Simplified Stock Trading Explained for Beginners
Do your own due dilligence. Knowledge is power. Nothing is certain.
Types of Stock Trading (covered here)
We're interested in day trading, swing trading, and long-term stock investing.
What is a Day Trade?
Day trading is when you buy and sell a stock in the same day.
What is a Swing Trade?
Swing trading is when you buy a stock, hold it for more than a day, and then sell it for a profit.
What is a Long Term Investment?
Long term investments are when you buy a stock and hold it for a really long time — months to years.
Reading Stock Charts
You need to at least know the basics when it comes to reading stock charts.
How to Read a Stock's Candlestick Chart
Stock market candlestick charts show a stock's volume, direction, and movement over a given period of time. Each candlestick represents a period of time on the chart. The candlesticks come in two colors — red and green. Red candlesticks mean the stock price ended the time period lower than it started the time period. Green candlesticks mean the stock price ended the time period higher than it started the time period. The wicks or tips of the candlesticks represent the stocks highest and lowest price movements for the time period. The size of the candlestick's thicker area represents the relative volume over the period's price points. If the candlestick is long and fat then there was a lot of volume over the majority of the time period. If the candlestick is long, but the fat part is short, then there was only a lot of volume of a smaller segment of the time period. Visually examining the placement of the candlesticks along the chart shows which direction the stock's price is trending — either up or down.
How to Read a Stock's Simple Moving Average Line
The Simple Moving Average (SMA) line is the blue line running through the middle area of the candlesticks in the chart above. A stock's SMA helps show which direction the stock's average price is trending and provides insight into trading opportunities. Eyeballing the position of the SMA line versus the position of the candlesticks on the chart helps show whether a stock's price is acting bullish (increasing) or bearish (decreasing), so you can strategize with purpose.
Simply put, interpreting the SMA usually results in knowing if a stock's price is trending up or down.
Typically, when a stock's price is trending up the SMA line will flow below the bars on the candlestick chart. When the stock's price is trending down the SMA line will crossover and flow above the bars.
How to Read a Stock's Volume Bar Chart
Reading a stock's volume chart helps you determine the time when trading takes places and the relative amount of trading that's taking place during that time. Typically, the higher the volume of trading there is the more volatile a stock's price will be and you'll see greater levels of movement over those periods. Similar to candlestick charts, volume charts come in two colors and represent the dominant trading actions over a period of time. Big green bars mean there's a lot of stock traders buying the stock. Big red bars mean there's a lot of stock traders selling the stock. Short volume bars mean less people are trading at that time. Stocks with higher volatitlity and levels of active trading often present more opportunities to enter and exit the market.
How to Read a Stock's MACD Graph
A stock's MACD graph shows the stock's momentum. The MACD chart consists of vertical bars and lines. Similar to a volume chart, the vertical bars on the MACD graph represent the volume or the strength of the stock's price momentum — it shows if the stock price is moving a lot or a little. The lines on the MACD chart give a clear visual representation of which way the stock price's momentum is trending. When the lines are moving up, the stock's price is moving up. When the line's are moving down, the stock's price is moving down. The sharpness of the line's movements can indicate
How to Read a Stock's RSI Graph
A stock's relative strength indicator (RSI) graph shows the stock's buying levels. Typically, there's a trend line representing the stock's strength and movement, as well as two other horizontal lines representing a floor and ceiling of resistence. When the RSI trend line moves above the ceiling the stock is overbought and typically corrects itself by going down. When the RSI trend line moves below the floor the stock is oversold and typically corrects itself by reversing and moving up. The price range between the floor and ceiling is considered the stock's fair-market-value — or what the stock is probably actually worth at that time. A favorite strategy amongst day and swing traders is to buy the stock when it dips below the floor and to sell when it moves above the ceiling.
Three Stock Buying Entry Opportunities
Knowing when to buy into a stock is half the battle. Here's three opportunities to look for when you're scanning for stocks to stake a position in that will give you a higher chance of profiting.
Buying Stock's Using the Three-Bar-Play
Buying stock's using the three-bar-play is a strategy for spotting a price swing and buying in. The three-bar-play (or three-bar-pattern) involves a specific pattern of three consecutive candlestick bars on the graph. The pattern is green, red, green — the first bar is green with a decent amount of volume, the next bar is red with low volume and closes the period equal to or lower than the prior period. And, the third bar is green and opens the period equal to or higher than the previous red period. This pattern can't tell you how high the price will trend, but more often than not it at least will alert you to the higher probability that the stock will trend upwards over the course of at least the next period.
Buying Stock's Using the Cup with Handle Pattern
The cup with handle pattern is a bullish continuation of a stock's price trend. It often presents higher quality entry points for buying into a stock. The cup with handle pattern begins with a dip, creates a rounded bottom, and trends back upwards to form the "cup". After the cup, the pattern tends to trend briefly dowwards and then takes a quick turn to the upside to form a visible handle. Identifying a cup with handle pattern presents a trader with multiple opportunities to buy and sell while shorting the stock, as well as playing long holds.
Buying Stocks that Continually Bounce
Some stocks display a regular pattern of bouncing. The up and down of the bounces are swings from overreactions to news or other catalysts and then a continuation of not just correcting, but over-correcting — repeatedly. The old addage "buy low, sell high" comes into play. The swing trading strategy for a stock with a regular bouncing pattern is to buy the dips, sell at the peaks, buy back in at the dip, and rinse and repeat until the pattern breaks the trend.
When to Sell Stocks for Profits
If you want to make a profit trading stocks then it's important to know when to sell.
Selling Stock at Price Validation
One strategy for selling stocks for a profit is to buy at confirmation and sell at validation. In this case, validation means where the validation line crosses over the SMA line. In the graphic above, the validation line follows the daily open price at a length of (2) and the SMA is set to a period of 5 — the candlesticks are set to 3min:1day. If you bought in at the beginning of the uptrend then you would wait until the validation line crosses down over the SMA(5) line to know when it's time to sell. You'd miss the peak of profits, but you'd still be selling out at a higher price than you bought in for, so you can count on keeping the margin as profit.
Selling Stock at Price Validation
A second strategy for selling stock for a profit is to buy at confirmation and sell at the position where you see the first candle hold underneath the validation line. It's impossible to predict a stock's peak, but it indicators like a candle underneath the validation line can alert you when the price is going to trend down — selling out at the top of a down trend is better than selling out at the bottom.
Limiting Financial Risk
Buying and selling stocks is a gamble. No one is able to 100% accurately predict the movements of the stock market — sometimes you're going to be right and sometimes you're not. Given the opportunity, it's often wise to minimize risk and tip the odds in your favor whenever possible. Invest intentionally and always have a strategy to minimize losses just in case.
Stop Loss Orders
Don't get stuck holding the bag when a trade goes south.
Setting a numerical or percentage based limit stop loss order can save your rear when the unexpected or undesired happens. It's normal for the price of a stock to swing up and down, but too much of a swing could snowball into a trend and quickly turn a trade into an investment or worse. Deciding on a hard stop — like 10% or $x-dollars-below your average share price — before taking a trading position is going to help remove the emotion from your trade, so you can make better financial decisions by establishing a clear set of critereon for getting in and out of a position when the time is right. New opportunities manifest themselves every day, so don't waste time when you know a position's soured.
Locking in Profits
Some traders like to take profits and some infinitely reinvest. On average, risk increases inversely in relation to the size of your trading account. Smaller acounts have a higher risk of losing it all, whereas, large accounts can afford to take the same losses at a less significant impact to the overall account. Locking in profits early and often is one of the best ways to minimize risk while growing a small stock trading account.
Buying the Dips
One strategy to pull profits on a trade is buying the dips. Buying the dips means buying the stock when the price is discounted, selling your stake when the price is peaking, and re-buying when it goes on sale again. It's the base concept of the bouncing stock strategy we talked about above. Buy low and sell high. Keep the difference between what you paid and what you sold for (i.e. the "profit margin"). Buying and selling stocks this way affords you the opportunity to maintain the same amount of stake (or more) in a company while you're claiming profits versus if you were to continually withdraw a positive margin without selling and rebuying the entire stake (which would perpetually lower the amount of the stock you'd own; not as efficient).
Find Up Trends Using the Golden Cross Pattern
The "Golden Cross" often signifies a stock is going to have an up trend. The Golden Cross point on a stock chart is where a short-term moving average intersects a long-term moving average — in other words, there's two simple moving average lines that have different length periods assigned and you're looking for where X marks the spot. Common settings for the two SMA lines are 50 and 200, but with everything related to technical analysis you can experiment with the numbers and may find lengths that work better for your specific setup.
As a friendly reminder, this website and the information found here does not come from a financial advisor. Trade at your own risk.