Online Stock Trading for Beginners - Strategies for How to Trade Stocks Online
As a beginner to stock trading you need to decide on a strategy to help you choose which stocks to buy. Most people go down one of two routes (or a mixture of both) - fundamental analysis or technical analysis.
Fundamental analysis involves analyzing the fundamentals of a company such as its accounts, its trading reports, the quality of the management and the stock price compared to what you believe the company is actually worth. If you believe the stocks are undervalued then you can buy them in the expectation that eventually the stock market as a whole will see that the company is making good profits and that the share price should be higher. This is the stratgegy adopted by Warren Buffett and others and it works very well if you know what you are doing, or if you copy what Warren Buffett does. This strategy does take a lot of knowledge and also a certain amount of faith in company reports and company accounts, it is also generally a long-term strategy and you may have to wait a number of years for the benefits to make themselves felt.
The other strategy adopted when trading stocks is technical analysis, which involves studying stock charts and ignoring the fundamentals of a company. Technical analysts believe that the charts tell you everything you need to know, for the simple reason that the people who really know what is happening inside a company will have an influence on the share price before anyone else finds out. This leads to the belief that everything is in the charts first.
To be able to understand technical analysis you do of course need to know what the various chart patterns are telling you, but this knowledge can be acquired relatively easily compared to fundamental analysis.
Technical analysis and analyzing stock charts and patterns relies on the following assumptions - supply and demand determine prices, supply and demand is a result of rational and also irrational behavior, stock prices move in trends which are usually long-lasting, any changes in supply and demand can be discovered by analyzing stock price behavior.
Technical analysis is more of a short to medium-term strategy than fundamental analysis. It requires less in-depth knowledge than fundamental analysis. It does not rely on company accounts, which may be manipulated by companies, if properly understood it can give you clear buy and sell signals.
Finally, and most importantly, technical analysis is a way of analyzing the behavior of crowds. When trading stocks using technical analysis you do not fight the crowd, you go with the flow, although it is better to go before the flow starts. Because stock market charts reflect what the majority of investors did, these charts are also self-fulfilling prophecies. They work because people expect them to work, then after they have been proved correct it becomes clear that the charts were correct.
For example, people know at what time a football match is going to end, therefore some people position themselves to be near the exit when the match ends so that they can be the first to the car park and the first out of the car park, before the rush starts. The same thing can happen with stocks and shares.
If you expect something to happen when a certain signal is given, then you will react in a particular way when you spot that signal. If enough people analyze the situation in the same way then the expected result is achieved and the analysis is proved correct i.e. it becomes a self-fulfilling prophecy. If enough people expect a stock price to go up then when they buy it, the stock price does indeed go up, this confirms that they were correct to buy the stock in the first place. The whole art of technical analysis is therefore knowing what people are going to do, before they actually do it.
The reason that technical analysis works is because there are many thousands of expert analysts basing their investing decisions on the same stock market patterns. Because there are so many of them doing this they actually influence prices by their reaction to the same signals.
Online Stock Trading for Beginners
As a beginner of course it is difficult to know which signals to react to. One of the most basic signals is the moving average. Any stock market chart, such as those available at Yahoo, will work out the moving average for you and place a line on the chart. A moving average is merely the average price of a stock over a specific number of days. One of the most important of these moving averages is the 200 day.
5 Year Chart of the DOW with the 200 day moving average in green
It is important to realize when learning how to trade stocks online that if a stock falls below its 200 day m.a. this is considered by most technical analysts to be a very bad sign and in fact a signal to sell the stock. It is not therefore a good idea to buy a stock which is below its 200 day moving average. On the other hand however, if a stock moves above its 200 day m.a. this is seen as a good sign.
From a wider point of view if 80% of stocks are above their 200-day moving averages, the market is said to be overbought and so people tend to sell. If less than 20% of stocks are above their 200-day m.a., the opposite is true and it is seen as a signal to buy.
This was just a basic introduction to technical analysis and why it is important to know some of the most basic ideas at least to avoid jumping in to a stock just when everybody else is jumping out.
For more information on stock charts and moving averages and a video explaining the significance of the 200 day moving average see - stock trading for beginners
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