Monday, January 2, 2017

Basics of Trading Part 1

Starting a series of post on the Basics of Trading for the Beginner. Will be archived for so can be used in conjunction with trades I post, my trading plan which doesn't cover the basics, and for anyone who is looking to be a trader.

THE BASICS:

Stock Symbol: Is the abbreviation used to uniquely identify publicly company or stock. Example DIS is Disney, A is Agilent Technologies Inc.

Stock: A share in a the company. If DIS is trading at $50 and you buy 1 share it will cost you $50. If the you buy 100 Shares it will cost you $5000

Commission: Anytime you buy a stock you pay a commission to your broker. This can be as low at $4.95 a trade with Options House.

S&P 500 Index or SPY: A weighted priced of the largest 500 companies in the United States. Its wise to trade with the direction of this Index.

Bullish (Bulls): A stock that is rising

Bearish (Bears): A stock that is declining

Two simple ways to trade the Market and make $:

1. Buy a Stock: Here you are betting on the stock to go up, you are bullish. Example: You buy 300 Shares of DIS at 50 with a goal to sell at 50.50 for a net a gain of $150.

2. Short a Stock: Here you are betting on the stock to go DOWN, you are bearish. Example: You short 300 Shares of DIS at 50 with a goal to cover at 49.50 for a net a gain of $150.

Who are you trading with: I call this the greatest game ever invented as you are trading against someone else and you are betting you are smarter. In its simplest form If you are buying you are betting the stock will go up and the person you are trading with is selling, betting the stock will not. This trader can be anyone: A large brokerage firm, a teacher, a nun, a stay at home mom or dad, your cousin, someone in India, China, Africa, Australia....ect

Determining the Trend: You want to trade with the trend of the stock. Is the stock trending up, down or sideways. The best way to determine is use a simple moving average (sma) on a stock chart. Start with the 20 sma. I will preach over and over and over trade with the @#$% trend. Put the odds in your favor.

20 SMA (simple moving average): The 20 simple moving average is taking the closing price of the stock for the last 20 time periods, adding them together and then dividing this total by 20, which gives the average price of this stock. Stocks trading above the 20sma are considered to be trending up or bullish. Stocks trading below the 20sma are considered to be trading down or bearish. SMA is found on all charting software systems.

Candlesticks: A candlestick shows a stocks trading range for that period. Each candlestick is made up open, high, low and close for that time period and this determines the look of the candlestick. The time period could be a 30 minute time period for day traders which means every 30 minute's of trading a new candlestick is formed. This time period can also be the Daily Chart which is a candlestick of an entire days trading. As new traders you will focus on Daily Charts. ( I will present this basic system at the end of these post) A Daily Candlestick is made up of the OPEN 9:30am est, the Close 4:00pm est, with the High of the day and the low.

Parts of a Candlestick: The wide part that represents the range between the open and close. When the real body is RED it means the close was lower than the open so the day was bearish, a DOWN day. If the real body is GREEN it means the close was higher than the open, bullish an UP day.
Just above and below the real body are wicks that show the high and low prices of that day's trading. The low wick shows the Low of the day, the high wick shows the high of the day.




 I have also attached a stock I am watching tomorrow, CA. The white line is a 10SMA and the blue line is the 20sma. As you can see CA is trading below these moving averages, which signals a BEARISH or Down trend. As a trader I want to trade with the trend to give me the highest odds of success. I will look to go short tomorrow if an opportunity arises.


Support System: This is critical. Trading while simplistic in nature will mentally challenge you as a new trader as you are putting your money on the line. Like any profession it takes time to learn. Its estimated 90% fail due to greed, fear, discipline, greed again and not taking the time to learn and wait for high % setups. Those that fail start with the thought process of thinking about the money and not focusing on the process of making high % trades and learning. You need a plan for each trade: When to enter, when to exit if the trade goes in your favor or does not go in your favor. You will have losing trades and as a new trader you will question your system and trade after each loss. As humans we hate to lose but in trading its part of the game and must be accepted. For example a successful trader can have these results after 10 trades risking $100 per trade
-50, -30, +100, +60, -65, +100, +75, +100, -100, +90, ..Result $280... This results in 6 wins and 4 losses. Notice the first 2 trades were losses and 40% of the time you exited with a loss. The physiology behind this can cause you to panic. Its imperative you stick to your discipline and take your small losses and not hold on to a stock in hopes it will come back. If you don't stick to your discipline those losses will be much larger as those -50 and -30 losses can turn into -150 or larger if you dont stick to the plan.

This is why having positive support is critical. I highly suggest another trader to bounce ideas off of or just keep your trading ambitions to yourself. Your spouse will not understand, your friends of family wont understand...you need positive in your life as a trader. For me my support system was my 6 month old son. I got hammered early on as a trader, had no mentor and was learning as I went. Everyone told me to quit. Anyone I tried to discuss trading with had no clue and all I heard was don't do it, wasting your time, its for professional's blah blah blah. It hurt my trading even more as I pressed and made bad trade after bad trade. But I was lucky as I got to be a stay at home Dad everyday until 4pm. I wanted to be a trader badly so I turned to my 6 month old son to discuss my trading (and losses) with. He would just stare at me and smile away as I released my frustrations and brainstormed how I was going to make this work. Yea I had a conversation with a 6 month old daily about trading, sat him right next to the computer...and it helped tremendously. Good trading days meant we go to the park...and bad trading days meant... we went to the park. He always knew after trading we went to the park and he kept on smiling and pointing at green candles. (think WILSON in the movie Cast Away, he never talked back!) Anyone can make it in this game but you need to have that positive support so you focus on the process and not on the $.

Next Post I will cover Charts: Support points, Resistance points, Volume, candlesticks I look for, managing your bankroll, risk and reward. In Post 3 I will cover a simple setup using the Daily Charts.



* You don't have to trade everyday. If the conditions don't feel right or if you're unsure of the current days trading environment then PASS on the trade. Missed money is better than lost money.  Day trading and the stock market is not a "war" that you must win at all cost. Trading should be fun, wait for only the good setups. Follow your rules, stick to your stops, and know that everyday the market presents a new chess board.

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Disclaimer

I DO NOT MAKE RECOMMENDATIONS TO BUY OR SELL SECURITIES - I JUST POST TRADES I MAKE OR FIT THE RULES OF MY TRADING PLAN ON A DAILY BASIS. DO YOUR OWN DUE DILIGENCE - YOU ARE RESPONSIBLE FOR YOUR TRADES, INVESTMENTS, AND DECISIONS! ALL CHARTS COURTESY OF TRADESTATION, SCHWAb & TD AMERITRADE