Guide to trading

If you are an active investor, consider these three steps—plus a range of tools—to help trade the market.

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Three-step guide to trading

Have a plan.

Do your research and understand the risks.

Monitor your investments and adjust them as needed.

At Fidelity, we believe in taking the long view when investing. Of course, some investors like to actively trade the market. If you are thinking about trading, or are already doing so, here is a three‐step guide that you might consider.

1. Have a well‐thought‐out investing and trading plan.

We believe that having a long-term investing plan will help you achieve better outcomes. Here are four key components that you should identify to help you build a comprehensive investing plan:

  • Investing objectives
  • Risk tolerance
  • Time horizon
  • Tax situation

If you are interested in actively trading, you should also think strategically about how much of your portfolio you are comfortable trading. We do not believe that investors should be actively trading with all or most of their investment funds.

Instead, we think that you should first build a diversified portfolio that aligns with your investing objectives and risk constraints. No matter what your age or objectives, we believe this means being diversified both among and within different types of stocks, bonds, and other investments. One benefit of diversification is that it can help you manage your risk. We believe that you should always manage your risk—by choosing an asset mix (and associated long-term risk level) that is appropriate for your current circumstances, and creating diversification within that asset mix to improve your risk/return relationship.

Then, if you fully understand the risks involved, you might choose to set aside some percentage of your investment funds to use to trade. Having a plan will help you determine what percentage of your funds you believe it’s appropriate to use to trade. If you are already trading with some percentage of your funds and you haven’t yet considered the risk involved, you should consider it.

2. Fully research your idea and use best practices when making a trade.

Of course, diversification won’t ensure gains or guarantee against losses. You still need to do your own research—especially if you are investing or trading for yourself. Here is a step-by-step guide as to how you might consider researching and actively trading an investment opportunity:

  • Generate ideas: Only use sources that you trust or deem reliable, or use screeners to help you filter ideas based on specific criteria.
  • Start with the fundamentals: Know what you own. We believe that the fundamental factors of an investment opportunity drive its performance over time. Some fundamental factors to consider are earnings, price multiples, or free cash flow for individual stock.
  • Layer in the technicals: Fundamental analysis can help you decide what to buy and sell, and why. Technical analysis can help you know when and at what price. Among the most popular technical tools are moving averages, support and resistance, and relative strength.
  • Pick a strategy: You should have a strategy for every position. This can range from buying or selling a stock, bond, ETF, mutual fund, or other investment to executing more advanced strategies—such as buying or selling options. Strategic approaches may involve testing short‐term strategies, like trade earnings or longer‐term strategies, such as sector rotation.
  • Execute a trade: Before you make a trade, we believe that you should have both an entry and exit plan in place; for help with this, consider trying Fidelity’s Trade Armor®—a visual tool that helps you assess price levels at which you’d like to buy and sell. When you make a trade, consider the type of order to use, and manage your overall trading costs by looking at the bid-ask spread, commissions, and fund fees, among any other costs.

Regardless of your strategy, it is critically important to recognize that investing involves the risk of loss, and those risks can be greater for many shorter‐term strategies. While having a plan that aligns with your objectives and risk constraints can help you avoid strategies that expose you to more risk than you are willing to take, you still need to do your research to know the risks of a specific strategy or investment opportunity.

3. Monitor your positions and adjust them as needed.

Fidelity believes you should check your investment mix at least once a year or any time your financial circumstances change significantly. However, if you are making short‐term trades, you should monitor your positions more frequently, depending on your time horizon.

Determining how often you will monitor and manage your investments should be a part of your plan. Checking the investments in your portfolio can entail assessing your gains/losses, rebalancing your asset mix, or reconsidering some of your specific investments.

Here are some things to think about when monitoring your investments:

  • Risk and return: Know what you own by using all the research tools previously mentioned to determine whether an investment still aligns with your objectives when monitoring your positions. In particular, you may want to set alerts to actively monitor any news, rating changes, or other factors that could affect your investment.
  • Portfolio impact: If you have a desired asset allocation, you should fully understand how any buy or sell decision you make will affect the rest of your portfolio. You can view your entire portfolio online or evaluate particular investments via a watchlist.
  • Tax situation: As time passes and the value of your investments change, so too do the tax implications. There are tax-loss harvesting strategies that may help you optimally manage your portfolio by offsetting gains with losses.

Investing implications

This guide is not meant to encompass all the factors that you should consider if you’ve decided to trade. Indeed, you may have a different process that works well for you. However, for those seeking a comprehensive approach to investing and trading, following these three steps—having a plan, doing your research, and monitoring your investments—may help you plan for the future while actively trading the market.

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