How to Trade Stocks

Trade Stocks

Trading stocks is different than investing. Stock represents part ownership in a company and investors buy shares to exercise ownership rights, collect dividends, and realize long-term capital gains. Traders, on the other hand, have a much more focused goal of making a profit in the relatively short term. To do so, they focus on technical setups in stock charts instead of the underlying fundamentals of company, and use specific techniques to protect capital and minimize risk.

Step 1

Learn how to read a chart. There are several online resources to help beginners read stock charts. Understanding price action in terms of moving averages, oscillators and candlestick patterns and finding good entry points will ultimately make the difference between simply owning a stock and making money on it. Focus on how to identify a buy signal and a sell signal.

Step 2

Simulate. The market can move in mysterious ways and there is simply no substitute for experience. Using a trading simulator before buying is a great way to get a "feel" for the market, for how stocks fluctuate and respond to news that even back-testing a strategy won't provide. The gains in a simulation account won't be real, but more importantly, neither will the losses.

Step 3

Scale into positions. Even the most experienced traders tend to forgo trying to time exact tops and bottoms in stocks. Instead, they prefer to scale into a position, that is, to buy incrementally so they can take advantage of lower prices and minimize risk. To scale in effectively, it must be understood in advance how much total capital will be allocated to the stock.

Step 4

Swing trade. Sometimes, the best defense is a good offense. Having a good strategy and sticking to it will increase odds of success and get a trader to exit a position before too much damage is done. In general, start out with longer time frames and after the larger gyrations of the market are mastered, move toward day trading and other short-term strategies if desired.

Step 5

Protect capital. Position management can mean knowing when to cut a loss, when to take partial profits, exiting a position completely, or hedge it in some way, but the No. 1 priority of any trader is to survive to trade another day. Capital is the lifeblood of trading and significant losses can dramatically impair the effectiveness of an account. Selling covered calls is an easy way to lock in profits and protect against potential losses.

Tip

Know yourself. Every trade, before entered, should have clearly defined goals. How much do you want to make, and how fast? Most stock investments are on an intermediate- to long-term basis, meaning at least six months or more. With stocks, the longer the time frame, generally, the lower the risk. Starting with a sector and then drilling down to find the best stock or a hidden gem within that sector can be a very effective stock-picking method. A stock's sector can account for most of its stock performance, as sectors tend to come in and out of favor on Wall Street. Stick to your gameplan. Take profits when you have them if you've reached your goal for the stock. A gain is not realized until the stock is sold.

Warning

There is no risk-free investment. Buying stock can result in losses and should be conducted with due diligence and, if possible, under the supervision of a professional. Markets can and do react to news after hours and overnight when they cannot be easily traded. Knowing your stock is the best way to avoid unpleasant surprises.

Things You'll Need

  • Capital to invest

  • Stock broker or online brokerage account

  • Access to charts and company-specific research, usually online

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