If you are considering getting involved in the stock market as a trader but don’t know where to start then take care. It is not just a question of picking a stock that you like the sound of or because you think they are making something wonderful that has a good future. You need to understand that the stock market is driven by professional traders, who trade most of the time based on what the stock charts look like and where they think the charts are headed, not what they think of the company or what it makes.
In order to be able to compete you need to understand at least the very basics of stock market charts and what the professionals are thinking when they look at them. Professional traders make short-term decisions (days, weeks or months) based on charts and you, as a beginner, need to bear this in mind. They say that the “fundamentals come out in the charts first” i.e. a stock price will start moving up or down before there is any news from the company.
So, where do you start? The first thing to understand on a stock chart is the notion of support and resistance. If you look at the chart of a stock price you will often find that it moves down to a certain point before turning round and moving back up again, if it does this several times, trading online then the low price it reaches becomes known as the support level. The high point it reaches is known as the resistance level.
When a stock moves between the support level and the resistance level it is said to be in a trend and you need to buy it when it reaches the bottom of the trend and sell it when it reaches the top. Generally you will be looking for a short-term profit of around 8-10%. You make 10% profit and you sell up and get out. You then look for another stock in a similar trend or you wait for your original stock to fall back to its support level and you buy it back again.
It’s not rocket science, but the trick is in finding a stock that is in a predictable trend and interpreting the signs correctly. You also need to limit your losses. If you find for example that you made a mistake and that instead of going up your stock starts to go down, you need to get out. To do this you set a ‘stop loss’ – this is a price at which you automatically sell. This ‘stop loss’ needs to be around 3-4% below your buying price. This means that you are looking for a 10% profit but are only willing to bear a 4% loss. It’s all about the risk/reward ratio. If the risk is too high then you don’t do the trade. Above all a stop loss will prevent you losing all your capital in one trade!
So, look for a stock that is in an upward trend and that you think can make a minimum of 7% profit. Identify the support level and buy the stock at or close to the support level. You don’t have to buy all your stock in one go, you can buy half of what you intend to buy then see if the stock starts moving up, if it starts to move up then buy the other half.
If the stock starts to move down instead of moving up then get out when you have lost around 4% of your money – you have lost a battle, don’t lose the war.
To help you identify trends you should also study ‘moving averages’ and ‘swing trading’. For example two basic rules are ‘don’t buy a stock that is below its 200-day moving average’ and ‘don’t buy a stock if its 5-day moving average is pointing down’. If you don’t understand what these quotes mean then you need to research ‘moving averages’. Good luck with your trading.