1. Figure Out What Your Strengths Are
Some traders can make plays using only technicals and charts and do very well. Some understand the news and psychology well and can trade around them successfully.
Try different methods and combinations of methods to see where your trading strengths and weaknesses are. Play with charts, technicals, earnings, splits, indexes, futures, etc. and find out which ones you can play well and which ones you can’t.
If you are getting every trade wrong on news items, stop trading around it. If the charts always go against your trade, focus more on something else. In the same way that you want to become an expert on the few stocks that you trade, you also want to become an expert in a few areas of trading methods.
Very few traders can do it all well. Find where your trading niche is and keep your primary focus in that area. You can keep working on your weaknesses over time, but do it with virtual account and don’t wipe out the earnings you get from your stronger methods.
2. Read Books
You can learn a lot from those who have done well in the market, and many of them have published books sharing their methods and tips.
You can also learn about different techniques, such as candlestick charting and how different technicals like RSI, MACD, or Bollinger Bands can help you look for signals to pull the trigger.
The more you learn, the better you will be, just like in any activity in life. Some books that I personally recommend are Profitable Candlestick Trading by Stephen Bigalow, The Disciplined Trader by Mark Douglas, and The Market Maker’s Edge by Josh Lukeman. There are many more out there, just find some that you can relate to and read them.
3. Watch TV
I’m not talking about infomercials or 30 Rock. A good trader knows what’s going on in the markets every day, all day long, and you should have CNBC or Bloomberg playing as your background noise throughout the day.
It’s not necessary to pay close attention to everything that’s said or reported, but you need to half-listen to it for the “gold nuggets” that come here and there. You should be able to glean something every day that can help you with research or specific trades.
Remember that news about an industry or another company in the industry of a stock you are following can be very relevant information for you. For instance, if a company that competes with the company you are following reports bad earnings or has negative news, it may either cause your stock’s value to go up or drag it down with it, depending on the news.
These types of reports are important to be aware of. There are economic reports that come out almost every day of some sort. Find out how your stocks react when they do and which ones affect your stocks.
4. Practice with Imaginary Money
Before you go throwing your hard-earned money into a trading account, use a practice account to see how you do. Several sites offer free accounts with virtual trading.
I used OptionsXpress when I started, and their virtual trading option is excellent, but there are others out there as well. Using a virtual trading account will help you to assess how well you do with different information without risking your money.
5. Keep a Journal
Make sure that you write down and record your trades. You want to keep a record of what factors you considered when deciding on the trade, what happened (were you right or wrong), and what you did that worked or didn’t work.
This will be similar to a life journal or diary. You want to record everything that you can (within reason) about the economic day. Record the opening, closing, high and low prices of your stock, the different indexes, and related stocks.
Record economic reports that came out and news stories that are related to your position, directly or indirectly. Looking back on this journal will give you greater insight as to what caused the market or the stock to move the way that it did yesterday, last week, or last month.
It takes perseverance to trade well, and you learn from your mistakes and successes.
6. Learn About Trading Options
Trading options instead of actual stocks is a little more complicated, but it allows you to get started with less capital invested. One option contract represents 100 shares of stock, but costs less to buy and sell than the actual stock.
The movement of the option price is slower than that of the stock price, but when you get the trade right your gains are exponentially better. The other advantage is that you can make money easier using calls and puts, especially when there is volatility in the stock, than just trying to look for stocks that are going up.
Calls are basically bets that the stock price will rise, while puts are similar to short-selling, in that you are betting that the stock price will fall. Because you don’t actually own the stock, only the option to buy or sell it at a certain price, you can leverage your money into bigger gains more quickly than you can buying and selling the actual stocks.
7. Compare Company News to Stock movement
Watch for news about a company you are thinking about trading and see what happens when they have good earnings, bad earnings, splits in the stock, stock buy-backs, upgrades or downgrades, and mergers/acquisitions.
Pay attention to what their stock price does when each of these happens, and how long it lasts. Research what has happened in the past when these have happened.
Keep in mind that bad news usually effects a stocks price for a longer period of time than good news. You also need to be aware of news about other company stocks in the same sector or industry, particularly if they are competitors.
For example: Let’s say you are watching the stock of a company that makes a particular kind of drug. Their competitor, who makes the same type of drug, comes on CNBC at lunch and announces that their drug is being recalled by the FDA because of potentially dangerous side-effects.
Your company’s stock will be affected, but you need to figure out whether it will go up because of the competitor’s misfortune, or if they will be dragged down as well from public fear of the category of the drug.
These types of insights take time and patience to understand well, but in the long run they will greatly help your trading.
8. Study a Stock’s Relationship to its Index
Look at historical charts to see if the stock you are watching moves with its index, against it, or is rogue, meaning its index doesn’t necessarily affect what it will do very often.
If a particular stock always moves in the opposite direction of an index or another stock, this is valuable information. If it always moves in the same direction, this is also valuable information.
Anytime you can identify persistent trends from a stock, it greatly increases your chances of being right on its movement in relation to other factors.
9. Focus on a Few Stocks
Don’t jump in and start trading on every stock that has good news or lots of movement right now. Pick a few stocks that you are interested in, that have movement regularly (up or down), and become experts on them. Study the stock’s history, know what is going on with the company, and stay aware of news about the company and how it affects the stock.
Once you have a good feel for a few stocks, add another one to your watch list and get familiar with it. This will take time, but you are looking at building experience that will make you money over your entire lifetime if you take the time and do it right.
After you have studied and consider yourself an expert on a certain stock and how it acts and reacts in a variety of situations, consider adding another stock. Trying to trade every stock in the market will lose you money.
10. Take a Class
There are tons of people out there who teach classes on how to trade the market.
I took one myself several times years ago, and took it again several times. Do your homework before you pay for one though, and find out their credentials and success stories that have come from the class.
Don’t take at face value what’s on the brochure or website. There are plenty of scammers out there that want to take your money but have nothing of real value to offer you. Make sure that you are getting quality information before you hand over your money.
There are also plenty of free classes or websites that have good information, but if you want to get a good, solid foundation or some strategies that are effective, you are probably going to pay something for them.
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