Trading For Dummies. Lita Epstein
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Beyond the Book
In addition to the material in the print book or e‐book you’re reading right now, this product also comes with some access‐anywhere goodies on the web. When you just want a quick reminder of trading basics, check out the free Cheat Sheet at www.dummies.com; just search for “Trading For Dummies Cheat Sheet.” There you’ll find explanations on how to identify the beginning of bull and bear markets, how to trade in those types of markets, and how to develop your own trading system. We also recommend websites that offer trading information, analysis, and advice.
Before you can read charts, you need to create them. To help you get started creating and reading financial charts, we have partnered with StockCharts.com, one of the web’s premier charting platforms. We’ve even arranged a 20 percent discount especially for Trading For Dummies readers toward a subscription on the website. Sign up today and get a free one‐month trial of the site’s advanced charting tools, resources, and more. The coupon code is SCC‐DUMMIES‐17. Access the trial as a Trading For Dummies reader at http://stockcharts.com/sales/index.html. If you’re already a StockCharts member, use the discount code to renew your existing subscription.
Where to Go from Here
You’re ready to enter the exciting world of trading. You can start anywhere in this book; each of the chapters is self‐contained. But if you’re totally new to trading, starting with Chapter 1 is the best way to understand the basics. If you already know the basics, understand everything about the various markets and exchanges that you care to know, have a broker picked out, and have all the tools you’ll need, you may want to start with fundamental analysis in Part 2. Remember, though, to have fun and enjoy your trip!
Part 1
Getting Started with Trading
IN THIS PART…
Know what you’re getting into before you begin trading stocks by reviewing the ups and downs you’ll encounter.
Get familiar with the various stock markets and the different types of market orders.
Pick an appropriate trading partner by finding a broker who’s right for your trading style.
Figure out the minimum hardware and software requirements and check out recommended websites and programs.
Chapter 1
The Ups and Downs of Trading Stocks
IN THIS CHAPTER
❯❯ Making sense of trading
❯❯ Exploring trading types
❯❯ Gathering your trading tools
❯❯ Discovering keys to success
Making lots of money is the obvious goal of most people who decide to enter the world of trading. How successful you become as a trader depends on how well you use the tools, gather the needed information, and interpret the data you have. You need to develop the discipline to apply all that you know about trading toward developing a winning trading strategy.
Discovering how to avoid getting caught up in the emotional aspects of trading – the highs of a win and the lows of a loss – is key to developing a profitable trading style. Trading is a business and needs to be approached with the same logic you’d apply to any other business decision. Setting goals, researching your options, planning and implementing your strategies, and assessing your success are just as important for trading as they are for any other business venture.
In this book, we help you traverse these hurdles, and at the same time, we introduce you to the world of trading. In this chapter, we give you an overview of trading and an introduction to the tools you need, the research skills you must use, and the basics of developing all this information into a successful trading strategy.
Distinguishing Trading from Investing
Trading is not the same thing as investing. Investors buy stocks and hold them for a long time – often too long, riding a stock all the way down and possibly even buying more along the way. Traders, on the other hand, hold stocks for as little as a few minutes or as long as several months, and sometimes possibly even a year or more. The specific amount of time depends on the type of trader you want to become.
Investors want to carefully balance an investment portfolio among growth stocks, value stocks, domestic stocks, and foreign stocks, along with long‐, short‐, and intermediate‐term bonds. A well‐balanced portfolio generally offers the investor a steady return of between 5 percent and 12 percent, depending on the type of investments and amount of risk he or she is willing to take.
For investors, an aggressive portfolio with a mix of 80 percent invested in stocks and 20 percent in bonds, if well balanced, can average as high as a 12 percent annual return during a 20‐year period; however, in some years, the portfolio will be down, and in others, it will go through periods of high growth. The opposite, a conservative portfolio with 20 percent invested in stocks and 80 percent in bonds, is likely to provide a yield on the lower end of the spectrum, closer to 4 percent. The volatility and risk associated with the latter portfolio, however, would be considerably less. Investors who have 10 or more years before they need to use their investment money tend to put together more‐aggressive portfolios, but those who need to live off the money tend to put together less‐aggressive portfolios that give them regular cash flows, which is what you get from a portfolio invested mostly in bonds.
Seeing Why Traders Do What They Do
Improving your potential profit from stock transactions is obviously the key reason most people decide to trade. People who want to grow their portfolios rather than merely maintain them hope that the way they invest in them does better than the market averages. Regardless of whether traders invest through mutual funds or stocks, they hope the portfolio of securities they select gives them superior returns – and they’re willing to work at it.
People who decide to trade make a conscious decision to take a more active role in increasing their profit potential. Rather than just riding the market up and down, they search for opportunities to find the best times and places to be in the market based on economic conditions and market cycles.
Traders who successfully watched the technical signals before the stock crash of 2008 either shorted stocks or moved into cash positions before stocks tumbled and then carefully jumped back in as they saw opportunities for profits. Some position traders simply stayed on the sidelines, waiting for the right time to jump back in. Even though they were waiting, they also carefully researched their opportunities, selected stocks for their watch lists, and then let technical signals from the charts they kept tell them when to get in or out of a position.
Successful Trading Characteristics
To succeed at trading, you have to be hard on yourself and, more than likely, work against your natural tendencies, fighting the urge to prove yourself right and accepting the fact that you’re going to make mistakes. As a trader, you must develop separate strategies for