Stock Trading for Dummies

The world of stock market investing is a complicated, convoluted, greed-laden environment, and anyone telling you anything different simply hasn’t spent enough time in the markets, or made enough trades in the markets to know the deal. One thing that I want to establish at the onset of this hub about stock trading for dummies is the fact that there are just as many stock trading methods as there are traders who trade them. You just have to find your flow, so to speak, and that’s not going to come any other way than by experience in the markets alone. You have to trade actual shares for actual money—not just paper trading—to understand your REAL emotional attachment and reactions to your trading capital, otherwise you’re just living in a paper trading pipe dream, thinking that you’ve got it all figured out because you know how to read “buy-sell” indicators, or you have the advance-decline numbers figured out, or you know how to whip out the MACD indicator to really give you an edge on the markets. The bottom line to the whole ordeal is that if you’re great with numbers and stats and indicators but you suck at handling your money objectively, you will flop. If you’re great at analyzing fundamental data and understanding economic trends and the things that drive the stock market but you have a greedy disposition, you’re going to flop. Emotion, not rationality, rules the day in the stock market my friends. Don’t let anybody tell you any different. So if you’re wondering how not to look like a dummy or feel like a dummy in the markets, there’s no such thing for your first 20 trades or so. Now if you spend a year trading consistently, as in several trades per week, and you’re still feeling (and acting) like a dummy, then you just might really be a dummy. But if you take your time, analyze your trades before you get into them, approach your trading with a well-thought-out plan, execute your trades with reasonable profit targets and loss thresholds, and learn from your mistakes as you go, you’ll be a man, my son (forgive the nearly-unrelated Rudyard Kipling reference). The truth of the world of stock trading is that you can always learn from your mistakes, no matter how painful the mistakes are. The truth is that if you’re willing to correct faulty trading behavior, you will get better with every trade, but if you keep repeating the same stupid trading mistakes, you won’t get any further with this thing.

But on to some actual nuts and bolts, keeping with our theme of stock trading for dummies. I’m not going to cover the very basics of the stock market, such as what a share is, or the difference between the NYSE, AMEX, and NASDAQ exchanges are, or anything like that…I’m assuming that most people reading this will know the absolute beginner basics of the stock market and how it works…this is mainly for people who want to TRADE the markets, not just park their money in a mutual fund and wait umpteen thousand years for a 12% return. So…some things you should know: First up, every market has ups and downs. Study price charts to understand these ups and downs, and the importance of catching the market at the right time (which, incidentally, is normally the opposite of when the talking heads on Bloomberg tell you to). A good site to go to is ChartPatterns.com. They give great tutorials on how to recognize chart patterns and use them to your advantage. Another important point: Define your risk level BEFORE you even enter the trade. This can be a dollar amount or a percentage amount. Know at what point you’re willing to throw in the towel if the trade doesn’t go your way. Don’t do like a bunch of those investors did with Enron, watching it go from 80 bucks a share to 80 cents a share, still hoping for the best all the way down. If you made a wrong move in the markets, own up to it quick and get the heck out before you lose your shirt. Another point: Trade with the trend (see above regarding Enron). Why the heck would you want to try and be bigger and badder than the prevailing market trend? You are not a super-hero, and you can’t single-handedly move any market, unless you have billions of dollars to back you up as some of these institutional investors do, and in that case, you probably wouldn’t be reading a hub entitled “Stock Trading for Dummies”. Another point to remember: Price action is king. Take what everyone is saying with a grain of salt; look at the price action. If a stock is tanking faster than a greased rattlesnake going down an icy hill with an 80-mile-an-hour wind at its back, it doesn’t matter how “optimistic” everyone is, you’re still going to be hurting for it if you try to go long. And lastly, make sure to always have a written trading plan. Know (and write down) what stock you’re getting into and why. Know your profit targets. Know your risk threshold--How much pain can you take before you just have to get out? Know how closely (or loosely) you will trail your stops. In short form, just remember the words of Kenny Rogers: You gotta know when to hold ‘em and know when to fold ‘em. Well, hopefully this hub about stock trading has enlightened you; I will be putting more hubs out in the future to go into more details about different aspects of stock market investing.