Generally, a trader should meet buying with selling and vice versa when it comes to the stock market. Typically, stocks (especially when considered on an intra-day basis) will only go so high, or so low, before tending to attract the next group of contrarian thinkers and switch direction. Often times crowds (such as the markets) are wrong in their actions and over react to the up or down side. When the "markets" as a whole are moving up dramatically or down dramatically, there is a strong case to be made that these actions ultimately will be wrong or will tend to reverse simply as the contrary views of things builds on each side of the fence.
If you can train yourself to go against your natural emotions, you'll tend to be able to keep a clearer outlook on the markets. When stocks are being bought, you have to train yourself to think, "These stocks are buying bid up too high - maybe I should sit back and wait". By the same token, when there is a great deal of panic selling in the market, you need to train yourself to think, "Wow, look at all these prices falling - I may find good deals here soon". It's more difficult than you think to be "happy" when the markets are falling and "cautious" when the markets are rising. However, normally taking this view of things will help improve your trading over the long haul. The old saying, "Buy when there is blood in the streets" stems from this basic idea of going against the masses on Wall Street.
People tend to have a desire to buy at the bottom and sell at the top. Not just near the top, but the "exact" top. It's simply human nature to want to be the best at something, and trading is no different. Most people that take up daytrading want to be the best they can be. However, aiming for exact tops and bottoms when buying stocks can be very detrimental to your overall trading.
I would much rather give away 10% at the top and 10% at the bottom. You will drive yourself crazy if you punish yourself for not selling at the high or buying at the low, as it's almost impossible for most people to do on any sort of consistent basis. Far more often than not, you'll simply end up missing the trade. Even missing a top or bottom by 20% is nothing to worry about. As many a successful trader has said, "You can worry about the tops and bottoms, and I'll worry about the remaining 60%". In fact, it's often much safer to wait until a stock clearly signals a move either up or down before taking up your position.
Some people use stop orders quite often, some people hardly use them at all. In my view, stops are best used to protect a nice profit and/or limit down side risk in a trade that isn't acting as you think it should. How a stop is used (or placed) is largely dependent on the individual stock and how the overall market is behaving at any given time as well.
Often times using stops also helps to remove some of the emotions from trading. It's far easier to place a stop on a trade than watch it trade tick-by-tick and try to decide the exact moment to get out.
What about taking profits at big gains? At some point, just like experiencing a large loss, you are likely to hit a really big winner. When this happens, consider taking 1/2 your gains off the table right away to reduce risk to the profit you have just made. This allows you to continue to profit, but protects a large amount of the money you have just made. Additionally, you may wish to consider selling enough of the position to recoup your original investment. This results in the remaining shares effectively being "free" and allows you to hold them indefinitely without any fear of a "loss" to your original capital (which has now been removed completely).
When shorting stocks, there are several points to always keep in mind. Never short a stock simply based on the stock price. To really be successful as a short player (i.e. someone that shorts stocks), you need to locate stocks that are extended with a significant void of fundamental reasons. There must be some reason for the stock to decline in the near term (e.g. declining profits, lack of direction, etc.). Simply shorting a stock "because it has a high share price" is just inviting danger.
Additionally, keep in mind that shorting stocks exposes you to additional risks that are not present when buying or going "long" a stock. These include having the stock called away from you, as well as being caught in a short squeeze. Also keep in mind that the very act of shorting a stock increases the pent up demand for the stock - namely the number of people that will ultimately have to repurchase the security down the road to cover.
Finally, a good rule of thumb is to never short a stock which may end up on the front page of the Wall Street Journal or some other major financial publication. Typically, the best short candidates are stocks that have moved up rapidly on little or not fundamental changes and which are generally not well know to the investment public at large. While it's true you can make money shorting well known, large cap stocks, it tends to expose you to additional risks not associated with smaller and less well known companies.
Good luck in the markets!
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Ray Johns is the founder and Senior Market Editor of Daytraders.com, Proudly serving day traders & short-term investors since 1996, at http://www.daytraders.com
Daytraders.com is the publisher of the award winning Morning Stock Market Report and the home of the Internets finest real time trading desk. Ray has been on the forefront of trading and investing in the markets and has appeared as a guest on a number of radio and television shows including CNBCs Market Talk. If you would like a free trail of the newsletter and the live trading desk log on to Daytraders.com. Comments and questions can be sent to articles@daytraders.com.