Tips for Active Individual Traders

As more individual investors try their hands at active trading via online brokerages, they ride a learning curve. Here are some time-honored rules that professional traders suggest following to better your chances of success:

* Before buying a stock that is rallying, check to see if the industry group or sector is also strong. Weak group action may mean an individual stock’s performance will be limited.

* Likewise, always consider your trading decisions in light of the action in the broad market. If you’re in search of short-term gains, you want to buy stocks that are showing good “relative strength”--that is, the stock is stronger than the market in an up trend, and not as weak as the market in a downtrend.

* Pay attention to share volume. The best rallies in individual stocks often are accompanied by rising share volume. A rising share price in lighter-than-normal volume might signal a short-lived rally.

* The flip side also is true: Rising volume during a stock’s downtrend can signal a much deeper slide ahead. Ideally, you want to see volume dry up when your stock is losing altitude, suggesting a lack of selling pressure.

* Cut your losses quickly. If a purchase results in an immediate loss, liquidate the position right away rather than risk a bigger loss. Some professional traders are willing to lose no more than 7% from their purchase price before jettisoning a position.

* Use “limit” orders as much as possible. A limit order specifies the price at which you’re willing to buy or sell. Using “market” orders--which are executed at whatever the prevailing price happens to be--can put you at extreme risk of getting a poor price, especially in the case of volatile stocks. However, if you’re trying to exit a stock quickly, a market order may be necessary.