Bill Valentine

On Jan. 28 of this year, the stock of a waning video game retail company called GameStop briefly traded at $483 per share. Two weeks earlier, the stock was trading at just $20 per share.

Insane, right?

That may be, but wildly fluctuating stock prices, and the traders that cause them to do so, are not new to the stock market. Nor are the dreams of large paydays on the back of stocks that provide riches overnight.

Given the rising popularity of stock trading, thanks to GameStop and the likes, it seems now is a good time for me to pass on some tips to aspirant traders. While my career has been that of an investor, not a trader, I have picked up some concepts that should help you with your trading.

Tip No. 1: Never trade during amateur hour

It’s a well-understood fact among my professional peers that the market activity that takes place during the first 60 to 90 minutes of the day is mostly that of novice traders, buying and selling at a frenetic pace. We call this “amateur hour.” These early risers are seemingly trying to get ahead of the rest of the marketplace as volume picks up throughout the day.

However, if you watch how a stock trades during the day, you’ll notice that whatever happens in the first hour and a half is often erased over the course of the trading day. In fact, there are studies that show that whether buying or selling, you’ll get better pricing if you wait until amateur hour is over. Exactly how and why amateur hour exists, and why it produces the effect it does, is a mystery to me. But I don’t have to understand the dynamics of amateur hour to appreciate the wisdom of avoiding it.

Tip No. 2: Set a sell target

Whether you’re buying a stock for a short-term gain (the objective of the trader) or a longer-term gain (the objective of an investor), one of the most important things you must do to enhance the probability of maximizing your investment return is to set a sell “target.” A sell target is a price, or set of prices, that if triggered, will cause you to sell the stock. It’s often said that the hardest part of trading and investing is not deciding which stock to buy, but rather, which point to sell them.

Let’s say you buy a stock at $50 per share. You might set one target to get you out if things go well at, say, $75. You might set another target if things work against you, at, say $35. The reason these targets are important is that they take emotion out of the trade. Too often, when a stock you buy at $50 gets to $75, you start to convince yourself it’s on its way to $100.

Alas, things rarely go that well with a trade. And when a stock is getting clobbered, you fail to cut your losses , clinging to hope of a recovery that can prove elusive.

Tip No. 3: Sometimes the best decision is to do nothing

It seems these days that the term FOMO , or fear of missing out , gets bandied about a lot. With all the news about riches to be had in the markets — buying the likes of the GameStop — it seems like we should be harvesting our share of the goods by getting in early on the next big thing. But in the quest to do so, we sometimes feel a temptation to make purchases that aren’t really well thought out. Often, this results in disappointing outcomes.

Unless you are certain that you have an investment that you understand and makes sense, it’s better to do nothing. Nobody lost a penny on money they didn’t invest.

Tip No. 4: Never trade when you’re feeling emotional

If you’ve read this column over time, you’ll recognize a theme that I’ve hopefully cultivated: Emotions are the enemy of the investor. That’s equally true of traders as well.

Greed and fear cause us to act oppositely of our interests, and the only way to counter the influence of emotions on trading is to establish disciplines — like sell targets — that create a process in place of trading on whimsy.