Contents
Stock Trading vs. Stock Investing
Should You Trade Stocks?
A Trader’s Guide to Stock Markets
How to Get Started Trading Stocks
How to Make Stock Trades
How Stock Charts Work
How to Analyze Trends, Support, and Resistance in Stock Charts
How to Use Technical Analysis Indicators to Analyze Stock Charts
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Should You Trade Stocks?
Due to the inherent risk of stock trading, generally you should consider trading stocks only if you meet all three of the following conditions:
- Savings goals: If you haven’t achieved your basic personal finance goals, such as saving up an emergency fund of 3–6 months’ worth of expenses, you should not be trading stocks. It’s also best to achieve all other major savings goals, including saving up for the purchase of a car or house, before you begin to contemplate stock trading.
- Balanced investment portfolio: Stock trading is not a viable alternative to building and maintaining a balanced investment portfolio. Before you begin trading, you should have already established a diversified portfolio of investments designed to meet your long-term financial goals.
- High risk tolerance: Risk tolerance refers to the amount of risk you can comfortably accept in your investments. You should trade stocks only with money for which you have a very high risk tolerance. In other words, never trade stocks with money that you might need to use at a specific point in the near future.
If you don’t yet meet all three criteria and aren’t sure what steps to take to get you there, see the Quamut guides to Personal Finance and Investing Basics, available in Barnes & Noble bookstores and online at www.quamut.com.
The Riskiness of Stock Trading
Risk refers to the uncertainty of an investment’s return over a given timeframe. Volatility is the degree to which the value of an investment tends to fluctuate over time. Risk and volatility tend to correlate with an investment’s return: the higher an investment’s risk, the higher its volatility and potential returns. The risk and volatility of stocks depend primarily on your holding period.
- Over brief holding periods (less than five years), investments with high risk and volatility, such as stocks, have a greater chance of losing value than investments with lower volatility and risk.
- Over long holding periods (more than five years), investments with high risk and volatility tend to have a greater chance of increasing in value than investments with lower volatility and risk. This phenomenon explains why stocks have outperformed every other major type of investment over the long term.
Stock trading involves brief holding periods, so it’s inherently very risky: a stock you buy today could be worth much less tomorrow, or even 10 minutes from now. You must recognize this risk and accept the prospect of losing money at least as often as you make money when you trade.
The Three Types of Stock Traders
There are three main types of stock traders, differentiated by the length of time they hold the stocks they trade—that is, their holding period. The three main types of stock traders are day traders, swing traders, and position traders.
- Day traders: Traders who rarely hold a stock for longer than one trading day. If a day trader takes a position (places a trade) on a stock in the morning, he or she will almost always close out (sell) that position before the end of the trading day. Day traders often perform dozens of trades within a single trading day and often buy and sell a stock within a matter of seconds. Day trading is the riskiest type of stock trading.
- Swing traders: Traders who use longer holding periods than day traders do but who typically close out their positions within a few days, or a week at most.
- Position traders: Traders who take positions with holding periods from about a week to a few months at the most. Though position traders use longer holding periods than swing or day traders, position traders are not stock investors—position traders still rely exclusively on technical analysis to guide their trades.
Which Type of Trader Should You Be?
Though you can apply the techniques in this guide to all types of stock trading, it’s best to start out by trying swing trading or position trading and to avoid day trading until you’re more comfortable with stock trading in general.
| Acknowledgments & Disclaimer |
