How to Trade Stocks and Options

Some basic things you need to know

The objective of this site is to introduce the reader to some of the factors that can be considered in the process of making a decision to buy or sell a stock or a stock option when operating not as an investor but as a trader. To learn how to trade stocks it is necessary to become familiar with, and to gain an understanding of, the daily market-related information and the sources from which it is readily available, often represented graphically. That is the objective.

Trader or Investor, what is the difference?
It is a matter of emphasis, with the trader on stocks as the trading entity and the investor as a shareholder in a corporations. The major difference being that the trader wishes to make money from the movement of a stock, up or down, usually with a relatively short-term involvement and the investor most often takes a much more in-depth approach and stay with an investment for a longer amount of time.

The Trader
Successful stock trading depends on the ability to forecast what will probably happen regarding a stock and a stock market. And the forecasting process is derived from an interpretation of many events of the past with the expectation that there is a high probability that the patterns of the stock and the market in reaction to those repeated events in the past will be again repeated as new events occur. The past fluctuations of the market and individual stocks that have taken place until the present day can be represented graphically by a chart that displays a variety of attributes and activities. In this way, much significant information becomes available to those who know how to interpret the activity portrayed.

The trader is more affected by the activity that occurs as the market fluctuates in response to many day-to-day factors, reactions to related corporate news, general market conditions, supply and demand, short term news, global events and a myriad of other uncertainties as they play out over the short-term. The trader is more likely to depend on, at least to some degree, what has come to be known as “technical analysis”, much of which can be made from a review of charts of the stock’s past activities and charts of the market activity which show graphically the state of the market in which the stocks trade

. That can be complicated but there are some simple and basic approaches that can easily be learned with practice and patience. Frequently the trader will operate without the aid of a stockbroker and to do so, it is necessary to know how to trade stocks online, not difficult to do.

The Investor
The investor buys stocks, becomes a shareholder, in companies he or she believes have the likelihood of growth and profitability so that the shares of the company will gain in value as more investors are drawn to become shareholders in that company. The investor usually accepts the need to hold a position for much longer time periods than would be that of the trader.

The investor’s decisions are usually based on a review of the fundamental properties of a company. Those would include the company’s assets, its historical profitability and its current performance, and prospects for future profitability. Other aspects might be to review the balance sheet and company management to see how the profits and assets are managed and distributed, all of which takes time and experience.

In conclusion

So this site adopts the stance of the trader and will identify some basic indicators depicted on stock charts. Analysis of stock charts is not a science, there are so many variables and possibilities to be considered, but they do help focus attention on relevant factors so we will discuss some general guidelines that help interpret the data represented that relate to stocks and market performance.

We will test ourselves when we examine some individual stocks to see how well our earlier chart interpretations hold up, those that we choose for “pretend” trades for illustration purposes. That should be of value in meeting our objective to learn how to trade stocks.

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The possible profits that can be made by trading stocks are a valid reason for wanting to be involved in the stock market. But as well as a source of profits, there are also possibilities of losing money in the stock market.

Beyond knowing what stocks to buy, it is important to learn how to minimize risk and to know when to buy and when to sell. There are often occasions of unexpected volatility that occur, many unforeseen situations can arise needing a prompt and knowledgeable response to save a position. Experience can be the best teacher but when a speculator is still in the “learning how to trade stocks” phase the lessons can be expensive.

Professionals in the industry generally believe that most beginners lose money in their early days of trading while they are still learning how to trade stocks. It is those who learn from their mistakes that can survive and continue to trade. Many successful traders speak of their own early days when they lived through periods of loss while still learning the “ropes”.

Paper trading as a means of learning how to trade
A possible method for beginners to learn how to trade stocks without suffering the accompanied loss of money is to engage in a program of paper trading in which all transactions are simulated, using the same procedures just as if they were real. It is fictitious trading in which transactions to buy and sell are placed with a broker, financial institution, or other stock market simulator source, but are not actually acted upon and backed by cash in the market place although the paperwork is issued as if all the orders were really filled at the prices that would have applied.

With the aid of the same tools, techniques and trading platforms as the real traders who are making trades, and with the normal record keeping procedures, the paper trader is enabled to track both success and failure and to analyze results and see where mistakes were made and perhaps could have been avoided, or the trading decisions modified. If a beginning trader cannot succeed in paper trading, it is unlikely that trading in reality will have any different outcome.

In paper trading, all the regular procedures are followed as if the trades were real. When a paper order to buy or sell is placed, it is executed and recorded at the best market price available from that moment, which should be close to the existing market price but just as in real trading, that price may not be exactly as existed a moment before the order was placed, and occasionally, in some cases, the order may not get filled at all and have to be returned as “unable”, but that’s the way the market works.

Just because the trades are fictitious, the paper trader should treat them as if they are real, using the proper constraints on the paper trading funds, not to dissipate them rashly or take unrealistic or risky stock positions. Mistakes are to be expected, that’s the point of using paper trading when learning how to trade in stocks, so that mistakes can be identified and an understanding of how to avoid them in the future can be acquired.

It is especially useful when the decisions of what to buy or sell are based on analysis of a stock chart patterns that may be interpreted as signals to buy or sell. There is much to be learned about chart analysis and fundamental analysis if the stock trader wishes to utilize those techniques in their stock market trading activities.

Paper trading, sometimes called virtual trading, can be a very useful learning tool. But it should be backed up with appropriate educational support and trading expertise. And it has to be used over a sufficient length of time where many transactions can take place and where there is sufficient time for market fluctuations to be observed and to see their affects on the paper trading decisions that are being learned and implemented. There has to be enough time for “What should I do now?” questions to arise.

Many stockbrokers offer paper-trading facilities free of charge to their clients and there are also other sources of market simulators that can be checked out. Paper trading is not limited to equities (just another word for stocks), they are also adapted for most other forms of market activity, such as bonds, commodities, futures, and Forex trading.

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