There are plenty of conflicting opinions on how to get started in trading. All the noise may confuse people who’d like to start trading. So today we wanted to give some impartial advice to individual savers looking to make money in stocks. The first thing to understand is that financial markets are huge and always offer new opportunities. You should never feel compelled to trade anything or to rush. That emotion will cause mistakes and discouragement. The best way to get started is simply to observe.
But, what’s the right way to observe? After all, there are thousands of stocks and events happening all the time. No one can monitor even a fraction of the activity.
So here are some ways to approach the market. The most important suggestion is to think by sectors and industries. Most stocks tend to move in groups because they share the same business conditions. When demand for semiconductors is strong, for instance, that will be true for many chip makers. The same is true for industrials when manufacturing accelerates or slows. Ditto for retail, investment banking and homebuilding.
So, always ask which sectors are doing well, and which are not. Then focus your reading on news stories linked to the big moves. Those will give you the “why” and prevent distractions.
The next big subject is technical analysis, or the study of price charts. Again, there are many opinions, but the three most important concepts are trend, reversals and levels.
Trend is the idea that stocks have a longer-term direction, which you may want to follow by buying or selling. This makes sense because business usually gets better or worse over several months or years. Investors incrementally put money to work as conditions change, causing stocks to trend upward. And, of course, the opposite is true with selling.
Next, reversals are chart patterns that suggest a trend is stopping – at least for the time being. We don’t have space to elaborate, but beginners should watch how they impact a stock’s price action. There’s plenty of information about reversal patterns on the Internet.
Levels are also known as “support” and “resistance.” These are specific price points where a stock previously bounced or peaked. Traders often wait for pullbacks to these levels to enter positions or sell when one is reached.
Another important skill is learning how to think about time correctly. As an individual trader, you’ll have an urge to jump into the market at certain moments. Unfortunately, these are often the products of our own emotions or wishes rather than reality. Even worse, traders can be right about the market’s basic direction, but lose money because they ignored the calendar.
So, try to know the big events for a company or sector. When are earnings? When are industry conferences? Staying abreast of the news as mentioned above will help. Next, traders should try to think by weeks because that’s how sentiment often shifts. The market thinks about things like “Fed week” or “tech earnings week.” Knowing those big items ahead of time can save you a lot of frustration.
There’s another very important word: sentiment – the mass sense or emotion investors have of the market. Are their collective feelings positive or negative? This is important because fighting sentiment is probably the most common mistake traders make. Even if you’re “right” about a stock being undervalued or overvalued, you’ll still lose money.
Thinking about sentiment can also help you sense when the herd is getting complacent. You’ll notice times when everyone seems to think the same thing but price action in the market does the opposite. They all love a stock but it goes down, or a company everyone rates “sell” keeps pushing higher. In those cases, sentiment is reversing before your eyes. Perceiving this correctly can help you make money – or at least prevent you from losing it.
Finally, beginners should know how and when they can trade. Day trading, for instance, involves entering and exiting positions in a single session. Swing trading lasts for a week or two. You need to understand the risks and rewards of each, and decide which fits best into your life and schedule. Always “keep it real” in terms of what you can do.
In conclusion, you can learn trading over time if you try. This article outlines broad ideas for how to organize your self-education. Never feel the need to rush anything. Remember the market will always be there when you’re ready.
David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.