Learn How to Trade Stocks, Preparation
Preliminary comments leading to our first trade
“Trading is a profession, and, like any profession, takes years of learning and hands-on experience to master.”
That quote is from Gary Smith, a well-known and successful trader from his book “How I Trade for a Living” published in 2000 by John Wiley & Sons, Inc.
By citing that quote, I am not wishing to scare anyone off from becoming a trader but just wanting to start with a sense of reality that trading is not a single routine with a set of rule that if followed automatically brings success.
But there are guidelines and routines that do help and they should be followed if you wish to learn how to trade stocks. It is essential to acquire appropriate knowledge and understanding of the way the market works, which is sometimes counter intuitive and illogical, especially in the short term. For instance, when a company announces a decent quarterly profit, the stock will often immediately drop in price. When you “know” the market it is easy too understand why.
I’ve been told that personal psychology, of which I know nothing, plays a part in making a good trader, the need to know oneself, whatever that means, but I do know that over time, with the right commitment of patience and by following a plan that incorporates risk management and emphasizes the discipline needed to follow pre-determined rules for limiting losses, there is a better chance of success. It brings the odds more into a beginning trader’s favor.
This How to Trade Stocks blogsite, as its name indicates, deals only with the trading aspects of stocks. We will not deal with financial planning or the guidelines for asset allocation or anything that involves building a diversified portfolio of serious long-term investments, mutual funds, retirement funds, or whatever might be best left to a professional financial planner who would probably follow established classical investment theories.
But regarding the monies to set aside for trading, I will just mention that a commonly suggested approach is to allocate for trading in the short-term no more than 20% of a total investment portfolio. The higher possible returns of short-term trading are accompanied by much greater risks. Short-term trading involves holding stocks for days, weeks, or months but not years.
Beyond that there is another “rule of thumb” often cited, saying that no individual trade should utilize more than a given percentage of the total trading stake, that percentage may be set at 5% or maybe more, but in this series of posts I am more concerned with illustrating the possible steps that lead up to the decision to make individual trades, so I will not be confined by those rules.
We can go through the steps to identify which stocks, out of the thousands of stocks available, show sufficient promise in their characteristics that we can expect them to provide a profitable trade. We must also know ahead of time, if they do increase in price, at what point we would be satisfied with the profit and sell all or part, or, conversely we must know at what point to exit if the trade turns against us, as often happens. In other words we should always follow a scenario that as close as possible maximizes but protects any gains that occur but on the other hand, protects us against too severe a loss. These are the normal routines followed by traders who know how to trade in stocks. A stock may rise in price but a profit is only realized if it is sold at that higher price.
The IBD, reference source for all stock trading matters:
In the pursuit of learning how to trade stocks, an excellent daily source of information about the market, stocks, company earnings, etc., together with technical and fundamental information, is the IBD, the Investor’s Business Daily, founded by the successful stock trader William J. O’Neil.
Just about any of the several books authored by William J. O’Neil in which he describes a simple and effective trading system called CANSLIM.
The stocks selected on this blogsite are examples only, not to be traded
Choosing stocks as examples enables reference to be made to associated decision making considerations and may provide a source of discussion points. In addition, whatever stock I discuss now will, by the time this is available for reading will be well past the time when the facts pertained to warrant the selection as a possible trade. Things change quickly in short term trading and the stocks chosen are just meant to be examples that have real life and from which we can observe the success or failure of the selection process within the time-frame of the particular trade under consideration. That has greater validity than merely stating it as theory.
All stocks we “trade” we will buy long, short trading has it’s place but we will discuss that separately later. We will buy with the anticipation for a gain of at least 15% but that have technical target of 30% or more. On the downside we will exit from the stock if it falls by 8%, another fairly common “rule of thumb”. These are short-term trades and some will show losses so we need to target a winning ratio of wins versus losses that leaves an overall profit.
The stocks will be selected from those listed on the major U.S. exchanges which number over ten thousand or so, more than enough.
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