Scrooge famously improved his future by taking a hard look at his past and present. After an extremely challenging 2022, it's time for investors to learn or relearn key lessons on how to invest in stocks. Preparing to succeed in the new year begins in three core areas: investor psychology, managing risk, and understanding support and resistance.
The bear market in 2022 ravaged the stock market indexes, particularly the tech-heavy Nasdaq. Once highflying tech stocks like Nvidia, Amazon.com, Meta Platforms and even Apple got scarred.
Will 2023 be more of the same, or will the market launch a robust rebound? Inflation, geopolitical turmoil and a slew of issues foster fear and uncertainty among investors.
To understand — and just as important, apply — sound rules for how to invest in stocks, kick off 2023 by sticking to what works no matter what the market does.
Investor Psychology: Stay 'Numble'
Stock market direction and investor sentiment can change very quickly.
Investors who get overly and stubbornly bearish may miss signs that a new bull market has begun. And those who get overly bullish in stocks like Tesla could get gored if they simply follow a hope-and-hold approach without applying any sell rules.
So stay balanced by staying "numble" — both nimble and humble.
Over his decades-long career, IBD founder Bill O'Neil embodied this ability to keep his ego and emotions at bay and act on what is happening, rather than cling to what he hopes will happen.
To successfully invest in stocks, investors need to take that same approach. Those who held TSLA, META or AMZN stock as they sold off in 2022 were not being nimble. And if it was the pride of not wanting to admit a mistake that left them holding the bag as these stocks sank, then they weren't being humble either.
Wherever you're at on your road to understanding how to invest in stocks, investor psychology will always be a key component to either success or failure.
To help understand if now is a time to buy, sell or hold stocks, check The Big Picture and Market Pulse each day as the market fluctuates. It will put the current action and market trends in perspective.
Managing Risk: Light At End Of Tunnel Or Oncoming Train?
Newer investors often focus on how much money they can make, with big dreams of getting in early on the next Amazon, Nvidia or Apple stock. But the reality is that investors should first and foremost focus on managing risk.
While smart investing is not gambling, the idea that you should not bet more than you can afford to lose also applies to Wall Street. Controlling risk is absolutely key to long-term success when it comes to how to invest in stocks.
Rule No. 1 for controlling risk is to always sell if a stocks falls 7%-8% below what you paid for it. If you follow sound rules for how to buy stocks, most of the time a stock will not trigger the 7%-8% sell rule. If it does, it means something is wrong with the stock, the market or both.
Don't let small losses become big ones. If you stay "numble" and quickly cut your losses, you're not just protecting your portfolio. You'll also be protecting your confidence, putting you in control and in the right frame of mind to make — and keep — big profits in strong market uptrends.
Support And Resistance: Key To How To Invest In Stocks
It's easy to overcomplicate stock investing. That's especially true when it comes to technical analysis and how to read stock charts.
Instead, keep in simple. At its core, chart reading comes down to spotting areas of support and resistance. Armed with that one concept, you'll be able to spot buy points and breakouts. You'll also see when stocks like Amazon, Apple and Nvidia are breaking down by losing support at key moving averages like the 50-day and 10-week lines.
Simply put, new buy points form after a stock temporarily sells off and then forms a bottom, or floor. The stock then begins to climb and returns to its former ceiling of resistance. That presents a new buy point.
If a stock has the strength to punch through that ceiling of resistance in heavy volume, chances are good that it is now poised for a new run.
But here again, the concepts of staying "numble" and managing risk come into play. Not all breakouts work.
By staying nimble and humble, you can quickly retreat from the stock if the breakout fails. And you will have already managed your risk by following a buying checklist that outlines basic guidelines for how to invest in stocks — and when. If the breakout subsequently fails, you can manage risk by following a selling checklist.
How To Invest In Stocks In 2023 And Beyond
There's no denying that 2022 was a trying time for growth stock investors. And it would be foolhardy to simply assume that the market will rebound to new highs in 2023.
But it would be equally foolish for investors to bury their heads in the sand and give up on the market.
By focusing on these pillars on how to invest — investor psychology, managing risk, and understanding support and resistance — you can stay protected and profitable no matter what the new year brings.
Follow Matthew Galgani on Twitter at @IBD_MGalgani.
