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Help for Stock Trading

by Alex Cosper

Overview

Learning stock trading is extremely risky and challenging. There are many books written on the subject but information on the stock market becomes quickly outdated as markets change. While some patterns repeat themselves over time, there is no sure formula for predicting which stocks will rise or fall. Stock prices move up and down based on supply and demand and can be driven by various market conditions.

candlestick chart
Financial Experts

The Wall Street Journal is the most popular financial publication in the United States. You can learn a great deal about the market just by staying up to date with this newspaper or visiting the Website at www.wsj.com. Other popular financial publications include Barron's, Money, Forbes, Fortune and Investors Business Daily. What you get from these resources are stories from top financial experts. Analyst ratings are considered research but not the final judgement of whether to buy or sell a stock. CNBC is the leading financial news network on television and features breaking stories throughout each market session. News is one of the main factors that can move a stock.

Technical Information

Many traders study stock charts, which are a form of "technical analysis." Stock charts show price movement over time with respect to trading volume. Professionals look for patterns that indicate reversals in price trends. The graphs come in many different styles. One popular style is called "candlestick charts" as shown at www.americanbulls.com. Candlestick charts show the succession of opening and closing prices as well as highs and lows in a series of days. Regular line charts paint the image of price action behaving like ocean waves. Advanced traders compare a stock's "50 day moving average" with the current price, looking for a trend.
Fundamental Analysis

Reviewing financial data about a company is part of "fundamental analysis." Fundamentals are based on company earnings as delivered in annual and quarterly reports. One important metric is "earnings per share" aka "eps," which is based on an equation of company earnings divided by total number of shares in the company. When eps has a minus sign in front of it, this indicates the company is not turning a profit. Usually eps is a much smaller number than the current stock price. Since stock prices are usually inflated due to speculation of future earnings, it's useful to know how many times a stock is trading above its actual earnings, which is expressed as "price to earnings ratio" or "PE ratio." It is also called "earnings multiple." So, if a stock is trading 20 times its earnings, then it has an earnings multiple or PE ratio of 20. Market capitalization, which is number of shares of common stock multiplied by stock price, is the value of a publicly-traded corporation.
Developing a System

Institutional and independent traders develop a system that works for their goals. Each trader must customize their own system, and utilize market factors such as news, overall market direction, time of day, volume and price action in specific sectors. Account size inevitably plays a key in determining appropriate trading systems. Various software packages designed for trading became popular at the start of the new millennium. One of the most fundamental principles of designing a system is that the first order of business is to protect capital. This is known as risk management in which you know exactly how much money you are willing to lose on a trade. Limiting loss, which can be done with a "stop loss" order, is necessary to be a successful trader.