Stock Trading

Stock Trading

 

Stock trading, Here is your 401 k here today gone tomorrow

Stock trading, 24/7 and Global —mikebaird (Flickr.com)

Stock trading – just the sound of these words conjure up images of Wall Street, bulls and bears, and a sea of people awash on the floor of a stock exchange who are frantically buying and selling the hottest stock of the day.  Each day, trillions of dollars of equities and derivatives are exchanged and each day fortunes are made and lost.  While there are enormous risks, the stock market represents one of the world’s most enduring institutions of global capitalism as well as an iconic symbol of wealth for average people to strike it rich.

There are many paths to making money in the market – value investing, growth investing, initial public offerings, and others – stock trading has been a cornerstone to creating real financial wealth as well as being one of the most misunderstood methods for wealth creation throughout stock market history.

And, it’s easy to understand why a lot of people would think of the stock market like it’s a giant casino and buying and selling stock is the equivalent of “bet on black” where everyday people make wild bets on the latest stock issue with junior’s college fund since.  Lots of people, through no fault of their own, invest in a stock on a tip or wild speculation who later end up losing most of their money, if not all of it, because they didn’t know when to cash out and take profits or when to exit to avoid an unnecessary risk?

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Stock Trading

People of every back ground – blue collar and white collar, educated and ignorant, wise and dumb, rich and of meager means – come to the market with the secret aspiration to strike it rich with all the irrational exuberance of a San Francisco 49’er during the California Gold Rush, only to end up dirty in the mud, far poorer than when they first arrived.  With no expertise or training, the stock market, one of the greatest tools of wealth creation, can quickly become the Shiva of Wall Street, the God of Destruction for your life’s savings and future financial welfare.

While the folly of following your brother-in-law’s stock tip or blindly following the rants of a TV stock guru’s buy/sell recommendations is beyond the scope of this article, take note that if the idea of having to depend on a 25-year old stock broker’s advice whose only real job prior to graduating college was busing tables at P.F. Chang before falling into this line of work makes your gall rise to breathtaking heights only to be matched at the utter contempt at the idea of such a scenario, then you might be a good candidate as a stock trader.Stock traders are attracted to the both the complexities of the stock market itself and have an inner desire to match themselves against the best of the best in today’s market, and naturally lean towards such a challenge.  They are fiercely independent and believe in their own innate ability to control their destiny and achieving stellar returns in the

Stock trading, Tokyo Stock Exchange

The markets never sleep as stock trading take place globally in the new century

stock market is a reflection of that deep inner need for independence.To do that, they approach the market using one or a combination of the following:

Stock traders use a variety of trading methods or systems to buy and sell a stock but every approach is based on market analysis, fundamental analysis, and technical analysis to some degree.

What a carpenter’s tools are to his craft, these tools are to the craft of the professional speculator, the stock trader, and how well he uses them ultimately determines what he is able to build for himself.

They are literally the foundation of a trader’s success.

 

Market Analysis

 

Any stock trader worth his salt is going to refer to the general market to gain an understanding to both the health of the stock market  in addition to the general trend of the market.

As a general rule of thumb, 70 – 80% of stock move in sync with the larger market which makes referring to popular stock indexes like the S&P 500, Dow Jones Industrials, and the Nasdaq so invaluable.  Each of these indexes are made up of key segments of the stock market which you can refer to in order to determine what direction the market is moving in.

Also, with the right tools and methods, the O’Neil Follow Thru Day, for example, you can spot reversal points in the general market’s price action.  This allows you, the trader, the opportunity to spot stocks that are about to break to higher highs or lower lows and profit from the resulting move before its made apparent to the rest of the trading community.

The takeaway lesson for market analysis is to be sure that you trade in the direction of the overall market.  Like surfing, it is critical for you to move with the tide in order to profit in the stock market because going against the tide at the wrong time can lead to losses and a potential wipeout.

 

 Fundamental Analysis

 

Stock market, The Market

Fundamental Analysis, The Market—Iman Mosaad (Flickr.com)

Fundamental analysis is the study of key financial aspects of a company in order to gain an understanding of its fiscal health.  For stock trading, there are key ratios that you should look for in order to find fiscally strong stocks that are likely to trade higher when the general market is in a bullish trend and fiscally unhealthy companies that are likely to trade lower when the general market is in a bearish trend.

Financial criteria to look for is year-over-year sales growth, earnings per share (EPS), little to no debit, quarter over quarter sales growth, return on equity, competitive advantage in the market place, cutting edge products or services, and others.  Studying these criteria allow you to gain an understanding on how a company is performing financially as well as how competently its managers are performing by increasing shareholder value and assets.

As a result, stocks with these criteria are more likely to perform well and begin to attract the attention of institutional investors that will result in the accumulation of shares by these institutions and a corresponding rise in share price.

 

Technical Analysis

 

Stock trader, DSCN1753

Stock trader, DSCN1753—Perpetualtourist2000 (Flickr.com)

Technical analysis is the study of a price action to find points of entry and exits in a stock’s price movement.  It is this price movement where you, as the stock trader, look to find where trends exist and how to exploit them at a profit.

For example, in a shopping mall, a fundamental analyst would go to each store to investigate the products and services offered, research the competitive advantage of the business model, dig into the financial performance in the store’s operations ,  and then decide whether to buy, sell, or move on to the next store. Conversely, a technical analyst stand just outside the store’s entrance and watch people flow in and out of the stores while completely ignoring any financial ration of the store’s fundamentals with the trading decision solely based on the patterns or activity of people going into each store.

In trading, there are two types of price action – contraction and expansion.

When price is in a period of price contraction, it trades back and forth with no clearly defined direction.  It is like a ship at sea with no rudder to give it direction.

In a period of price expansion, price is trading in a clearly identified direction and is under control by either the bulls or the bears which forced it out of a period of contraction and into expansion, the trending phase of price movement.

Like the Yin-Yang concept, these two forces are at play at any given point and are in a constant state of flux.

While there are many forms of technical analysis – Elliot Wave, price patterns, Gann, Fibonacci, and others – it is these two forces at play that you want to learn to look for and exploit.

When price is expanding, that is when you look for breakouts out of contraction periods or pullbacks in price.

In a contraction phase, price trades between support and resistance levels until one side – the bulls or the bears – takes control of price and forces into a period of contraction again.

All technical analysis methods look to give the trader the ability to move between these two types of price action and profit in between each transition period.

 

Stock Trading Strategy

 

Any effective stock trading strategy is going to use a combination of these methods in order to gain a true edge in the stock market in order to achieve high performance.

All 3 of these critical factors are used in conjunction with one another in order to give stock traders the tools to outperform other traders they are competing with to achieve superior returns but, more importantly, to give them the tools to make their own investment decisions on how to deploy their money in order to reach their financial goals.

Stock trading is a skill like any other in that it needs to be nurtured through a combination of intense study, growing experience in the field, and patience as you move from beginner to expert.  If you use these 3 factors as you learn stock trading from the novice level to respected professional, then you can potentially lower your learning curve while reaching your goals much quicker with lower risk.