Owning part of a successful business without having to take the pressure which comes along with day to day management of running one – is the dream job for most of us.
Stock trading makes this a reality for people like us.
By owning stocks in a given company, you can maintain your distance and watch your company grow from one level to another.
Stocks are excellent financial instruments that allow you to grow your income by doing nothing but collecting profits at the end of a financial year.
This gives you the opportunity to witness the growth of your assets while all you must to do is understand the ways in which the stock market works and patiently make pragmatic market decisions.
With patience and precision, stock market trading can provide you with unhindered profit and growth.
Investing in stocks is considered to be an integral part of an investment portfolio.
Thus, it is important for you to have a complete understanding of what stocks are and how to trade them before embarking on your journey to financial freedom.
Stocks are traded in stock markets (also known as the share market in India); hence it is vital to understand the stock market/share market as well.
Like all other fields of money making, stock market trading also requires an in-depth understanding of how to make investments, when to buy or to sell your stocks.
Reading market signals is considered to be of utmost importance and this would lead you to all the wealth you were hoping to acquire!
Stock market has gained quick popularity over the past few years and this is mostly due to the advance in technology which has made stock market trading open to a larger crowd.
Through the course of this post, we will take you through certain points which would help to make your initial trading experience a smooth one!
As a beginner, you must acquaint yourself with all the terminologies associated with stock market trading.
These terms are going to pop up in any chart you view and would also help you choose the appropriate approach for trading.
We offer a detailed eBook as well as several in-depth reports which would help you develop a comprehensive idea about the trading terminologies.
These reports also provide detailed information on several trading strategies which would help you acquire knowledge about popular trading methods as well.
They can be found at other SMS Reports
Before you begin trading, it is pivotal to sketch out a plan for possible goals you wish to achieve through your trading experience.
This plan should help you reflect on yourself – what your financial goals are and what your risk profile for trading might look like.
These plans must also outline the stocks you wish to purchase, how much you can invest and when would you consider selling stocks.
They must also provide an insight into your trading needs and expectations.
Even as you move ahead with your trading, always keep a sketchy plan ready.
This plan should be something you refer to if you are caught in a situation where you require recapitulating on why you have ended up in the situation in the first place.
So, always plan your trading activity far ahead.
Do not rely on your emotions while trading.
Try to be as practical as possible while making trade decisions.
This has been one of the major problems faced by rookie traders due to their lack of experience.
Always remember to restrain your emotions while trading as you cannot mix finances and emotions.
Be a constant learner.
There are newer trading strategies and approaches which are coming up in the market every day.
It is important to keep yourself up breast about all of them.
A beginner in trading is always advised to not go against the market – this is important as going against trends or bet against the market momentum, can lead to grave financial disasters.
Yes, there are several veteran traders who are known for the risks they have undertaken on their road to success, but they have done so due to their unhindered years of experience.
With time, you would be seasoned enough to think about these risks and measure the possibilities of whether it is doable for you.
All veteran traders would agree with the advice to begin trading with smaller sums and low leverage, while adding up to your account as it generates profits.
This is most advisable in case of Forex Trading.
It is not advisable to adopt the belief that the larger the account, the greater profits it might generate.
It would be wise to increase the size of your account through your trading choices only .
On the same hand, it is important to note that constantly pouring money into an account which is bringing in more losses than gains is an absolutely useless act.
Always remember to notice the price movement.
Price movement is very vital for stock market trading.
It is important to learn about the nature of the market – is it trending or declining?
Is it a bear market or a bull market?
These are terminologies which are associated with the nature of the market.
A bear market marks a general decline (negative market) in the stock market over a period of time, while a bull market marks a period of rising prices (or a positive market).
While investing in a market, the nature of the market determines whether you should buy or sell your stocks.
Therefore, knowing about the nature of the stock market is a rather important prerequisite for trading.
Gather a good knowledge about the capacity of your capital – how much of your capital can you invest?
How much of it are you willing to risk?
It is very important to remember that without adequate control and resilience, it is very difficult to trade freely in the stock market.
The stock market is a game of betting on what you believe to be the perfect odds for you – to be able to do so; you must have a good hold over your capital.
This does not necessarily mean huge investments mean huge returns.
This may not always be the case.
What is meant by this cautionary statement is that you must be well aware of your financial assets and play with them with utter pragmatism.
Always think about which investment would work out well for you because in stock trading, there is no “one” way which would lead you straight to success.
This focus on your financial assets would take you a very long way!
Along with the last point comes the responsibility of having a good knowledge of money management.
Once you reap profits, it would be advisable to think about protecting them as well.
Money management teaches you to do so.
It is about the minimization of your losses and maximization of your profits – in other words, it helps you cut your losses short and lets your profits ride high.
Before you get into some serious trading, keep money management as a commandment in hand – lest you lose track of your capital.
Your ability to make good money from your predictions and to easily control your exposure to risk factors which would eventually identify, would be the most accurate and appropriate strategy for any trading situation.
Lastly, it is extremely important to remember that the crucial hold over success can be achieved only through years of experience in trading.
Unfortunately, there is no easy way around this one rule.
The right mentor and a supportive broker might be two means through which you can achieve success faster.
This success, as tasted by many traders around the world, can be achieved through persistence and years of resilience.
One cannot be fooled by the glossy advertisements available on the internet which might promise you a million dollars through their trading approach – always remember this is a farce.
Just like a sharp downfall which descends post an unprecedented up trend, easily gained money also slips out of our hands just as easily.
So, remember that there is no short cut to becoming rich but a good understanding of the stock market will definitely put you on the map of success.
These pointers would definitely help you understand what are the things you might want to keep in mind before entering into the world of stock market.
Top Fundamentals for the Amateur Investor
Let’s now look at the top fundamentals you could pick up as a rookie investor in the market!
As someone new to this space, the share market is an unfamiliar territory with endless opportunities.
Through this post, we will help you define certain fundamentals in stock market trading which have been found to have increased the success rate among most traders across the world.
So what are they?
Momentum Trading helps you focus on stocks that are moving incomparably in one direction on high volume.
Momentum traders may hold their positions for a few minutes, a couple of hours or even the entire length of the trading day, depending on the how the stocks may move.
Such a strategy would enable you to list out some of the strongest up trends shown by a stock and narrowing down on which ones you would want to place your bet on.
It is vital to remember that traders using momentum mechanisms only do so for a limited time bracket.
This requires for the trader to be vigilant about the stocks which are constantly on the move – to know when exactly to strike.
Buying and selling of stocks becomes an easier exercise due to such serious vigilance.
Momentum Trading uses charts as a means to trade in the direction of the bigger trend.
This strategy is thus designed lower the risk and find out what the higher reward opportunities are by waiting for correctional methods.
The constant moving average helps us understand whether the market is bullish or bearish.
In such cases, The Stochastic Oscillator is used to identify when to pull back during an uptrend and when to bounce back during a down trend.
At the same time, The MACD-Histogram (Moving Average Convergence Divergence) is used measure buy and sell signals and to signal the end of such a pullback or bounce.
Breakout is one of the most common stock trading strategies.
So, what are breakouts?
Breakouts majorly work with the identification of a key price as well as buying or selling price as soon as the stock price breaks a particular pre-determined level.
This is helpful as in case the stock price has enough strength to break that pre-determined level, it will in most probabilities continue to move in the particular direction.
To put breakouts into good use, one must know the function of resistance and support.
To know Gap Trading, you must know the meaning of the term “gap” in the stock market.
A gap is a change in price levels between the close and open ends of two consecutive days.
A Gap can be of the following types – “Full Gap Up” (Full Gap Up-Long, Full Gap Up-Short, Full Gap Down- Long, Full Gap Down-Up) and “Partial Gap Down” (Partial Gap Down-Long, Partial Gap Down-Long, Partial Gap Up- Long, Partial Gap Down- Short)
Keeping the chart pattern in mind, technical analysts divide gap patterns into four types Common, Breakaway, Continuation and Exhaustion.
Gap Trading can be defined as a methodical approach to buying and short selling stocks.
Traders can watch a price gap from the previous close of a stock and identify the trading range to understand when to buy or sell a stock.
When the stock rises above the trading range, it signals a buy and when the stock falls below the trading range, it signals a sell.
Average Directional Index (ADI) and Stochastic Oscillator
These are two of the most widely used strategy tools in stock market trading.
The next point deals with the function of two trading equipments which help out traders to foresee the profits that lay ahead for them.
The first one is an Average Directional Index or ADI.
Average Directional Index can be defined as an indicator that is mainly used in technical analysis as a target oriented value for the strength of the trend at work in the market.
It does not provide directions, so it will assess a trend’s strength regardless of whether it is moving up or down.
ADX is illustrated through two lines in a chart window along with two lines that are also called DMI or Directional Movement Indicators.
The role of the DMI lines is to tell us whether an instrument is trending or not.
These DMI lines help in acquiring ADX lines, as ADX is a moving average of the Directional Movement Indicator.
There are oscillators available in the markets which help in telling us whether a market has been rallied too far and thus, helping us know whether the market might turn soon enough.
One such oscillator available in the market is the Stochastic Oscillator.
It is a technical momentum indicator that helps in comparing a stock’s closing price to its price range as noted over a given period of time.
This indicator is calculated with the following formula:
%K = 100[(C – L14)/(H14 – L14)] (Where – C = the most recent closing price, L14 = the low of the 14 previous trading sessions, H14 = the highest price traded during the same 14-day period)
Swing Trading is an approach which attempts to benefit from the gains in a stock within the span of one to four days.
Technical Analysis is extensively used by Swing Traders to find stocks with short term price momentum.
These swing traders do not look for the elemental value of stocks but are interested in the price trends and patterns.
These market movements as noted in swing trading are in the form of waves or “swings” which note the changing movement of market price.
How Do Deal with a Bear Market?
Now that we’ve spoken about what to do while beginning to trade in the market, let’s take a quick look at ways to deal with a Bear Market.
Understanding the innumerable terminologies associated with the stock market is the best place to start before you completely delve into the world of trading.
The two most vital elements which define the state of the stock market are ‘Bulls’ and ‘Bears’.
What do these animal names have to do anything with stock market trading?
The answer to that is – everything!
While a bullish market indicates optimism and a well trending market, a bearish market indicates negativity and a possible downtrend.
Therefore, bear markets are feared by traders all over the world and one of the first things a potential trader hopes to do is to pick up as many strategies as possible to combat a bear market.
Through this part of the post, we hope to do the same for you, by elaborating on the top 10 things you must learn and know about a bear market.
One of the most important factors to note about a bear market is that as existent investors anticipate losses, selling continues on in the given trend and the pessimism keeps growing.
Hence, a possible bear market is a trading situation feared by all.
Let’s begin by looking at the 10 things to know and learn from a bear market –
(1) One of the most first things you must do with the onset of a bear market is to keep a cool head.
Be patient and make sure that you do not make hasty decisions during this time.
Most traders, in a fit of anxiety, make extremely wrong decisions and this in turn causes their capital to suffer.
(2) A bear market is usually triggered when a lot of investors lose faith in the stock market which in turn decreases the demand for stocks.
This is seen to happen when the economy enters a recession or when unemployment rates are high causing inflation to rise.
On the other hand, the bear market brings down the price of stocks which invites a lot of young traders to buy stocks around this time.
This is a counter-intuitive argument but this is a trend which has been noticed in the recent years.
(3) Reviewing and updating your portfolio would be the smartest thing to do in a bear market.
Diversify your portfolio to include more than you had before.
This way shifting your assets won’t be an issue and at the same time, you have a good grasp over diverse financial instruments.
Along with this, make sure that your investment options are well reviewed as well.
This reviewing would help you understand whether your funds are faring well in the market.
(4) Short selling or taking a short position in trading takes place when a trader sells shares which he doesn’t feel confident about as the stock has changes of falling lower in the future.
If these details move as planned and the price of the shares drop, the smartest thing to do would be to buy the shares at the lower price to cover the “short position”.
This is how short selling takes place. Most traders have found this to be one of the best steps to take during a bearish market.
(5) The next step which you could take during a bearish market is to use a put option.
It can be defined as the right to sell a stock at a particular strike price until the “expiration date” for the stock approaches.
In such cases you pay the premium amount for the put option and as the stock price falls, you have the option to sell the price at a higher stake price or sell the put option which has increased in value as the stocks have fallen, for an amount of profit that is provided as the stock moves below the strike price.
(6) Another option which has been found to be extremely helpful during a bearish market is to invest in a short exchange traded fund (or ETF).
A short exchange traded fund is also known as an inverse ETF and it produces returns are transposed to a particular index.
For example, an ETF that performs inversely to the BSE 100 will drop about 25% if that index rises by 25%.
But if the index falls 25%, the ETF will rise proportionally.
This transposed relationship between the two makes inverse ETFs best suited for investors who wish to reap profits from a bearish market and this also enables them to hedge long positions against a downturn in the market.
(7) During a bearish market, it would be wise to mark companies that curtail unusually low margins or companies that are in a developing stage and do not have much earnings as such companies can be easily crippled during a financial downturn.
At the same time, companies which are known to not have fared well in the market and are second or third tier players, must also be put into the same group.
In times of a bearish market, traders or potential buyers normally seek out companies on the basis of quality and this causes several companies which are not in the same league to fall behind – thus, getting affected during a downturn in the market.
While in case of companies with low multiples for cash flow and earnings, during bearish markets they are considered to be good investments.
(8) It has been noticed that equity securities perform better than the other financial instruments during a bearish market.
Such industries are often, thus, termed as defensive industries or non-cyclical industries as they act like a strong fall back option for your portfolio in times of market distress.
The equity securities normally include companies that are known to provide equipments as well as services from which consumers, the government as well as the state economy could benefit from in good times as well as bad.
An example for this would be the non-durable commodities in the market like shampoo or food products.
Regardless of whether a market is trending or declining, people would require using these products everyday and would continue to buy them even when there is a fall in economic prosperity.
(9) Bear markets can prove to be a site for great opportunities for investors.
The wisest thing would be to sketch out what you are looking for as part of your investment plans.
Most of the stocks during a bearish market would be battered and bruised in terms of their price and trending line.
Investors who usually stick to the belief that there are certain stocks in the market which have been undervalued are known as value investors.
They view bear market are an arena of vast buying opportunities as stocks from the best companies and the worst companies get thrashed during a bearish market.
The price valuation would thus seem extremely attractive to these value investors.
Value Investing is a risky ground to be playing at and it would be advisable to be wary of what is individually at stake while dealing with investment in a bear market.
Always plan out your movements and run it through with your fellow traders who might possess the trading strategies as you do.
(10) Apart from all the strategies mentioned above, it would be wise to remember that investment is a good option only if you are willing to lose that small amount of money.
Predicting market movements during a bearish trend is close to impossible – therefore, it would be wise to remember that the market is going to act unpredictable and therefore, you must not make any major investments during this time.
Another thing to be wary about are your funds during this time. Secure your funds and make sure that they have been invested well.
A bear market might be a rather scary prospect for most traders but it is important to remember that nothing lasts forever in the stock market – neither good news nor bad news.
It would be wise to not look at long term investments but to wait till a change comes over the bearish market before thinking about long term investing.
Only cautious planning can take you further in this game of stock market trading – enabling you to combat any unprecedented market trends.
Adopting strategies and investing in defensive trading mechanisms would not only add to your knowledge of the stock market but also limit your losses during a bad market phase.
Keeping your expectations in check is another vital detail most traders forget to remind themselves about during a bad market phase – lose your anxiety and patiently wait for the phase to pass.
These fundamentals have been tried and tested – through the years, they have gained quick popularity amongst many seasoned traders.
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