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5 Common Sense Tips To Make Un-Common Dollars

If there is one thing that I have learned from my years as a day trader - its to apply common sense to every investment you make. Every investor possess the ability to apply common sense but few know the extent to which common sense can be applied to investing.

Here are a few tips the professionals use to maximize the their returns.

1) Lowering trade costs to increase your investment returns.

This is a real no brainer but take advantage of this principal you have to know how many shares you trade at a time. Many brokerage firms charge a flat fee - say $9.99 per trade. Others charge a fee per share traded. (IE .0065 cents per share.) Some are a combination.

It has been my experience, the charge per shares traded works out to be cheaper for me. If there is a flat fee (the $10 per trade) ends up eating me alive.

2) Get the best information available - don't use delayed quotes.

Current Level 2 Quotes give great insight into the short term moves of a stock. Level 2 quotes are a quoting system that not only show the best bid and offer for a stock but it also shows the size and the exchange posting that offer. It also provides subsequent bids and offers above and below the best bid and ask. This information provides the best picture of immediate supply and demand.

3) Trade between Bid-Ask Spread - (especially in the options.)

For stocks, the bid-Ask spread is not generally a factor but in the options market the spread becomes a real factor in wheather you making a profit or loss. Trying to buy options between the bid/ask or in some cases or joining the bid to buy and join the ask to sell an option may increase your returns immeasurably.

4) To find stocks on the move look for stocks on the "most actives" list. Then follow them for a few days to see which direction they are heading.

Stock with high volumes indicate a lot of money moving in or out of a stock. To make a stock move it takes a disruption in the equilibrium of the stock. Supply and Demand move the price of a stock. The more buyers (Demanders) out there - the faster a stock goes up. The more sellers (Suppliers) out there - the faster a stock goes down. This is why many professional traders like to follow the most actively traded list.

A stock that is moving up a few % each day on large volume is indicative of a lot of buying. I have found that by using this method I can identify many stocks on the move. After all if you are the only person to recognize a great stock it may never move. You need others to join in the buying to make a stock move.

5) "The trend is your friend" -

This is an old trader saying and I think it is one that still holds true today. Many traders like to buy stocks that are trending down in an expectation that they will rebound. Picking the tops and bottoms of a stock is very difficult. It is like "catching a falling Knife." Watch for stocks that are moving in the direction you want them to go. The most actives list will assist in picking stocks that are trending because of increased interest vs short term blips.

6) Protect your profit -

Many investors have a price in mind in which they will buy a stock. Few investors have an exit strategy. With the use of stop-loss orders and puts you can protect your profits. In my opinion, given this current economy, the idea of buy and hold may not be the best strategy. If you don't believe me take look at Japan's Stock Exchange. In 1990 the Nekkei 225 topped out around 40,000 and today it is just under 14,000. If you used the buy and hold philosophy, you would have lost 65% of your money over 26 years. Protect your profits!

So to maximize your returns apply these 6 common sense principals. Lower your trade costs by knowing how you trade. Get the best information available. Don't used delayed quotes. Try to trade between the bid and the ask (a level two quote system will help with this). Buy stocks that have increasing volumes and are trending in the right direction. And lastly, protect your profits. When you get a head don't give back that profit.

The bottom Line is everyone has common sense however the difference between success and failure are the people who actually apply common sense.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.