November 22, 2013 5:09 pm
In our sluggishly recovering economy, there are many threats to your bank account: job loss, underemployment, falling incomes, rising costs, and more. Wouldn’t it be great if you could earn some extra cash to counteract this slow financial bleed…and maybe even sock away some money for the future? If you enter the world of stock trading, you can.
But wait, you think. Isn’t stock trading mostly for Armani-suited Wall Streeters who spend all day shouting “Buy! Sell! Buy! Sell!” into their BlackBerries? Real people like me don’t actually make money by taking the things Jim Cramer rants about on CNBC seriously…do they?
Actually, they do. You don’t have to be a Wall Street hotshot to use stock trading as a responsible and lucrative way to increase your income, say authors Michael Griffis and Lita Epstein.
“It’s true that trading used to be the domain of institutional and corporate representatives, but now technical advances have leveled the playing field, making trading much more accessible to individuals,” says Griffis, coauthor along with Epstein of Trading For Dummies®, 3rd Edition. “If you’re disciplined and are willing to learn, you can develop a winning trading strategy.”
That—helping individuals learn how to competently and confidently trade—is the purpose of Trading For Dummies®, 3rd Edition. In this accessible volume, Griffis and Epstein explain the how-tos of trading in plain English, covering topics including stock charts, trading techniques, analyzing trends and indicators, and much more.
“Before you get started, it’s important to understand the differences between trading and investing, which many people incorrectly assume are the same thing,” comments Epstein. “Investors buy stocks with the goal of building a balanced portfolio and hold them for a long time—often decades. Traders, on the other hand, hold stocks for as little as a few minutes or as long as several months—more rarely, a year or more. In other words, trading tends to be much more fast-paced and involved than investing.”
“In large part because of its dynamic nature, trading is not a risk-free activity,” notes Griffis. “Although some losses are inevitable, you’ll want to minimize their frequency and severity so that you can stay solvent to trade another day. Our book will give you the principles and advice you need in order to do that.”
Here, Griffis and Epstein review ten of the top trading survival techniques to keep in mind as you enter the world of trading:
Build your trading tool chest. Before you buy anything, you need to be certain that you have the right mix of trading software, hardware, and Internet access to be successful. You need the right tools to identify trading candidates; display and interpret charts; research trading opportunities; screen stocks for technical or fundamental constraints; and monitor and analyze your portfolio, open positions, market indexes, sectors, and trading statistics.
“In summary, the proper tools are the core of any good trader’s business,” says Epstein. “They’re critical to finding the right trades and then monitoring those positions after you’ve found and entered them. Without the right tools, your chances of success drop dramatically, so don’t scrimp in this area!”
Choose and use your favorite tools wisely. As you begin sorting out your software and hardware and making contact with other traders, you’ll probably find out about the hundreds of tools and charts that are out there on the market.
“You don’t need to learn and use them all,” assures Griffis. “To avoid driving yourself crazy, pick the top two or three trading tools that make sense to you and fit your trading style. Take your time getting to know how they work and how best to interpret the information they generate. Use them to build the types of charts that match your trading style and don’t worry about learning all the new gadgets. If your tools are working and you’re making a good profit, don’t rush to add the newest tool innovation.”
Use both technical and fundamental analyses. You may have heard that all traders use technical analysis and believe that fundamental analysis is a waste of time. Don’t believe it. Although technical analysis is crucial to finding the right entry and exit points, fundamental analysis improves your ability to make the right stock choices, given market and economic conditions.
“You’ll find as a trader that knowing the current state of the economy and the state of the market is critical,” comments Epstein. “Using a combination of fundamental and technical analyses, your chances of identifying bull and bear markets and finding phases of transition and consolidation improve dramatically. Your best trading opportunities are at the beginning of these phases of change, so be sure that you understand the six phases of the market—bullish transition, bull market, bullish pullback, bearish transition, bear market, and bearish pullback—and know which sectors offer you the best trading opportunities within each of those phases.”
Count on the averages to make your moves. You may think that using data from averages to find the right time to enter or exit a position is counterintuitive, but moving averages can be powerful trading indicators. Moving averages actually smooth out the data for you visually and help you identify any trends. Although they can’t predict the future, they nevertheless help you understand the past so you can more effectively extrapolate what may happen to a stock in the future.
“Be sure to find out how to use moving averages and what they mean,” instructs Griffis. “After you understand them and what goes into them, you can manipulate moving averages to your advantage and to coincide with your trading style.”
Develop and manage your trading system. You need to have a road map that helps you find buy and sell signals for your trades. A trading system is such a map. It’s developed using a collection of tools created from technical and fundamental analyses, all woven together to let you know when it’s time to enter or exit positions.
“You can buy trading systems off the shelf, but these systems are available to thousands of others who ultimately will end up with the same buy and sell signals,” points out Epstein.
“To be able to trade outside the pack, you need to develop your own trading system, using your own favorite tools. Although you can use tools provided in off-the-shelf software packages, you want to develop and adapt a trading system that fits uniquely with your personality and trading objectives.”
Know your costs. Trading isn’t cheap. Even if you’re using stop or limit orders, you’ll rarely end up executing trades at the exact entry or exit prices you plan. Some slippage (or the difference between the quoted price and the actual price for the security) is bound to occur, so in addition to carefully monitoring your commission costs and transaction fees, you’ll also need to keep an eye on slippage costs.
“In addition, don’t forget to consider the tax man,” warns Griffis. “If you’re trading stocks that you hold for less than a year, any profits you make are taxed as current income instead of at lower capital-gains tax rates.”
Have an exit strategy. Knowing when to take your profits and get out and when to accept your losses and close a position before it becomes even more damaging can be among the hardest lessons any trader must learn. All too often you’re enticed by the win and want to ride it to the absolute top.
“Wise traders plan their exit points at the top and bottom of each position long before they ever enter that position,” Epstein shares. “And more important, they stick to their plan. Getting caught up in the emotions of a winning trade is easy, but don’t forget you’re operating a business. Take your profits when you reach your goal and get out so you don’t risk turning a winning position into a loss. And when you do make a mistake, own up to it quickly, take your hit, and get out of the position. If the stock recovers, you can always reenter the position at a later time.”
Watch for signals; don’t anticipate them. After you make a decision to buy a stock, you may find that you’re impatient to actually get into that position. You start watching the charts and waiting for the right signal to buy. Often, you’ll see charts move close to your planned signal but not actually reach it.
“Be patient,” Griffis instructs. “Wait for the signal you’ve designated in your plan. Don’t anticipate any moves, even if the stock price is getting close to that point on your charts. You may miss the perfect entry point, but you’ll be less likely to make the fatal mistake of entering a position before the signal is triggered, only to see your stock reverse course and be forced to take a loss.”
Buy on strength; sell on weakness. Buy on strength and sell on weakness is a mantra you’ve probably heard frequently from investment and trading gurus. The reason for its popularity is a good one: It works! And it needs to become your trading way of life.
“When you see a stock showing strength and heading into an uptrend, it’s time to buy,” says Epstein. “When you see a stock falling and showing signs of entering a weakening period, it’s time to sell. If a weak stock takes a turn for the better, you can always reenter the position.”
Keep a trading journal and review it often. The best way to improve your trading skills is to keep track of what works and what doesn’t. After each trade, take the time to write down the details of what went right and/or wrong with that trade, and why. You can improve only what you measure, so measure everything and put it in a trading journal.
“Don’t forget to review the contents of your journal every week,” instructs Griffis. “You may find that reviewing your successes is enjoyable but reviewing your failures is difficult. Failure, however, sometimes is the best teacher. Try figuring out why your failed trades didn’t work and what you could’ve done to improve your results. And, of course, don’t ignore your successes. After all, you need to know what works and why so that you can incorporate those winning strategies more consistently into your trading system.”
“How successful you become as a trader depends on how well you use your tools, gather the necessary information, and interpret the data you have,” concludes Epstein. “While these survival techniques aren’t a complete guide by any means, they will help you to make smart decisions while avoiding potential pitfalls.”