- Personal Finance
Stock Market Trading Basics
Stock Trading for Beginners
Stock Market Charting Basics
The Basics of Trading using Stock Market Charts
In these difficult economic times lots of people are looking around for ways to make money independently, without being reliant on an employer or on just one source of income. The Internet affords you many opportunities to increase your revenue, including by websites such as Hubpages, or by blogging, but many people are also tempted by the idea of making money on the stock market. If you are a complete beginner to the stock market, here are the absolute basics you need to know before risking any of your hard-earned money.
First of all you must understand that it is possible to make money stock trading, but it is also possible to lose money, very easily. The aim when stock trading is obviously to increase your gains and limit your losses, you do this by limiting risk. It is not possible to make every trade a winning trade, your aim must therefore be to make more from your winning trades than you lose on your losing trades.
Support and Resistance Levels
It should be noted that I am talking here about short-term ( a few days) and medium-term (a few weeks or months) trading, not long-term investing. The most successful long-term investor on the planet is billionaire Warren Buffett who likes to say that the stock market is a "means for transferring money from the impatient to the patient". Long-term investing, however, requires researching and understanding company fundamentals i.e. their accounts and financial statements and also, crucially, it requires time.
Stock Charts Support and Resistance
Trading or Investing ?
In short or medium-term stock trading, however, you are looking to make a quick profit of around 10% before selling your shares and re-investing the money elsewhere. In order to do this it is essential to have a basic understanding of how stock prices move in the short-term and to do this you need to understand stock charts.
Before your eyes glaze over and your brain starts to smoke and smell funny, take a look at this video of a pretty woman explaining MACD and volume and then take my quick poll !
Figures, Curves and Blondes
Take My Poll - Is She the Real Deal ?
Does our beautiful blonde friend really understand what she is talking about or is she reading a script and thinking naughty thoughts ?
Stock Charts for Beginners
Meanwhile - back in the real world
There are those who claim that studying stock charts is akin to reading tea leaves or chicken entrails, but this is not at all the case. for one simple reason. You cannot influence tea leaves and chicken entrails, they are distributed in a random fashion. Stock charts, on the other hand, are not random, they are created by stock prices rising and falling, and stock prices rise and fall as a result of human behavior. If enough people buy a share then its price will go up, based on the simple law of supply and demand. The trick with stock charts is that they can be used to predict when traders will start to buy shares in a company or when they will start to sell them. It is often said, in fact, that "the news comes out in the charts first" i.e. if a stock chart starts falling for no obvious reason, then quite often, a few days or weeks later, then news will be announced which will explain why the stock price had been falling. The reason the charts started heading down ahead of the news is because some people who knew what was coming started selling and rumors were being spread to other people in the loop.
There are other reasons why charts can predict what is about to happen. For example, there are certain signals that professional traders use that indicate to them that it is time to sell. One particular signal is based around what is known as the "200 day moving average". The 200 day moving average is merely the average of a share price over the last 200 days. It can be plotted on a stock chart alongside the stock price by any charting service on a site such as Yahoo. If a stock falls below its 200 day moving average it is considered to be a bad sign and professionals will tend to sell, in fact many of them will start to sell before the stock price reaches the 200 day moving average. When the stock price falls below the 200 day moving average then the momentum of the selling will drive the price lower, thus "proving" that the decision to sell was the correct decision. This is therefore a self-fulfilling prophecy. People expect something to happen, they therefore take decisions based on what they expect to happen and this makes what they expected to happen actually happen, thus proving that their decision was correct.
As this is how professional traders use charts, you as a private individual must understand what sort of things the professional traders are looking at and how they are likely to react to what they are seeing. This is why there is so much talk about charts and support and resistance levels on finance channels such as CNBC.
This, therefore, is why stock charts are not like tea leaves and chicken entrails.
So, if you are complete beginners to investing or trading, where do you start ? Well, the most basic aspect of stock charts is the notion of "support" and "resistance". A stock chart will often move down to a certain point, then turn around and move back up again, the low price it reaches is known as the "support level". The high point is known as the "resistance level".
If a stock bounces around consistently between a support level and a resistance level it is described as being in a trend. If you identify a stock that is in a trend (by studying the charts on a finance site) then the aim is to buy it when it reaches the bottom of the trend and sell it when it gets back close to the top. Your target will be looking to make a profit of 8-10%. Once you have achieved your target you sell up and look for another stock in a trend or alternatively you can wait for your original stock to move back down to its support level so you can repeat the trade.
The principle is simple enough to grasp, the skill comes in finding a stock that is in a trend and understanding the signals correctly.
Despite your best efforts, there is still some risk involved in any trading and you must therefore learn to limit your losses.
If the stock you bought continues to fall instead of bouncing back up then you need to cut your losses. You do this by setting what is known as a 'stop loss'. A 'stop loss' is a stock price around 3-4% lower than your buying price and if the stock price falls to this level then you sell. You can set this stop-loss automatically when you buy the stock, so that your position is automatically closed, even if you are away from your computer. A stop-loss will ensure that you limit your losses to around 4% on a trade, while your profits are a potential 10%. This is a reflection of the risk/reward ratio. If a trade has too much risk then avoid it and trade something else. A stop-loss can be your best friend as it will mean that you don't lose all your money in a single trade ! And yes, that can happen if you're not careful.
This is the most basic way of stock trading. You find a stock that is in an upward trend (down trends or sideways are no use for this type of trading), wait till it falls back to its support level, buy it, then sell it when it gets back up to its resistance level. In order to do this you need to use a finance site or software that shows you stock charts. Some people make money on the stock market by using only this one very simple method.
Other things you may need to research if you want to learn more about charts than this basic method are 'moving averages' and 'swing trading'. For example you should not buy a share that is below its 200-day moving average and you should also not buy a stock if its 5-day moving average is pointing down. You can see these on finance sites that show stock charts.