Yes, there is a way to win with penny stock trading, but first a brief definition and a caution.

The definition, sort of
Generally speaking, most of us consider a penny stock to be a low priced stock of a small company, often something we hear about because of its fund raising activities in connection with future speculative ventures. A penny stock is not likely to be listed on any of the major stock exchanges, although it could be, but penny stocks are often issued “over-the-counter” (OTC) by institutions known as the “Over-the-Counter Bulletin Board” (OTCBB) and the Pink Sheets.

But in reality, it appears that there is no precise definition of a penny stock. Certainly it is not limited to stocks that sell for pennies since many stocks that sell for up to five dollars are also considered to be in the same category. The Securities and Exchange Commission (SEC) takes the view that all shares trading for less than $5 are penny stocks. Nevertheless, to qualify in their own minds as a penny stock, most people would expect the stock price to be at less than one dollar. And some penny stocks trade at fractions of one-cent.

Whatever the situation, here and now we are interested in discussing penny stock trading and doing so in order to put up a small amount of speculative money to earn big returns. I believe that is the common view of many of the small speculators although I do believe myself that there are better and less risky ways to operate in the stock market when there is limited capital available. To be more specific, trading in options, but that is another story covered elsewhere on this website. For the penny stock advocates, claims are made that you can start with a few hundred dollars and turn that into thousands, losses are not too often mentioned.

The small trader does not have the time or the resources for adequate research
Successful speculation requires a certain amount of knowledge about how the stock market works in general and how particular stocks react to events of the day that are constantly changing. For listed securities there is an abundance of timely information available to the trader but that may not be the case for the penny stocks and it is much more difficult to conduct due diligence in order to properly assess the merits of any given stock issue.

The caution
Quite often, a significant amount of promotion accompanies penny stock issues in order to move the stock up in price and if you realize what is happening in such cases, you could well be in a position to realize a good profit. Stock promotion in this fashion is not illegal but is an essential part of raising money to fund operations with legitimate hopes that the company will benefit by the future works that require the funding. Although there is always the possibility that outsiders could manipulate the market for their own gains when stocks trade at very low prices.

A typical promotion piece would be a news release telling of good preliminary results on the company’s activities that show great promise and when completed, the final announcement of results could easily double and triple the value of the company and its shares.

How I would approach penny stock trading
Knowing that I don’t have the resources to properly research any of the thousands of penny stocks on the market, my best choice to start penny stock trading, I believe, is to subscribe to one of the many stock-tipping services that specialize in penny stocks. I would expect to pay about fifty dollars a month and would do so for at least a couple of months while I viewed the suggested Buys and Sells and also gained a deeper insight into the whole process. That’s a reasonable price to pay for a little learning, and who knows, I might also decide to put a few hundred dollars into one or two of the companies suggested – maybe even end up with the thousands they often claim can be made.

I have already checked out a few and can offer a few suggestions for your guidance. And before doing so, I assure you I have no affiliation or connection with any of the following and also I have no doubt by searching the internet you can easily find others providing similar information to help get started in penny stock trading.

1. For background information but not necessarily a lot of stock tips, I certainly liked the explanation of penny stocks given at the website http://www.buypennystocksguide.com/ . Under the title “Penny Stocks for Dummies – A Quick Synopsis” the author explains what you need to know before making commitments, he talks about the “pump and dump” scams and other things to be wary of and I see a list of other interesting articles of value to provide a good foundation to the process. I was also pleased to see references to the need to recognize stock chart patterns, something that we emphasize on this website.

2. A second website that does focus on stock tips is http://www.pennystockgeeks.net/. Their opening paragraph states:
“Make a killing in Penny Stocks. Invest as little as $300 dollars and we can help you grow it into $1,000′s of dollars. Subscribe as a VIP Gold Member today for just $49.95 US Per Month!”

3. Among the other hundreds of similar websites, you may also want to check out the following: http://www.thehotpennystocks.com/, http://www.cityequities.com/en/, and http://www.superstockhunter.com/.

In closing:
My final comment: If your capital is small and if you are uncertain about penny stock trading, read the posts on this website relating to options trading, another process that only requires a few hundred dollars. There are guidelines that show how to minimize risks and keep it simple.

The date is March 30, 2010 and we have been watching the stock OII (Oceaneering International, Inc., traded on the New York Stock Exchange), then trading at around $62 and decide to buy 1 call option, in keeping with our Four Rules for Trading Options, it has to be in the money, expire several months out, and with a delta of about 60.

The choice is obvious, there is a July 60 call available with delta 63 at $6.65. One contract controls 100 shares and the call contract costs $665, ignoring the commissions for now.

Over the next 4 weeks the stock rises, falls back and then rises again to about $68, it then again falls back and when the price goes down to $66 we close out the trade on April 29, selling the call option at  $8.90 for a gain of $8.90 – 6.65 = $2.25 per share, 100 shares times $2.25 = $225, that’s a 34 percent gain. A good example of how an option can provide an excellent gain with a maximum risk limited to the possibility of losing only a modest amount.

How the extended stock option strategy can provide added gains

Below is the stock chart showing the action that took place for the period of interest, the period covered by the option, March 30 to its expiry on July 17, 2010. From this we can consider what could have happened if we had followed the Stock Option extension method described in the post titled “Trading Options, an Extension of the Basic Strategy”  in which we would hold the option and sell short the shares of OII, the underlying stock.

So instead of closing the long call option position with the stock at $66 let us assume we held the option and, in another account, we sold short 100 shares of the underlying stock, OII, at $65 and stayed with both positions while the stock dropped in price, something we could not be sure would happen when we entered the trade, but we followed the guidelines of the strategy that in this case works out exceptionally well, and it should be emphasized that other “hold the option, short the stock” plays do not always produce such profitable results as can be seen possible on the above stock chart.

To review the possibilities, three things can happen with the price of the stock at this point, it can stay at the same price for a while, it can continue on its new downward path, or it can reverse and go back up.

If the stock had not continued to fall but again reversed and went back up, as it started to do on May 09, we still had the call option with a July expiry date that would capture the continuing upward move, although in that event losing on the short position, but the losses and gains on the two positions cancel each other out.

As it turned out, the upswing that did occur from $55 was short-lived and after reaching $60 the stock again reversed and continued lower. On May 19, with the stock down to $55, a 10-point gain on the stock short from $65, the stock option is now far out of the money and worth much less but probably with some value left because it is still far away to expiry.

So the option can be sold at this stage, but does not have to be, as the stock declines further in price the option will become almost worthless.

But if it was sold at this point, let’s be conservative and say the option can be sold for only $100.00 net, giving a loss of  $665 – $100 = minus $565. However, the gain on the short is $1000 meaning a $435 gain if both positions are then closed out ($1000 – $565 re the option loss = $435) That is a very good result compared with the $225 gain on the basic option play.

What happened next if the positions are not closed out?
The stock, as shown on the chart, appeared to have no support and seemed likely to continue on down at this point, although at that time we cannot be sure of that, we have no way of knowing what did actually occur after that date, we can only see it now after everything has been recorded.

If the short position was not already closed, there would an element of increased risk in holding the short position in case of another turn around so the stock needs a lot of watching and with the trailing stop loss in place until the trader is ready to exit and secure a profit. That might be at any time from that moment on. The chart shows that the stock actually dropped to $42 as mentioned above. If the short position was held until then and sold after a $5 rise from the low it had reached, it would have produced a very good profit indeed, much more than is usually the case. You may wish to make the calculations to determine the amazing gain that would have been made.

Conditions required for success with this strategy
The success of this strategy depends on owning a long call on a stock that, after rising in price to provide a profit for the option holder, faces a likelihood of falling much lower in price, perhaps because of negative news or some other unforeseen events.

The stock option extension strategy requires that, with a winning call option trade in hand and when the underlying stock begins to fall back in price,

1. Don’t close out the option trade but continue to hold the long call, that’s a must.
2. Sell short 100 shares of the underlying stock, the number of shares controlled by the call option. The brokerage account has to be a margin account to allow stocks to be sold short.
3. At an appropriate time in the future, sell the long call option and  cover the short position not necessarily simultaneously. Only then can you count the profit from this strategy for trading options.

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Following up a recent post on trading stock options by using the simple and less risky approach in doing so, as outlined in Four Rules – A Guide for Trading Options,  there is a further twist we can add to that strategy.

We can take the strategy a step further and describe an extension of the basic play. It works well with stocks that tend to rise periodically to a peak, perhaps to the extent of being overbought, and then falling back to a much lower price after reaching the higher price.

If the option was purchased early in its ascent then the option trade would have been profitable and the usual pattern is to capture that profit by selling the option at the new higher price – remembering it is not a profit until it is sold.

“The best, most conservative strategy ever invented to profit from the stock market.” Jim Cramer, from his book “Getting Back to Even”.

But in an extension of the basic play, and for the purposes of description, let us consider the option is a long call, the option is held and not sold until later because a new and additional position is first taken by selling short the actual underlying stock of the option. The short sell involves the same number of shares as that controlled by the original option. A single call option controls 100 shares of the underlying stock, so therefore, for every option contract, 100 shares of the underlying stock will be sold short at or near a recent peak of the stock’s price.

The short trade
The trader borrows the underlying shares and sells them at the current price while having an option that gives the trader the right to buy the same amount of shares at the price established by the option strike price.

I hope that does not sound confusing, but the object is to gain from any substantial fall back in the price from the stock’s high and to do so without any risk involved because the call option already gives the right to buy those shares back, as the short position requires, at the lower strike price of the option.

The big advantage is that there is no risk because the option provides a safety  net.

The anticipated outcome of the strategy is that the fall in stock price will enable a greater profit to be captured that the one-way call option strategy provides.

Perhaps it is best explained with reference to an an example that can be found here.

I would also like to mention that the well known trading pundit by the name of Jim Cramer, known to almost everyone in the stock market, has outlined this same strategy in his book “Getting Back to Even” published in 2009 by Simon & Schuster.

For the record, although being known for his somewhat wild antics and clowning around on his nightly TV show Mad Money, Jim Cramer has achieved great success and financial independence as a trader, making money in markets where others failed. He credits the strategy described here in which, in his words, he goes “long-call, short-common”, as having made millions of dollars for his hedge fund and for himself in his own trading. Cramer, in his usual enthusiastic fashion, describes this method as “the best, most conservative strategy ever invented to profit from the stock market.” I would say that it’s worth the price of the book just to read the two chapters, “Using Options to Replace Stocks” and Taking Options to the Next Level”.

I echo his advice, for this and for all other stock trading strategies, to first practice and learn how to trade stocks by paper trading [http://howtotradestocksguide.info/explanation/learn-how-to-trade-stocks-by-paper-trading/] before putting up real dollars, and when it seems appropriate to start trading for real, start cautiously. After the first ten or so trades are made it will probably show there have been winning trades and losing trades, just like there are for the pros,

Obviously, the objective is to make more wins than losses but it is also important to know how to minimize losses through good trading practices, using stop losses or setting automatic price levels at which a losing stock must be sold and not held onto because of thinking “it may come back if held a little longer”. See: The Stop Loss and Exit Price when Selling a Stock.

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The bigger potential gains are accompanied by much greater financial risks. It is accepted in the profession that most non-professional traders lose money in options trading, and a lot of professionals do too. It is best to start with the simpler option strategies of buying calls and puts while the many other more complex strategies can be considered later.

The most important factor is to be able to identify stocks that have a high likelihood of moving up or down in price from their current level, coupled with the ability to forecast within what timespan the move should occur. With options, timing is very important, options gradually lose their value every day until they can expire worthless, as most options do. That is why they are called a wasting asset.

The main advantage of trading options is the substantial leverage they provide and the smaller amount of working capital needed to purchase them compared with the amount of capital to purchase stocks. Both those factors are important to the small trader, the non professional who wishes to participate in a speculative way where the risks are higher but the rewards can be greater.

This article is addressed to the speculator who has already made money in the market, is familiar with how it works and has at least a basic understanding of options – as many do but are hesitant to enter the field. The following paragraphs explain a real life option play that will show what can happen when trading options. This example should encourage further study and investigation into the subject by stock traders.

Following the above comments about trading options, I would like to describe an options play reported in a Forbes online stock market news column that appears to actually have taken place. That may make it more realistic for the beginning trader instead of just inventing a hypothetical trade, although there is nothing wrong with using a hypothetical trade, the results would still be perfectly valid but I hope the added reality aspects would be even more convincing when discussing the benefits from trading options successfully. So here goes, and this is a current play right up to date as I write this.

Today is July 14, 2010 and the following report refers to a purchase last week of options for the stock of CSX Corp, stock ticker symbol CSX. We don’t need to know about CSX Corp, just the options play is what we are interested in and how it will turn out.

Last week, on Tuesday afternoon July 06, 2010, the Forbes news service article commented that at least one investor is ready to profit if the stock price of CSX moved above $51.15 by expiration date on Friday 16, 2010. The investor had purchased approximately 7,500 CSX options. If you wish to verify this report you can find it on the internet at Forbes Markets Channel News on the page for 2010/07/06.

The details are:
July 06, 2010, with the CSX stock trading at $48.01 per share, approximately 7,500 call options for CSX were bought at $1.15 per contract with a strike price of $50 and for July expiration, Friday July 16, 2010.

So let us look at this transaction. We can see it is “Out of the Money” meaning that the $50 strike price is higher than the stock price when the options were purchased. And the options are of short term duration with the expiry just 10 days away. Ignoring the commissions involved, the break-even figure that the stock has to reach is the strike price of $50 plus the $1.15 for the option, that makes it $51.15

What happened after the option purchase
The CSX stock did go up in price after the purchase until yesterday when it reached a high of $53.90 and closed at $51.72.

There is no urgency to sell the option while the price is still rising, but let us use today’s stock and options pricing as if it was actually sold with the transaction being made at 1:47 pm, July 14, 2010 at the exact price quoted by my broker, OptionsXpress.

The CSX stock is trading at this time at $52.51 per share and the $50 strike options are quoted as bid 2.61 asked 2.68. So for the purpose of this trade example let us say the options are now sold at 2.60 just below the bid price at the time. Now we can calculate the results.

Cost of option @ 1.15 Sold at 2.60 = + 1.45 = + 226 % A great trade and a great gain in 10 days.

Compare with the gain in sale of the stock only: Cost per share $48.01 Sold at 52.51 = + 4.50 = + 09 %.

In conclusion
The type of option trade described above is not recommended for the beginner, the purchase date is too near to the expiry date and the beginner should buy options that have several months to go until expiry. With a successful longer-term options trade, the same type of percentage gain can be achieved and often many times as much.

Not all option trades turn out successfully and the above transaction carries a high level of risk but it does indicate the power of leverage where a $1.15 option can provide a 226 percent gain compared with the 9 percent gain from buying a share of stock at $48.01. However, in the case of a purchase of the stock instead of the options, it would not be likely that a sale of the shares would have been made at this time. The share buyer would normally have a long-term outlook and objective, looking for the company to do well and prosper over time and appreciate in significantly in value while providing a less risky investment. But requiring a much greater capital investment of course.

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A basic profitable strategy

There are dozens, of ways for trading options, some of them very complex, but we want to start with an effective basic strategy that can be shown to be profitable, easy to follow, and easy to implement.

There are just four “rules”, listed at the end of this piece that provide a simple way to trade options, a field where strategies of varying complexity and risk for trading are numerous.

If you can pick winning stocks, those that go up in price, you can do very well trading the options for such stocks.

The key is whether a chosen stock performs up to expectations by rising in price in the case of a call option, or falling in price in the case of a put option, and doing so within the span of time before the option expires.

Time is the important factor
If the underlying stock does not perform as expected, the option should to be sold on or before a specific pre-set target date. That would mean a loss if there has been no gain at all in the price of the stock and maybe a loss even if it has gained, those possibilities should become clearer as we identify the guidelines later. Reference will be made below to a pre-set “sell by” date.

Loss and gain
With most options, the maximum dollar loss that can occur is the fixed amount of the purchase price paid, whether the option position cost $500 or $5000, that is the most that can be lost if the option is held until the expiration date when it automatically becomes worthless. But the guidelines below establish a fixed date prior to the expiration date of the option, which may allow a smaller loss.

It should be understood, that in this type of speculation, with a series of sensible trades there will probably be some losses, what is important is that a risk management plan is followed that can minimize those losses as much as possible and preserve working capital. Obviously there must be more winners than losers to stay in the game and provide sufficient reward to compensate for the risks involved. There should also be a strategy to maximize gains when they occur, in other words, to not exit a position too soon.

The right stock for the right time
In the same way that any other stock purchase is made, the choice of stock to trade should be made after what is usually termed as “due diligence”, appropriate research in checking out the attributes and prospects of any selected list of stocks. Whether after a short or long appraisal, or for whatever reason, we must assume that a promising candidate has been chosen to make a trade in options using the simple strategy outlined here.

For stocks, or indexes, or for other optionable financial vehicles, there are normally many different options available, offered at different strike prices and for different terms (lengths of time in which the option can be exercised).

As an example, let us assume a decision is made to buy calls. To make the option trade we need to specify the following, the first requirement is fixed, based on the stock chosen after suitable research.

1. name and symbol of the underlying stock (or index)

2. strike price

3. expiration date of the option

Those last two requirements provide a myriad of alternatives. There are many strategies followed in option trading that determine the specifics of the above and the risks attached to those strategies differ. Option trading promises bigger gains but the risks are higher.

Buying a Call, guidelines for a simple option trade:
Avoiding the option strategies of highest risk, the suggested guidelines for a basic call option trade establishes specifics for the strike price and term as follows:

1. The strike price will be “in the money”, at a price below the current price at which the stock is trading. How far below? The delta value noted below can help to determine that. The deeper into the money, the higher will be the option price.

2. The expiration date will be approximately 4 to 6 months after date of purchase

An explanation of why it is “approximately”:

Option contracts expire during different months according to a pre-determined calendar and vary for different companies. The day of expiry is always effectively the third Friday of the month (although it is actually the third Saturday of the month, but there is no trading on Saturdays.) The farther away the expiration date for a given strike price, the higher the option price will be, that’s because more time is being bought. But usually when an option is sold with a month to go before expiration, it should have some dollar value left in it because of the one month of remaining time whereas it will be worth much less the nearer it gets to the expiry date.

3. Important Note: the position will be sold no later than one month before the expiration date. Always. Depending on performance (we) may just exit or we may “roll up” to a later expiration date.

4. Delta, An additional guideline
Explained elsewhere on this site, the delta is a numerical value that varies dependent on the changing price of the underlying stock. It is a useful guide in tracking the stock’s progress and to assess the potential for gain as a stock moves in price.

Choose an option with delta of about 60 to 65

In our next post, to better explain the foregoing, we will provide more details and specific examples to show how the leverage provided by a successful option trade gives a bigger bang for a buck.

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Perhaps you have been thinking about trading options so that you will be able to produce a little extra income, or to improve gains for a retirement portfolio, or for some other reason.

If so, before you start, some words of caution:
Trading Options are considered by many to be a high-risk market activity so for that reason alone, unless you are already well informed, it will pay to learn a little more about how to actually trade them. The general belief held by most professional traders is that the vast number of retail traders, people like you and me, the non-professionals, lose money when they trade options.
But that should not necessarily deter you, what it should emphasize is the need to learn effective strategies, to apply them properly and be careful.

In reality, options originally were created to reduce risk by providing a method to acquire an asset of greater value at a fixed price within some specified time in the future without a commitment being made to actually complete the acquisition by the specified time. In which case, the fee paid for the option is the only real cost involved in the transaction.

In the above explanation, the option is a derivative, meaning its existence is derived as a byproduct of the original asset, whether that is a stock or other type of asset.

All forms of trading and speculating are accompanied by risk but in the case of trading options it is perhaps somewhat of an advantage for the option buyer to be able to set the maximum dollar amount that can be lost when a trade is made. That maximum amount at stake being the cost of the option, and that would only become a reality when the option expires. Although I believe that most options traded do expire worthless.

When an option trade occurs, the transaction identifies:

• the name of the stock, usually called the underlying stock.
• the price at which the underlying stock will be bought or sold if the option holder chooses to exercise the option, this is called the “strike price”.
• the expiration date, the latest date that the option can be exercised. The option  can be exercised at any time up to and including that date but after that date it no longer exists.  As mentioned above most options expire in this way. The unexpired time span is referred to as the term of the option.

The standard definition of an option
A stock option is a contract related to a particular stock, between a buyer and a seller that gives the buyer of the option the right, but not the obligation, to buy or sell (depending on the type of option) 100 shares of that stock at a specified price on or before a given date.

An owner of an option, the option holder, can re-sell that option during its term before expiration or can keep the option until it expires. The option could also be exercised in accordance with the terms of the options, although that does not happen in most cases.

Just for the record, there are several other styles of options we need make only a brief reference to here, the most common alternative being called the European-style option to differentiate it from the above description known as the American-style option. The only difference is that European-style options cannot be exercised before the expiration date. The names of the option styles do not limit them to any geographical location. In this article, all other references are to the regular options, the American-style options.

Options can be bought and sold
The seller of an option is called the “writer” of an option. To sell an option is to “write” an option. If an option is written, (sold) by a trader who does not own the underlying stock it is a short trade, a common occurrence. That type of trade comes with an obligation that is evoked if the option holder wishes to exercise the option in which case the writer of the option must deliver the stock, in other words must buy the specified stock. Not all sellers of options are short sellers, in many cases the underlying stocks is owned by the seller when selling an option to a buyer and this transaction is referred to as selling a covered call.

Terminology for stocks: Long, short, and covering transactions
A stock transaction can be referred to as either “long” or a “short”
long means to actually buy the stock and
short means to sell a  stock before owning that stock and in doing so it then creates the obligation to buy the stock at some later date, called a “covering” transaction.

Selling short is a technique used to profit from a fall in a stock’s price and where the expectation of the seller is to be then able to buy it at a lower price, an expectation not always realized. A situation much the same as a long purchase being made with the expectation of the stock rising in price and that does not always happen either.

When a stock is sold short, in theory, the stock is loaned to the seller by the seller’s stockbroker, who may have to borrow it from yet another stockbroker. Eventually the seller must buy back the stock sold short and return it to the broker, called covering the short position.

Terminology for Options: Calls and Puts
An option to buy a stock at a later date is termed a call option, buying a call option is termed buying a long call
An option to sell a stock at a later date is called a put option, buying a put option is termed buying a long put

A long call option is a simple  way to profit if you are correct in forecasting that the stock will gain in price, buying  a call is the most common choice made by beginning investors.

A long put option is a simple  way to profit if you are correct in forecasting that the stock will go down in price.

Educational resources
Stock options are securities that are listed and traded on special exchanges, the world’s largest such exchange is the Chicago Board Options Exchange (CBOE). There are many sources for education and training in trading options, but the CBOE’s Learning Center might be a good place to start. CBOE tutorials can be found on the internet at http://www.cboe.com/LearnCenter/Tutorials.aspx

In Summary
There are many special terms used in trading options that we will cover in Part 2 of Trading Options, now in preparation, and we must also define some specific option trading strategies

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The key part of managing risk is to limit the losses that you are inevitable going to have. All traders experience losing times, even the great Warren Buffet does, and his first rule of trading is “Don’t lose money.” And in case you haven’t heard it, his second rule is “Don’t forget the first rule.”

The would-be stock trader needs to open an account with a stockbroker. A stockbroker is the essential link between the trader and the stock exchanges where the buying and selling of stocks, bonds, ETF’s, options, futures, mutual funds, and other financial securities occurs.

In today’s online world, most trading activity takes place with online stockbrokers. It is not difficult to open an account with an online stockbroker but it will take a little time to become familiar with how to get around the trading platform interface, to learn how to place trades, get stock quotes, access stock charts and modify them to suit personal preferences. And there are other such things, including knowing what learning resources are available. To become proficient in getting around and accessing what you need to find will probably require the aid of a help desk or technical advisor from within the brokerage, but that in itself is an essential learning experience much like any computer involvement and it is relatively easy.

The basics of the basics in how to trade stocks
But adequate market knowledge in learning how to trade stocks is not something that can be accomplished by a few visits to the internet. It will take diligent study. There are books to read, and financial newspapers such as the Wall Street Journal or the Investor’s Business daily to read or at to least become familiar with in order to know what they have to offer, those and financial magazines should become reading material of habit over time especially when actually trading and gaining some success – which you will if you learn properly.

Internet resources
There are many informative videos and seminars available to watch and listen to, they are free and cover a wide range of stock market topics that can be absorbed gradually. In addition to instruction and training in specific stock trading topics, it is worthwhile to read more general material if sufficient time is available, to become familiar with the jargon and the lore of the stock market and trading of today and of the past, that can be a fascinating and diverting source of information. A good local public library should have many stock market related materials, books or videos, available.

While learning, check daily or every few days into Finance.yahoo.com or Marketwatch.com, those sites will bring you up to date with news of what is currently happening in the market plus there is plenty of other information of value to be found on them.

Stock charts, an important area of study
It is important to learn about stock charts and how to interpret patterns of stock movement that can readily be seen on a chart. Many recognizable stock patterns can provide fairly reliable signals upon which trading action can be based. Charts can depict clearly the underlying trends of the market and where areas of resistance or support are likely to occur. The trader frequently awaits those times to see when it can be confirmed that one of those confining levels is broken through, with the expectation of continued movement in the direction of the break out.

Virtual or Paper Trading
There are also resources for those learning how to trade stocks in which a form of virtual trading can be carried out, where real day-to-day trading actions to buy or sell can take place but without using real money. Using this method enables practice trading and implementation of much newly learned trading information such as trading strategies that identify what to trade and when to trade. From the results obtained, it may help determine whether the participant is ready for action in the market with real money. Many stockbrokers provide such facilities to their clients and there are many other sources on the internet, usually without charge. For more on this topic check out: Paper Trading.

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An introduction and where we go from here

Our objective is to explain, from the viewpoint of the trader and using a mainly technical approach, what is involved in assessing the stock market situation, how to interpret stock charts, at least at a simple level, and the ways to identify and select stocks to trade with some rules governing when to buy and sell.

What we will do now, at the beginning:

1. Let us start out with a few general comments about the trading process that we can build on as we go along.
   2. Then we can introduce and examine some stock charts, a basic source of information that most traders refer to.
   3. We will pick a couple of “live” stocks to look at and follow their market action as the days and weeks go by, usually with expectation of holding for about 3 months.
   4. We will try to identify a few stocks that we will put on a list commonly known as a Watch List.
   5. There will also be a series of commonly used terms applied to various market aspects that we should define as we go, we can call that our Glossary.
   6. The reasons- to choose the first trade example

Some of the things we will discuss in future posts:

1. Stock charts, what they can tell us
   2.  Stocks to trade, how to find and assess them, the criteria to look for in their selection
   3.  Guidelines for entry and exit, the signal to buy and timing to sell, for profit or to cut losses
   4.  Other matters in no particular sequence

We should also describe briefly what is traded on the Stock Exchanges, NYSE, NASDAQ, ASE, TSE, FTSE etc. A stock exchange is an organization that provides facilities for trading stocks and other financial instruments.

Our Blog title is How to Trade Stocks but the real objective is to point out How to Trade Stocks Successfully, which obviously means profitably.

Not every trade in the stock market makes a profit but unless at the end of a reasonable time period there are enough gains that exceed losses there is not much point even if you end up knowing the mechanics of how to trade.

If required, the stock broker will advise on setting up a brokerage account
You can find out from the broker of your choice how to open a personal brokerage account and how to make a trade. And that account should be an on-line account that you will be able operate from your own computer. You will be provided with instructions on the procedures of obtaining a quote and placing a trade and monitoring the daily activity. And the broker will probably have a wealth of information and resources for you to access, free of charge, once you have learned what it is that you need to know.

We discuss what’s involved in selecting a stock to trade and tracking its performance
We are always faced with the question of “What are we going to buy? And Why? And once we’ve bought an issue, when should we sell it? What is our exit strategy, our profit or loss point that will trigger the sale?

Behind the answers to those questions is a lot of know-how involving decision-making, research, strategy, risk management, capital allocation, information and data sources, and so on. So that is what we have to become familiar with by making reference to it here and examining actual situations and data relating to the stocks we have chosen to trade and how those matters relate to the stock market in general.

While we are not participating here in real trades in the stock market, we can in the next few days, if the market conditions are right, try to identify a few stocks that do meet specific trading criteria to warrant making a trade or two and we can then follow their performance each trading day. We can also build a short “Watch List” of stocks of interest to monitor that may soon meet the criteria to trade. In doing those things, we can introduce the various reasons leading to the choice of the particular issue to trade and what needs to be taken into account to arrive at a final commitment of cash resources.

We can monitor such trades by using the many readily available resources and tools on the web to help us judge our progress. This should help make it a little easier to understand the various steps in making a decision and we can consider other alternatives or matters in reference to those trades and to the market in general as time passes.

You will be able to follow what is happening by going to a free site such as YahooFinance.com and entering there the details of the “pretend” trades that we select and in that way you can see for yourself what is happening each day as the stocks moves back and forth as they will do throughout the trading days and weeks. It is necessary to keep a watchful eye on your stocks and the market in general, but it is definitely not necessary to spend too much time to the extent it becomes obsessive and interferes with the normal enjoyments of life. By following this scenario we should be able to cover the basics in our aim to learn how to trade stocks.

Trading, not Investing

At the outset, I think we should establish that trading is not investing, at least not in the traditional sense. My own take is that trading is an action in speculation, usually of relatively short-term duration, meaning a few weeks to a few months but not years. There are exceptions to everything of course and there are several possibilities we might encounter.

There are also different approaches to trading and what suits one person’s temperament may not be appropriate for another. But this is a learning process and what we do on this blog should be of value as an introduction to  market situations that are common to many other trading activities and approaches and from which a wider extension of knowledge and trading style can emerge.

Caution:
This comments in the posts and articles on this How to Trade Stocks blog-site, do not make recommendations or suggestions to actually buy or sell particular stocks, I am not allowed by law to do this and anyway, I would not want you to risk your own money on something that has been chosen for the purposes of illustrating the trading processes and background research that is involved. All the matters discussed are to enable the introduction and explanation of the many aspects of stock market trading. So, learn what you can but I must emphasize: Do not invest in any stock featured on this site.

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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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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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