How To Begin In The Stockmarket

I had some spare time, so I thought I might as well post an article on the way the stock market can affect you when you first begin trading. This is on your way to making your first million.

In a "Bull Market" the prevalent conditions of rising share prices, resources boom and general market hype actually encourages novice traders to begin trading. The mind set they have is, "that making money is easy." And any losses they do have are quickly recuperated and therefore no lessons are learnt from the mistakes they have made.

When their first "Bear Market" or a downturn comes along and share prices drop, this is when the novice pays dearly for any mistakes they make.

Trading in the market is not a game for the novice. For being poorly armed and ill prepared the novice quickly finds that the honeymoon period is over. To their dismay the original capital they started with has been quickly whittled away.

The novice who thinks that profit is the only thing to worry about is in for a very rude awakening.

The first emotions that the beginner will experience are "Fear and Greed."(See past article.)

Fear will paralyse while greed will galvanise you into action. In other words
Fear makes you hold on onto a downward turning stock while geed encourages you to chase upward rising share prices.

The way the share price has moved in the past and also in the future can often be seen as fear and greed in action.

When any share transaction has taken place two things have happened. Firstly the "Seller" has sold to minimise any future losses. This is because He believes that the share price is not going any higher.

The buyer on the other hand believes that this stock is at a bargain price and that the stock will go higher still.

Only time will tell who will be happy or regretful. But at that instant both parties believes that they have done the best that is possible.

The best advice any beginner can have is to not rush in blindly.

Use the information that is available on this site and others. Take your time and learn, research, paper trade until you are fully prepared and then stick a toe in the water first before diving in.

Good luck and profitable trading.

Stop Losses - An Important Part of Stockmarket Trading

If there is one area guaranteed to confuse many traders and lead to multiple opinions on the most appropriate approach, it is the subject of stop losses. The science and the art of placing stops is featured extensively in many trading books and guides, but the bottom line is that there is no right or wrong answer, simply the fact that stop losses must be used to limit potential downside exposure when trading. Traders should also be careful not to confuse stop losses with buy stops, which trigger an opening position rather than closing the trade.

It is very important not to package together the placing of stops with money management, as the two represent different strands of trading. Simply put, stops are there to protect profits and limit the potential downside at any time once a trade has been opened, and are part of an exit strategy for trades that are already open. Money management covers position sizing or amounts to be risked within each trade of a portfolio.

Within this potentially complex subject, there are many different types of stops, and it should be added that stops are never guaranteed unless that facility is offered by the broker for an additional charge. Nevertheless, their use is an essential part of any trading strategy. For the examples below share prices are used, but stop losses should also be used when trading CFDs in commodities, forex or indices.

The uses and abuses of stops

Much has been written about the placing of stops and how to avoid them being triggered without too much risk. This of course is the $64m question for most CFD traders and very often causes more consternation than any other aspect of the trading process.

The basic idea behind where to place a stop is by reference to the overall trend or trading range within which the share is moving. As to the actual level of the stop, it depends on several factors including the trader's overall money management rules, the amount of leverage, the time frame, and crucially the underlying volatility of the share chosen. The stop should aim to be placed at a level which if triggered would confirm the trade was incorrect.

There is no point in trading a highly leveraged CFD account with routine 5% stops as eight losses in a row, which statistically can be expected every few hundred trades, would lead to a minimum 40% drawdown on the account.

Having said that, there is equally no point in attempting to reduce the risk too far by setting 1.5% or 2% stops in highly volatile stocks or takeover situations as each trade needs room to breathe, and stops this tight are likely to be triggered within the normal daily ebb and flow of price movements.

A good rule of thumb is that if you cannot see at least double the potential profit in a trade compared to where you expect to place your stop loss, that trade should be passed over. Indeed some CFD traders look for three times profits achieved against losses as a starting ratio. Consequently an approach like this can be very successful by winning just three or four times out of ten, and is the hallmark of many of the world's leading traders.

Many losing traders look for an entry point or strategy that wins six or seven times out of ten, but this is very hard to achieve consistently. Although the feeling of winning regularly is certainly warm, the win/loss ratio here very often tends to be very poor as too many winners are taken quickly, so the correct use of initial and running stops placement is crucial.

Types of stops:

The basic maximum loss stop

The maximum loss stop is the starting point for most traders and is triggered when the share price hits a level below or above the opening price of the trade, depending on whether it is a long or short position. It can be measured in percentage points or actual money terms, but for these examples percentages are used. So if a CFD trader buys shares in British Telecom at 330p with a 2% stop loss, then the allowed loss is 6.6p and the position is closed if the bid or selling price falls to 323.4p or lower.

Note that no mention is made of how many shares are purchased or how much is being risked, as this is part of the client's overall money management.

If the shares gap down below the stop either intra-day or at the open of trading the next day, the closing trade is triggered at the first price available in the market for that size, which is why stops are not guaranteed.

As to the percentage size of the stop to be chosen, that depends on several factors including the trader's overall money management rules, amount of leverage, time frame and crucially the underlying volatility of the share chosen, which is very important.

Volatility stops and the ATR

Clearly, a percentage based stop is likely to be triggered more quickly in a highly volatile share and one of the ways traders can adjust stop levels is by ratio to the underlying volatility. There are various measures of volatility available, but a simple way is to use a stop related to a multiple of the average true range indicator, which is featured in most software packages.

The ATR determines a share's volatility over a set period that can be defaulted as desired. The daily ATR indicator is very simple to calculate and is the highest of:

The difference between the current high and the current low

The difference between the current high and the previous close

The difference between the current low and the previous close

Basically this is the maximum range in which the share has traded from the previous close to the current high and low. The average is then taken over a set number of days (ten is often used), and the stop is then calculated as a multiple of the ATR.

The reason this indicator is useful is that it becomes easier to place a stop outside the normal range of trading so that it is not hit by the short term random action of individual shares based on their average volatility.

As to the multiple of the ATR to be used, that is for the trader to decide, but longer term players and seasoned stockmarket investors tend to find a 2.7 to 3.3 multiple (which can equate to 5% to 15% stop losses) is applicable. Shorter term or highly leveraged players need to tighten the stop accordingly by adjusting this multiple.

The breakeven stop

This is a commonly used stop in which the trader closes the position if it reaches a minimum profit and then returns to even or back to a loss. So in the above example, if the price of BT rises say 2% to 336p, the stop is moved up to 330p, which was the opening price of the trade.

Please note that the breakeven stop here is not simply a new 2% stop loss - it's very slightly different - but very often this approach is used as a rough and ready way to protect the downside. This leads on to the important subject of trailing stops.

Trailing stops

Trailing stops are widely used by professional traders as they provide an element of protection for winning positions without sacrificing too much of the profit.

The idea here is that once the position is opened, the trailing stop runs behind of the best profit achieved throughout the trade and the stop (whether percentage or price) is moved up accordingly.

There are three rules and suggestions (examples here are for long positions):

1. The stop can and must never be lowered

2. The percentage or price of the stop at each stage of the trade does not have to be the same. For example, the trader in the above example may begin with a 2% stop in BT, and then the share price might rise to 346.5p, which represents a 5% profit. At that point, the trader may wish to tighten the stop to 1%, so that a minimum 4% profit can be taken but with more potential upside. This approach is to the discretion of each player, but it is a very useful way of nailing down profits.

3. Another approach is to raise the stop loss with reference to recent action after a certain profit has been reached. Instead of a percentage stop, the trader might move the stop up behind daily lows, thus protecting against a potential trend change.

4. The stop might be triggered if there is a sudden rise in volatility with a reversal in the shares, and some traders use as a trigger if the day's ATR is double the average ATR of the last ten days. This is very useful where a wider initial stop has been taken and there is the potential for a trend change before the trailing stop is hit, thus protecting the downside.

Mutual funds – advantages

Mutual funds are a great buy and here are a few suggestions that have to be kept in mind when you want to consider mutual funds to invest in. If you want to enter the stock market and think that you do not have enough time to trade but have excess funds then mutual funds are the right option for this type of investor. If you have sufficient cash to invest and your goals are mostly long term ones then MUTUAL FUNDS should be kept in mind. Mutual funds are considered safe by many investors and they have grown steadily in the last decade. There are many mutual fund companies that have evolved and are performing well.

You can invest in a single mutual fund and can get an opportunity to obtain various stocks and bonds and can diversify your portfolio. The mutual fund managers and analysts have a wide range of exposure and so your money is in safe hands.

There are stock funds, sector funds, bond funds, securities and various other funds that are included under the big umbrella of “mutual funds” and you can avail any fund that seeks your fascination. Your fund manager will guide you and you can take his suggestions.

You can enter the mutual fund sector with a low minimum and can then grow steadily. You can invest a small amount regularly(monthly) into the mutual fund and this can be done online through your bank.
You can invest your gains back into the mutual funds without having to pay any extra fees.

There is transparency involved and you can ask for any information anytime, liquidity is also high as you can get your cash one day after selling of your mutual fund.

Any mutual fund company should maintain records and have them audited for accuracy. This means that your money is in safe hands and you can trust your mutual fund manager. If by chance your mutual fund company falls out of business, shareholders receive an amount of cash which is equal to their potion of ownership in the mutual fund.

A mutual fund can also give you dividends and this is the right option to invest if you are planning for your retirement, children’s education or any other financial goal. Individual stocks, closed end funds and ETF’s are some of the options available in a mutual fund. Read the brochure carefully before signing on for any mutual fund.

What moves the stock market in certain directions?

What moves the stock market in certain directions?The above question has no definite answer, as the stock market is very volatile and very difficult to foretell. Some moves of the stock market are expected and obvious but some moves of stocks catch everyone by surprise. The stock market is directly related to the social, economical and the political situation of any country and the changes (bull market conditions and bear market conditions) are a result of the above said situations. The stock market may see a slowdown or a speed up depending upon the overall situation in the country. The stock market is also influenced by the world economy and certainly is influenced by changes that happen internationally.

Our stock market is strongly influenced by inflation, earnings, the interest rates, energy and oil prices, war/ terrorism, fraud and crime rate, political unrest, weather conditions and overall domestic development. Some of the above conditions are not quite serious and can be considered as temporary problems but some like crude prices, political deadlock and slow economy have long lasting implications which is bad news forthe stock market.

One factor that cannot be discounted in the stock market is the term “uncertainty”. This is one word that can pull or push the market and can also bring the market crashing down. People speculate over a certain situation and this speculation can shakethe stock market .. If the factors are in line with speculation then the market sees very little change but if the news is reverse to the speculation then there is an abrupt change with rattles most investors.

Economic news, financial news and terrorism bring market to a standstill but if the news is sweet enough for the investor to digest then the market surges forward. Investors need not be frightened of sudden bumps, as they will smoothen over time and only make the investor more scared. Investors should stay alert and grab opportunities when the market goes into the red. Over-priced stocks should be eyed and if it does cross your range pick it up, and if the stocks cross your limit and expectation due to surge then book profits immediately.

When you want to sell stocks of large volume then it makes sense to watch out for earnings report or the budget or any other important meeting that could raise the price of that particular stock. When the bull market is at its highest speed, it is the right time to sell and save a little for tomorrow.

Distinctive features of successful stocks

What are the qualities that successful stocks of excellent businesses make them apart from other stocks? What separates the good stock from the ordinary stock? The answer is not simple. You should do proper research to find out why particular stocks click in the stock market and why certain stocks do not click. Financial analysis does play an important role but certain other factors are equally important.

A leader is not born he is made. This saying goes well with stocks too. A leader in the market is created mainly be consumers. It is the consumer who holds the key to the lock (share). The market should accept a particular company and its product to survive and sustain competition in this fast moving world.

The first and foremost question to be asked is whether the company’s products and services are needed tomorrow. A company may be a leader in a particular product in the market today but will that product survive tough competition and will it last the next few years. Technology and science is changing before we blink our eyes and so companies should adopt products and services that will not fade away i.e. will sustain any market conditions.

A decade ago who would have ever imagined that cassettes and VCR’s would become extinct and would pave way to DVD’s and CD’s. The television is also seeing a major revolution and the slim TV is gaining importance. PC’s are replaced by LAPTOPS. Companies should have products and services which can adapt to the changing needs of the consumer.

Very strong competitive advantages safeguard strong companies from competitors. A popular trademark, high cost of entry and heavy manufacturing costs are some reasons why companies stand out during tough times.

Market leadership is one of the greatest factors which determine a companies share in the market. Market leaders are followed by the others in the industry. But don’t only rely only on market leaders. Some companies grow slowly and lose their leadership tag and this brings their share price down. Market leaders have to be prompt in decisions and should not let competitors overtake them, as once strong ground is lost; it is very difficult to get back to number one position.

Although financial status and positions hold the first preference in determining the trait of a company and its shares, there are various other factors like that the ones mentioned above which determine the quality of a companies share. So you should be very careful while picking up stocks of major companies.

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Stock Market Investing:Making sense of a topsy turvy Market

Mention "Stock Market" to most people and the comments will most likely be "losing proposition", "I lost everything", "what a joke", "are we headed for a crash?", or something to that effect. If you are a casual investor who has savings tied to the stock market, or a professional stock trader, all you are thinking about is selling what you have while companies are still solvent. Everywhere you turn it seems, is all gloom and doom. Most professional brokers and savvy investors are thinking just the opposite. Stay in and hunker down. Ride the season.

Stock Market Trading in Tough Times

Stock Market trading, even in tough times such as these, can be exciting and yes, even profitable. The thing is that you must arm yourself with the proper foundation - through education, and you need to understand the ins and outs before you plunge in and make any kind of trading decision.

Super-Market Stock Trading

The Stock Market isn't an ordered store. You do not get in pushing a shopping cart and pulling a profitable stock of the aisle of profitable stocks, or a low-priced-up-and-coming high-tech stock, or even a great investment package from a utility or other. It does not work like that. There's a lot more to that than just deciding on a product and making a purchase. You need to understand what is behind the decision to buy one stock instead of another. It's nothing like what you may have seen on television when there's a shot of the stock market with the many traders shouting "buy, buy" or "sell, sell". Before the order gets to the floor, it goes through several steps and it is important for a budding investor to know and understand before putting down any hard earned cash.

Standing on a Good Foundation

The one thing that you should understand before placing an order through a broker, or through your computer from the comfort of your home, is that you have a good understanding of the underlying foundation to that product. If you are buying a stock, does the company, or industry - if you are working with an index - have a track record that shows that you will be able to get a profit out of that purchase? If you are selling a stock, before you own it, and you can do this, provided you understand what's involved, do you know with some certainty that the company is on a downward spiral? or are you just guessing? Guesswork in the Stock Market can cost you dearly.

Gambling your Winnings Away.

Stock Market trading can be very thrilling. The closest I can come to is the thrill of the casino poker games where a decision is made based on a lot of guess work and some understanding of how the players will react on a given situation. If you made a good decision, you win the pot. If you made a bad choice, you lose. And the loss can be monumental or minimal. It all depends on what you have invested. The Stock Market trading is, as far as I am concerned, a gamble but with far better odds.

Risk Avoidance, Anyone?

Stock market trading can seem very confusing and far too risky, especially for the overly cautious among us. Of course, stocks do rise and fall, and there are risks involved, but that is true with nearly everything in life. Investing in the stock market takes some education and some sound planning. There is enough information online to help you make the closest to the right decision you can make, but like everything else, it is a risk. The best approach is to get a good foundation, test it on paper trades, know your limits to start with, invest below those limits until you are comfortable and certain that your method is right more often than not. Once you have seen some good results from your investment choices, you can start taking some of those profits and invest in new investments, and make sure to diversify so that you don't end up losing it all.