Part 1
Getting Started with Trading
IN THIS PART . . .
Know what youâre getting into before you begin trading stocks by reviewing the ups and downs youâll encounter.
Get familiar with the various stock markets and the different types of market orders.
Pick an appropriate trading partner by finding a broker whoâs right for your trading style.
Figure out the minimum hardware and software requirements and check out recommended websites and programs.
Chapter 1
The Ups and Downs of Trading Stocks
IN THIS CHAPTER
Gathering your trading tools Discovering keys to success Making lots of money is the obvious goal of most people who decide to enter the world of trading. How successful you become as a trader depends on how well you use the tools, gather the needed information, and interpret the data you have. You need to develop the discipline to apply all that you know about trading toward developing a winning trading strategy.
Discovering how to avoid getting caught up in the emotional aspects of trading â the highs of a win and the lows of a loss â is key to developing a profitable trading style. Trading is a business and needs to be approached with the same logic youâd apply to any other business decision. Setting goals, researching your options, planning and implementing your strategies, and assessing your success are just as important for trading as they are for any other business venture.
In this book, we help you traverse these hurdles, and at the same time, we introduce you to the world of trading. In this chapter, we give you an overview of trading and an introduction to the tools you need, the research skills you must use, and the basics of developing all this information into a successful trading strategy.
Distinguishing Trading from Investing
Trading is not the same thing as investing. Investors buy stocks and hold them for a long time â often too long, riding a stock all the way down and possibly even buying more along the way. Traders, on the other hand, hold stocks for as little as a few minutes or as long as several months, and sometimes possibly even a year or more. The specific amount of time depends on the type of trader you want to become.
Investors want to carefully balance an investment portfolio among growth stocks, value stocks, domestic stocks, and foreign stocks, along with longâ, shortâ, and intermediateâterm bonds. A wellâbalanced portfolio generally offers the investor a steady return of between 5 percent and 12 percent, depending on the type of investments and amount of risk he or she is willing to take.
For investors, an aggressive portfolio with a mix of 80 percent invested in stocks and 20 percent in bonds, if well balanced, can average as high as a 12 percent annual return during a 20âyear period; however, in some years, the portfolio will be down, and in others, it will go through periods of high growth. The opposite, a conservative portfolio with 20 percent invested in stocks and 80 percent in bonds, is likely to provide a yield on the lower end of the spectrum, closer to 4 percent. The volatility and risk associated with the latter portfolio, however, would be considerably less. Investors who have 10 or more years before they need to use their investment money tend to put together moreâaggressive portfolios, but those who need to live off the money tend to put together lessâaggressive portfolios that give them regular cash flows, which is what you get from a portfolio invested mostly in bonds.
As a trader, you look for the best position for your money and then set a goal of exceeding what an investor can otherwise expect from an aggressive portfolio. During certain times within the market cycle, your best option may be to sit on the sidelines and not even be active in the market. In this book, we show you how to read the signals to decide when you need to be in the market, how to find the best sectors in which to play the market, and the best stocks within those sectors.
Seeing Why Traders Do What They Do
Improving your potential profit from stock transactions is obviously the key reason most people decide to trade. People who want to grow their portfolios rather than merely maintain them hope that the way they invest in them does better than the market averages. Regardless of whether traders invest through mutual funds or stocks, they hope the portfolio of securities they select gives them superior returns â and theyâre willing to work at it.
People who decide to trade make a conscious decision to take a more active role in increasing their profit potential. Rather than just riding the market up and down, they search for opportunities to find the best times and places to be in the market based on economic conditions and market cycles.
Traders who successfully watched the technical signals before the stock crash of 2008 either shorted stocks or moved into cash positions before stocks tumbled and then carefully jumped back in as they saw opportunities for profits. Some position traders simply stayed on the sidelines, waiting for the right time to jump back in. Even though they were waiting, they also carefully researched their opportunities, selected stocks for their watch lists, and then let technical signals from the charts they kept tell them when to get in or out of a position.
Successful Trading Characteristics
To succeed at trading, you have to be hard on yourself and, more than likely, work against your natural tendencies, fighting the urge to prove yourself right and accepting the fact that youâre going to make mistakes. As a trader, you must develop separate strategies for when you want to make a trade to enter a position and for when you want to make a trade and exit that position, all the while not allowing emotional considerations to affect the decisions you make on the basis of the successful trading strategy youâve designed.
You want to manage your money, but in doing so, you donât have to prove whether your particular buying or selling decision was right or wrong. Setting up stopâloss points for every position you establish and adhering to them is the right course of action, even though you may later have to admit that you were wrong. Your portfolio will survive, and you can always reenter a position whenever trends indicate the time is right again.
You need to make stock trends your master, ignoring any emotional ties that you have to any stocks. Although you may, indeed, miss the lowest entry price or the highest exit price, you nevertheless will be able to sleep at night, knowing that your money is safe and your trading business is alive and well.
Traders find out how to ride a trend and when to get off the train before it jumps the tracks and heads toward monetary disaster. Enjoy the ride, but know which stop youâre getting off at so you donât turn profits into losses.
Tools of the Trade
The first step you need to take in becoming a trader is gathering all the right tools so you can open and operate your business successfully. Your computer needs to meet the hardware requirements and other computer specifics we describe in Chapter 4, including processor speed, memory storage, and screen size. You may even want more than one screen, depending on your trading style. Highâspeed Internet access is a must; otherwise, you may as well never open up shop.
We also introduce you to the various types of software in Chapter 4, showing you what can help your trading business ride the wave to success. Tradersâ charting favorites such as MetaStock and TradeStation are evaluated, along with Internetâbased charting and dataâfeed services. We also talk about the various trading platforms that are available and how to work with brokers.
After you have all the hardware and software in place, you need to hone your analytical skills. Many traders advocate using only technical analysis, but we show you how using both technical and fundamental analyses can help you excel as a trader. (Part 2 covers fundamental analysis, and Part 3 discusses technical analysis.)
Taking Time to Trade More Than Just Stocks
The ways traders trade are varied. Some are day traders, while others are swing traders and position traders. Although many of the tools they use are the same or similar, each variety of trader works within differing time frames to reach goals that are specific to the type of trades theyâre making.
Position trading
Position traders use technical analysis to find the most promising stock trends and enter and exit positions in the market based on those trends. They can hold positions for just a few days, a few months, or possibly as long as a year or more. Position trading is the type of trading that we discuss the most in this book. After introducing you to the stock markets, the types of brokers and market makers with whom youâll be dealing, and the tools you need, we discuss the basics of fundamental analysis and technical a...