If you are considering stock trading as a means of making money but don’t know how to go about picking stocks, then these are the very minimum basics you need to bear in mind.
You have the choice between long-term investing as practised highly successfully by Warren Buffett aka the Oracle of Omaha, or short-term or medium term stock trading. As a beginner you should steer clear of day trading. Short-term and medium-term means your trade will last from a few days to a few months.
In order to be able to choose which stocks to buy it is not necessary to understand what the company does or how it makes its money. What you need to know is what the stock chart looks like and where the stock price is likely to go from here. In order to do this you need to understand the basics of technical analysis i.e. analyzing stock charts in order to predict future price movements.
There are software packages you can buy that will do the work for you and there are also sites like Yahoo or Advfn that will provide basic stock chart information.
In order to buy a stock that is likely to make a profit for you, you need to find a stock that is in an upward trend. This means that the stock is heading higher in a predictable manner – i.e. it is repeatedly moving up to a high or ‘resistance’ level then turning round and heading down to a low or ‘support’ level. Each time it does this the new high is a bit higher and the new low is also a bit higher.
Your aim is to buy the stock at the low point, hold it until it reaches the high point, then sell it and wait for it to fall back and repeat the process. The aim of such a trade is to make a profit of around 7 – 10%.
In order to be successful at this you also need to limit your losses. You will not get it right every time so you need to make sure that your gains are greater than your losses. In order to do this you set an automatic ‘stop loss’ when you you buy the stock, so that if the stock price goes down instead of going up you will automatically sell the stock when you have lost 4%. This prevents you losing too much in one trade.
These are the absolute basics of ‘swing trading’ – for further reading the next step it to read up on ‘moving averages’ – see stocks and shares for beginners. Trade well and prosper !
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