After 15 years or so of near obsessive trading and study of stock trading I feel I may have some things of value to give away. The idea that I know how to trade well has been slow coming, and I think that is part of the reason that I know that I know how to trade profitably for the long term and in all types of markets.
Trading as I refer to it is speculation. Speculation, the word comes from the Latin: Speculari; meaning to spy or observe.
As the origin of the word says, the bigger part of speculation is observing. When a trader can allow himself to just observe, he stands the best chance of making the decisions that will allow him to make money. When a trader has the opportunity to trade one of the hardest things to do is to not trade. To sit on ones hands and observe is requires the strictest discipline and self control.
However, the prerequisite to trading is the ability to know what he is observing. And what I have found invaluable is the ability to "read the tape". In the old days of the ticker tape this meant interpreting the prices as they came across the tape, and making judgements about the future price movement.
In the modern world, or at least to me, reading the tape means looking at short term charts in real time, watching the volume associated with each change in price, and getting a sense of the strength and direction of the price moves. I started out using 20 minute delayes quotes because they were free. I subscribed to a chart service where they sent the chart in printed form to your home every weekend, but they were alway a week late. So, to keep uptodate, I used graph paper and delayed quotes to make my own graphs during the current week. It proved to be an invaluable exercise. By checking prices every 5 minutes, and making a mark on the graph I very soon noticed that I developed a feel for the markets that I was watching. Coupled with this experience was the reading of many books on technical analysis. Technical analysis is the study of price and volume and time. The patterns that prices make when charted form a visual record and that record contains the combined emotions of all of the market participants as they participate in that market and win and lose money. A study of technical analysis is indispensible to my method of trading. I do keep it simple however and stick to the basic chart patterns with a keen attention to the volume associated with the price moves.
After a couple of years, and a couple more accounts down the drain, I found electronic charting. And now I use the real time charting that comes with the broker that I use for stock trading. (Scottrade. I find them to be very good and the commisions are competitive.)
Most days I sit and watch 5 minute bars on the stocks that I follow. These stocks usually are stocks that I have found by going through hundreds of charts and picking out the ones that look like there may be a good chance of a predictable price move. In practice, once I get these charts on my watch list they tend to stay, and become like old favorites. Which is not altogether a good thing to do since I then tend to trade them more from a familiarity than from an objective technically oriented viewpoint. But individual stocks, and markets, do each have a personality. I suppose this is due to the makeup of the people and institutions that are active in each of them. Getting to know a market/stock is helpful in that changes in personality are a clue to changes in the market.
All of that being said, the thing that I try to do at all times when trading is to buy and sell when I have the greatest chance that prices are going to move immediately in my favor with the potential for a significant price move. These opportunitys are the result of looking at longer term charts for patterns in price that indicate continuations of the primary trend. The primary trend is obvious on most charts if one looks at a longer term chart. I usually look at 6 month daily charts for my primary trend. If I see something that looks promising, I start watching it in real time and on a much shorter time frame. Namely 5 minute bars on the charts. This gives me a look into the personality of that market as I watch to see how the price reacts to the general market and any news that may come out that affects that market.
But since this chapter is on getting started in trading I suppose it is important to state the purpose of our trading. That purpose is TO MAKE MONEY. I'll repeat that. The purpose of trading is: TO MAKE MONEY.
Did you get that? The purpose of trading is not to get a rush from betting money. The purpose of trading is not to brag to our friends that we are trading in the stock market. The purpose of trading is not to feel self-important. The purpose of trading and speculation in the markets is: TO MAKE MONEY.
The reason I put that point that way is that you will find that your ego will cause you to make all sorts of mistakes in trading. And those mistakes will be the result of you thinking that you know more than you do. You will be prone to thinking that you are very smart after you have a couple winning trades. You will think that you can outsmart the market. You may think that you know what the market should do, given the conditions. But the market, and by market I mean the price of the stock, will not do what you thought it should and then you will not do what you should do as an intelligent speculator, and you will lose money.
To make consistent money is any market by speculating it is necessary to buy at the right time. You will know it is the right time because you will have an almost immediate profit. And then your job is to let that profit become big.
I will attempt to teach you in this blog how to identify those opportunitys that come when the price makes a large and predictable move. In other words, where the most market participants will be buying or selling, and thus the price will make a significant move. And then we will explore the reasons why it is so difficult to let the market give us money. When you learn how to trade well it will be like the market is trying to give you money, and all you have to do is just let it!
For now, the beginner has to do some basic study of markets and how they work. I will give some books that I have found useful. My only monetary compensation will be if you buy them from the links on this site. I hope you do so.
The post "Bookstore 101" will show the books I recommend to the person interested in learning to trade profitably.