to make a trade and exit that position, all the while not allowing emotional considerations to affect the decisions you make on the basis of the successful trading strategy you’ve designed.
You need to make stock trends your master, ignoring any emotional ties that you have to any stocks. Although you may, indeed, miss the lowest entry price or the highest exit price, you nevertheless will be able to sleep at night, knowing that your money is safe and your trading business is alive and well.
Tools of the Trade
The first step you need to take in becoming a trader is gathering all the right tools so you can open and operate your business successfully. Your computer needs to meet the hardware requirements and other computer specifics we describe in Chapter 4, including processor speed, memory storage, and screen size. You may even want more than one screen, depending on your trading style. High‐speed Internet access is a must; otherwise, you may as well never open up shop.
We also introduce you to the various types of software in Chapter 4, showing you what can help your trading business ride the wave to success. Traders’ charting favorites such as MetaStock and TradeStation are evaluated, along with Internet‐based charting and data‐feed services. We also talk about the various trading platforms that are available and how to work with brokers.
After you have all the hardware and software in place, you need to hone your analytical skills. Many traders advocate using only technical analysis, but we show you how using both technical and fundamental analyses can help you excel as a trader. (Part 2 covers fundamental analysis, and Part 3 discusses technical analysis.)
Taking Time to Trade More Than Just Stocks
The ways traders trade are varied. Some are day traders, while others are swing traders and position traders. Although many of the tools they use are the same or similar, each variety of trader works within differing time frames to reach goals that are specific to the type of trades they’re making.
Position traders use technical analysis to find the most promising stock trends and enter and exit positions in the market based on those trends. They can hold positions for just a few days, a few months, or possibly as long as a year or more. Position trading is the type of trading that we discuss the most in this book. After introducing you to the stock markets, the types of brokers and market makers with whom you’ll be dealing, and the tools you need, we discuss the basics of fundamental analysis and technical analysis to help you become a better position trader.
Swing traders work within much shorter time frames than position traders, rarely holding stocks for more than a few days and looking for sharp moves that technical analysis uncovers. Even though we don’t show you the specifics of how to become a swing trader, we nevertheless discuss the basics of swing trading and its strategies in Chapter 17. You can also read about the basics of technical analysis and money‐management strategies, both of which are useful topics to check out if you plan to become a swing trader. However, you definitely need to seek additional training before deciding to pursue this style of trading – reading Swing Trading For Dummies by Omar Bassal, CFA (Wiley), would be a good start.
Day traders never leave their money in stocks overnight. They always cash out. They can trade into and out of a stock position in a matter of hours, minutes, or even seconds. Many outsiders watch day traders in action and describe it as more like playing a video game than trading stocks. We discuss this high‐risk type of trading in Chapter 18, but we don’t show you the specifics of how to do it. If day trading is your goal, this book will only take you part of the way there. You discover the basics of technical analysis, but you need to seek out additional training before engaging in this risky trading style – check out Day Trading For Dummies by Ann C. Logue, MBA (Wiley).
WEATHERING A CHANGING MARKET
Housing stocks crumbled in the housing crunch. Financials were crushed in the credit crisis.
We can’t claim any special foresight or knowledge to know when a stock is about to take a big plunge. We don’t have a crystal ball. But we’ve been able to keep most of our money safe from the ravages of the down market since 2008. By using strategies that we discuss throughout this book, we can exit positions before giving back most of our accumulated profits – while many others unfortunately do just that.
An impending pullback is not illuminated with flashing beacons. There is no instant indicator telling us that it’s time to sell everything. Instead, we close individual positions as each stock’s technical conditions deteriorate. The tools we describe in this book enable us to recognize when risk levels have changed, when few stocks are attractive, and when simply leaving most of our trading capital in cash is the best course of action.
Getting credit in 2017 is much easier than it was 2009, but recovery from the housing crash in 2008–2009 is still weak. The stock market, on the other hand, has climbed. For example, the Dow Jones Index was at 8,000 in 2009 and topped 21,000 in 2017. Many traders and analysts expect another correction. We will weather this market with the majority of our trading capital intact as we take profits. Then we may make a little money by shorting a few stocks or buying some short or double‐short exchange‐traded funds. Thanks to the tools we show you in this book, we will be ready to trade aggressively when the technical condition of stocks begins improving again.
Going Long or Short
Before you start trading, you absolutely have to know what stocks you want to buy and hold for a while, which is called going long, or holding a long stock position. You likewise have to know at what point holding that stock is no longer worthwhile. Similarly, you need to know at what price you want to enter or trade into a position and at what price you want to exit or trade out of a position. You may be surprised to find out that you can even profit by selling a stock without ever owning it, in a process called shorting. We discuss these vital trading strategies in Chapter 15.
You can even make money buying and selling options on stocks to simulate long or short stock positions. Buying an option known as a call enables you to simulate a long stock position, in much the same way that buying an option known as a put enables you to simulate a short stock position. You make money on calls when the option‐related stock rises in price, and you make money on puts when the option‐related stock falls in price.
When placing orders for puts and calls, you’re never guaranteed to make money, even when you’re right about the direction a stock will take. The values of options are affected by how volatile stock prices are in relationship to the overall direction (up or down) in which they’re headed. We discuss options and how they work in greater detail in Chapter 19.
Managing Your Money
Managing your trades so you don’t lose a bunch of money is critical. Although we can’t guarantee that you’ll never lose money, we can provide you with useful strategies