
We have recently added some useful tools for our clients like Validea Guru Portfolios and Autochartist. Validea makes it easy to follow a “guru” as Willie describes in point 10. They use the investment philosophies of ten gurus like Warren Buffet to compile portfolios based on the criteria of the gurus. This gives investors ideas of companies to research and include in their portfolios. Autochartist scans the JSE in real time and identifies technical analysis patterns like triangles, wedges, head and shoulders, etc. This saves a lot of time in finding technical breakouts.
Gerhard Lampen, Head – Sanlam iTrade