Stock Trading Basics and Fundamental Principles of Investing
Stock trading basics are a necessity for traders to become prosperous in the stock market. It is necessary, if you will, to establish some fundamental principles as you are beginning investing in the stock market. Here are some basic strategies to follow:Stock Trading Basics
Develop a stock trading plan! It’s pretty difficult to make a cake without a recipe and the same definitely applies to stock trading basics. Even the most experienced traders can get themselves into trouble by not following their plan. When are you going to buy a stock? When are you going to sell it? What are you going to do to prevent losing a lot of money if your stock goes bad?
- Once you’ve developed your stock trading system, stick with it.
- Trade safe and often. Especially for beginner investing, this is an important stock trading basic. Although your daily profit might seem small, it accumulates over an entire year. It is always better to win small than to lose big!
- Look for stocks with the highest growth possibilities, and don’t hold stocks when their growth possibilities are close to the average value. When this happens, a wise stock tip is to switch to a stock that is more profitable. This requires stock technical analysis, but the results are worth the effort. Remember to factor in your transaction costs such as bid-ask spread and brokerage fees.
- Avoid risks as much as possible and only take calculated ones at that. The most important stock trading basic is to remember that you are in this to make a profit and the best way to do that is conservatively. Don’t put all of your capital into just one stock. Portfolio diversification will be the thing that keeps you alive in the market, especially as you learn the stock trading basics.
Risk Reward Ratios
It’s important to realize BEFORE your first trade that not all of your investments will be successful. This stock trading basic is exactly why you need a trading plan. If you don’t have a trading plan, it is difficult to make money investing in stock. If you’ve ignored the plan for selecting your stock, and you don’t have a stop loss strategy, you may not have any funds left when your purchase finally quits falling. By not taking too many risks, having a stock investing system, and being willing to take small profits, an investor is able to keep the risk reward ratios tipped in his favor.
Learning stock trading basics isn’t difficult. Fundamental and technical analysis are things that anyone who is interested is able to learn. But the stock trading basics don’t lie in the details as much as they lie in the approach of the investor concerning stock trading basics and risk reward ratios. Once an investor has developed a successful plan and follows it, the rewards will far outweigh the risks and he/she will truly become a successful trader.
Market Direction: When is it time to take profits? When the probabilities indicate that an uptrend is running out of steam. That can be clearly illustrated when analyzing the right combinations of candlestick signals. As mentioned in the members market comments for the past couple of months, the longer that an uptrend is maintained, the more severe the sell signal needs to be to illustrate that the investor sentiment has changed.
Last Wednesday, the NASDAQ formed a Hanging Man signal. What is needed to confirm a Hanging Man signal? The evidence of selling afterwards. The NASDAQ traded lower on Friday. However, it had opened at the low and moved positive from that level. What did that reveal? There were still buyers in the market. The previous uptrend was still in progress. If a Hanging Man signal appeared in an overbought condition, followed by lower trading, although not completely weak trading, what should be expected next? To see that the buyers were still in the market.
Nasdaq
Monday's trading showed the NASDAQ opening lower with a gap down in price. It opened near the previous trading day's open and almost immediately started selling off. The 'trader' should have started taking profits immediately. Why? Because the combination of a candlestick sell signal, the Hanging Man signal, followed by weak trading the next day needed to see that the Bulls were still in the markets to maintain the uptrend. The fact that they gapped the price down, and immediately started selling it off, creating a potential Kicker type signal did not provide evidence showing that the Bulls were still in the market.
The longer-term investor would have needed to see evidence later in the day that the buyers were still in the uptrend. The fact that they closed both the Dow and the NASDAQ at the lower end of their trading range demonstrated that there were not buyers in the markets after the strong candlestick sell signal. That was time to start closer long positions. Could the markets support on moving averages? Certainly, that would be illustrated with Doji's, small Hammer signals, or a Bullish Harami at the moving averages. But until that happens, the candlestick signals reveal that the sellers are taking control. Take profits and be ready to buy the positions back if they produce candlestick buy signals at the moving averages.
Will there be stocks moving up in a down market? If it can be analyzed what the fears are that was creating the selling, it can also be analyzed which sectors/stocks might be picking up strength due to those fears. The reason for the big selloff in Monday's trading was the weakness of the US dollar. That weakness added strength to gold prices. A strong buy signal was revealed in the GRS chart in Friday's trading. A gap up after a Bullish Harami, followed by a Hammer signal, produced a very strong buy signal. Although the indexes sold off hard, the strength in gold prices made buying the GRS stock a high probability trade.
GRS
The candlestick signals reveal where strength or weakness is coming into a sector/stock. Using candlestick signals to analyze a sector chart, or a commodity price, becomes a very quick and easy way to evaluate which stocks might still move positively in a downtrending market.
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