Stock Market Trading for Beginners
There are certain things that beginners need to know before trading stocks and shares either online or over the phone. The stock market and consequently stock prices are driven by the professionals. As a beginner you cannot hope to have any influence on stock prices, therefore you must follow what the professional traders do.
As a beginner to stock trading, in order to be able to follow what professional stock market traders are doing then you obviously need to understand why they make the decisions they do.
It is important therefore to realize that professional stock traders use stock charts in stock trading. They look at the chart of a particular stock or index and, with the help of their expertise and certain indicators they decide whether it is heading up, down or sideways.
So, as a stock market beginner, where do you start ? The most basic thing you need to learn to be a stock trader is what the stock charts are telling you. There is no need to learn about company fundamentals, such as what the company makes or sells, what their profits are etc... and whether you can believe a word they say. Stock charts don't lie, they are purely mathematical.
It is also said that the "news comes out in the charts first" i.e. if there is bad news on the way then it will be reflected in the stock chart first, the stock price will start heading down. This is clearly not always true as sometimes a company will surprise everybody and out of the blue announce something totally unexpected which sends the share price soaring or spiralling down. But generally speaking, if a share price is heading up or down it is for a reason. That reason may just be that people are buying (or selling) the shares. But people will be buying the shares usually because they are looking at the stock chart and taking a decision based on their interpretation of it.
So as a beginner to the stock market and stock market charts what should you be looking for? First of all you need to understand moving averages. Moving averages show the average price of a stock over a given time period. One particularly important moving average to consider is the 200-day moving average. If you look at a stock using stock charting software or a stock site then you need to insert the 200 day moving average (this is done automatically if you click on the right button). If the stock price is below the 200 day moving average then this is not a good sign and you would do well not to buy that particular stock but to look for something else.
If you look at the charts of some of the famous banks over the last few years and put in the 200 day moving average, you will see when the stock price crossed below it and what happened next.
This is only applicable to short or medium term traders, long-term traders such as Warren Buffett generally don't bother too much with looking at stock charts to time their buys.
Another very basic comcept to understand if you are a beginner to stock investing is that of support and resistance. Quite often stocks trade in 'price channels' i.e. they will rise to a certain level then fall back down to a certain level then start to rise again. This is known as trending and traders will often just buy at the bottom of the trend, then sell when the stock reaches the top of the trend and wait for it to fall back to the bottom then start all over again.
The bottom of the trend is known as support and the top of the trend is known as resistance. Some traders say that that is all they use. They prefer to keep it simple. Look at a stock price, identify the trend and the channel and use a bit of common sense to buy low and sell high.
Sometimes of course a stock price will fall back to its support line and just keep on falling. This is where stop losses come in. You need to decide your stop loss before you place your trade. A stop loss is a price at which you automatically close your trade for a loss. Usually a stock trader will decide on a stop loss of around 4% or 5%,. So once they have lost 4 or 5% on a trade they close it, chalk it down to experience and move on to the next trade. The reason is that if you don't, your 5% loss may turn into a 45% loss very easily.
The stock market is not about being right all the time, that is impossible. It is about managing your risk - reward ratio. On a short to medium term trade a 'swing trader' will hope to make around 10% profit so he sets his stop loss around 4% thus making sure his potential loss is smaller than his potential gain.
Another basic rule that swing traders often apply is never to buy a share if the 5-day moving average is heading down. So make sure you take a look at this moving average at least before buying or selling any stocks.
Finally you need also to look at volume. Check out the volume of traders and see if is it higher than normal for the particular stock you are looking at. Generally speaking you want the stock price to be going up on high volume and falling back down on low volume. If the volume is high when the stock price is rising that is usually a positive sign.
These are just the most basic concepts of stock chart analysis but it is important to realize that professional stock traders are using their expensive software packages to analyze charts and you should consider learning the basics about technical analysis so that at least you have a hope of competing on a level playing field.
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