Trading For Dummies. Lita Epstein

you complete your fundamental analysis, we show you how to use your new technical analysis skills successfully. Using them, you find out how you can

      ❯❯ Trade within the overall technical conditions.

      ❯❯ Confirm which economic cycle a market is in by using index charts.

      ❯❯ Determine whether an ascending sector is stuck in a range or ready to enter a new upward trend.

      ❯❯ Determine whether leading stocks are stuck in ranges or ready to break out in upward trends.

      Finally, we show you how to use your newfound skills to manage risk, set up a stop‐loss position, and choose your time frame for trading.

      In Chapter 14, we introduce you to techniques for using exchange‐traded funds (ETFs) to ride the trends instead of taking the risk of finding just the right company in each sector. Sector ETFs have become a major trading tool for position traders who want to take advantage of sector rotation, which we talk about in Chapter 5.

      After honing your skills, you’re ready to start trading. So in Chapter 15, we focus on the actual mechanics of trading by

      ❯❯ Discussing how to enter or trade into a position.

      ❯❯ Explaining bid and ask prices.

      ❯❯ Discussing the risks of market orders.

      ❯❯ Explaining how to use limit and stop orders.

      We also explore how to exit or trade out of a position and still stay unattached emotionally, when to take your profits, and how to minimize your losses, in addition to discussing potential tax hits and how to minimize them.

      Now that you know how to research the fundamentals, effectively use the technical tools, and mechanically carry out a trade, the next step is developing and managing your own trading system, which we discuss in Chapter 16. We explore the basic steps to developing the system, which include

      1. Designing and keeping a trading log.

      2. Identifying reliable trading patterns.

      3. Developing an exit strategy.

      4. Determining whether you’ll use discretionary trading methods or mechanical trading. We explore the pros and cons of each.

      5. Deciding whether to develop your own trading system or buy one off the shelf.

      6. Testing your trading systems and understanding their limitations before making a major financial commitment to your new system.

      We also discuss assessing your results and fixing any problems.

      

After you’ve designed, built, and tested your system, you’re ready to jump in with both feet. The key to getting started: Make sure you begin with a small sum of money, examining your system and then increasing your trading activity as you gain experience and develop confidence with the system that you develop.

      Trading at Higher Risk

      Some traders decide they want to take on a greater level of risk by practicing methods of swing trading or day trading or by delving into the areas of trading derivatives or foreign currency. Although all these alternatives are valid trading options, we steer clear of explaining even the basics of how to use these high‐risk trading alternatives. Instead, in Part 5 (Chapters 17 through 20) we provide you with a general understanding of the ways these trading alternatives work and the risks that are unique to each of them.

      If you decide, however, that you want to take on these additional risks, don’t depend on the information in this book to get started. Use the general information that we offer you here to determine what additional training you need to feel confident before moving into these trading arenas.

      Remembering to Have Fun!

      Although you are without question considering the work of a trader for the money you can make, you need to enjoy the game of trading. If you find that you’re having trouble sleeping at night because of the risks you’re taking, then trading may not be worth all the heartache. You may need to put off your decision to enter the world of trading until you’re more comfortable with the risks or until you’ve designed a system that better accommodates your risk tolerance.

      You may find that you need to take a slower approach by putting less money into your trades. You don’t need to make huge profits with your early trades. Just trading into and out of a position without losing any money may be a good goal when you’re just starting out. If you notice your position turning toward the losing side, knowing that you can trade your way out of it before you take a big loss may help you build greater confidence in your abilities.

      

Making a losing trade doesn’t mean that you’re a loser. Even the most experienced traders must at times face losses. The key to successful trading is knowing when to get out before your portfolio takes a serious hit. On the other side of that coin, you also need to know how to get out when you’re in a winning or profitable position. When you’re trying to ride a trend all the way to the top, it sometimes starts bottoming out so fast that you lose some or possibly even all of your profits, causing you to end up in a losing position.

      Trading is a skill that takes a long time to develop and is perfected only after you make mistakes and celebrate successes. Enjoy the roller coaster ride!

      Chapter 2

      Exploring Markets and Stock Exchanges

      IN THIS CHAPTER

      ❯❯ Explaining the different types of markets

      ❯❯ Surveying the major stock exchanges

      ❯❯ Reviewing order basics

      Billions of shares of stock trade in the United States every day, and each trader is looking to get his or her small piece of that action. Before moving into the specifics of how to trade, we first want to introduce you not only to the world of stock trading but also to trading in other key markets – futures, options, and bonds. In this chapter, we also explain differences and similarities among key stock exchanges and how those factors impact your trading options. After providing you with a good overview of the key markets, we delve into the different types of orders you can place with each of the key exchanges.

      Introducing the Broad Markets

      You may think the foundation of the United States economy resides inside Fort Knox, where the country holds its billions of dollars in gold, or possibly that it resides in our political center, Washington, D.C. But nope. The country’s true economic center is Wall Street, where billions of dollars change hands each and every day, thousands of companies are traded, and millions of people’s lives are affected.

      Stocks are not the only things sold in the broad financial markets. Every day, currencies, futures, options, and bonds also are traded. Although we focus on stock exchanges in this chapter, we first need to briefly explain each type of market.

Stock markets

      The stocks of almost every major U.S. corporation and many major foreign corporations are traded on a stock exchange in the United States each day. Today, numerous domestic and international stock exchanges trade stocks in publicly held corporations; moreover, the only major corporations not traded are those held privately – usually by families or original founding partners that choose not to sell shares on the public market. Forbes magazine’s top privately held corporations are Cargill, Koch Industries, Albertsons, Dell, and PricewaterhouseCoopers. Many of the large private corporations that are not traded publicly do have provisions