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5-step trading guide

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 5-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 4 key things to know about your specific situation to help you build a comprehensive investing plan:

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

A well-thought-out investing plan will incorporate these factors, enabling you to find the right asset mix (i.e., the types and percentage of stocks, bonds, and other investments that compose your portfolio) and strategies to help you accomplish your investing goals. In addition, you should factor in any unique circumstances that apply to your specific situation. Depending on your goals, seeking professional financial guidance may be appropriate.

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 think about 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 an approach that you might consider for researching and actively trading an investment opportunity:

  • Finding new ideas—There are many ways to generate investing ideas. Famed investor Peter Lynch, who for many years managed Fidelity® Magellan® Fund, espouses the idea that one way you can generate ideas is from what you already know. "Use your specialized knowledge to home in on stocks you can analyze, study them, and decide whether they are worth owning," Lynch says. You can also use insights and investing ideas from sources that you have determined are reliable. Online screeners can help you search for and generate stock, ETF, and mutual fund investing ideas based on both fundamental and technical factors. A watchlistLog In Required can help you keep track of new ideas as well as your existing holdings.
  • Start with the fundamentalsWe believe that the fundamental factors of an investment opportunity drive its performance over time. For example, earnings—which are a fundamental factor—are the core driver of a stock’s performance over time. While there can be short-term fluctuation, a company’s ability to generate earnings will dictate how the stock does over the long run. A fundamental approach might involve researching earnings, price multiples, and free cash flow for an individual stock, stock ETF, stock mutual fund, stock option, or other investment candidate. For bonds, bond funds, or ETFs, fundamentals might include cash flow and credit quality. You might also look at broad macroeconomic trends—like GDP growth, the jobs market, and productivity levels—as well as the phase of the business cycle and trends in different markets and sectors. You might also choose to incorporate independent experts’ analysis and ratings; to help assess those opinions, consider using the Thomson Reuters StarMine Equity Summary Score (on, a single stock rating of third-party analyst opinions that is weighted based on how accurate they’ve been in the past.
  • Layer in the technicals—Fundamental analysis can help you decide what to buy and sell, and why. Once you’ve researched all the fundamental factors of an investment, you might then consider using technical analysis (e.g., using charts and data to spot trends and patterns) to help you decide when and at what price to buy or sell. Among the most popular technical tools are moving averages, support and resistance, and relative strength.

3. Plan for a trade

Once you've done your research and you've identified an opportunity—along with any unique risk factors—via your fundamental and technical analysis, you might then consider selecting a strategy.

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.

You may also want to incorporate screeners and back testing software to help find any flaws and get a sense of the risks inherent in a trading strategy or idea. This approach may involve testing short-term strategies, like trading earnings, or longer-term strategies, such as sector rotation. Just as you need to assess the risks associated with an individual investment opportunity, you should also know the risks associated with a particular strategy.

A few keys to planning for a trade are having an entry and exit strategy to help manage risk and maintain a disciplined trading system, understanding what strategies and tools are at your disposal to help set up the trade, and knowing different order types to optimize your trade.

Having an entry strategy can help you position each trade for success. It can also help you navigate volatility in the event that things change (i.e., a market-moving event, earnings announcement, or any other significant news item) between the time you decide to make a trade and when you are ready to pull the trigger.

An exit strategy, in many cases, may be just as important. Emotion can be a powerful enemy when trying to make information-driven, dispassionate decisions. Having a plan for when things go right, or wrong, can help remove emotion from the equation. An exit strategy might include knowing your time horizon (e.g., is this a trade that you are looking to close within a few weeks or months, or over a much shorter period of time?) and risk tolerance (e.g., what percentage of your investment are you willing to lose?) for the particular trade, among other factors.

Some of the tools previously mentioned, like a watchlist, as well as resources like practice trading platforms, can be invaluable when planning a trade. When you move from planning a trade to placing a trade, order types can help you put your strategy into action. Plan for success by knowing how order types work, when they are best applied, and the limitations of their use.

4. Placing a trade

Finally, after you’ve done all your research on an investment candidate and decided on a strategy, the rubber meets the road when you execute a trade. You want to select a broker that offers the trading capabilities that you require, seeks best execution, and offers a trading platform that you are comfortable using.

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. Also, different types of investments can have varying trading characteristics, so you will want to be aware of what the best practices are for each type of investment. For example, Fidelity's ETF services group suggests these 3 best practices when buying and selling ETFs: Pay particular attention to bid-ask spreads, always consider using limit orders, and avoid trading near the market open and close.

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.

5. 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. Thanks to the increasing ease of monitoring your investments, including logging in online and via mobile apps, as well as alertsLog In Required and an array of other trading tools, you can manage your investments as frequently as you'd like. For active investors, Fidelity's Active Trader Pro® can help you trade and manage your positions.

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—You should have a plan for each trade before you make it, including your required return for owning an investment. Of course, circumstances can change after you enter into a position, and the market can move against you at any time. 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, analyst rating changes, or other factors that could affect your investment. At any time, you can adjust open trading orders to manage risk by setting new prices at which to buy or sell.
  • Portfolio impact—You might also assess how an individual trade might affect your overall objectives. For example, 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. Additionally, you could consider trying Fidelity Guided Portfolio SummaryLog In RequiredSM to review your current portfolio; get analysis on US stocks, bonds, and sectors; and get independent perspectives from Morningstar and Thomson Reuters StarMine.
  • Tax situation—As time passes and the value of your investments change, so too do the tax implications. One tax consequence in particular that active investors should consider is short-term capital gains (i.e., gains on investments that are held for less than a year), which are taxed at higher rates than long-term capital gains (i.e., gains on investments that are held for at least a year). Additionally, there are tax-loss harvesting strategies that may help you optimally manage your portfolio by offsetting gains with losses. With that said, you should never let the tax tail wag the dog, so don't base any decision solely on tax implications.

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 5 steps—get started on the right path, generate ideas, plan a trade, place it, and monitor your investments—may help you plan for the future while actively trading the market. 

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Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Sector investing can be more volatile because of their narrow concentration in a specific industry. The Equity Summary Score is provided for informational purposes only, does not constitute advice or guidance, and is not an endorsement or recommendation for any particular security or trading strategy. The Equity Summary Score is provided by Thomson Reuters StarMine, an independent company not affiliated with Fidelity Investments. For more information and details, go to

Past performance is no guarantee of future results.

Investing involves risk, including risk of loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Interest income earned from tax-exempt municipal securities generally is exempt from federal income tax, and may also be exempt from state and local income taxes if you are a resident in the state of issuance. A portion of the income you receive may be subject to federal and state income taxes, including the federal alternative minimum tax. In addition, you may be subject to tax on amounts recognized in connection with the sale of municipal bonds, including capital gains and “market discount” taxed at ordinary income rates. “Market discount” arises when a bond is purchased on the secondary market for a price that is less than its stated redemption price by more than a statutory amount. Before making any investment, you should review the official statement for the relevant offering for additional tax and other considerations.

The municipal market can be adversely affected by tax, legislative, or political changes and the financial condition of the issuers of municipal securities. Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets or for all account types. Tax laws are subject to change and the preferential tax treatment of municipal bond interest income may be revoked or phased out for investors at certain income levels. You should consult your tax adviser regarding your specific situation.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Fidelity Guided Portfolio SummarySM (Fidelity GPSSM) is an enhanced analytical capability provided for educational purposes only.

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