Trading your hard earned capital requires work, discipline and commitment so it’s important to gain an understanding of what is really involved before you place your first trade.
The first step is to gain some knowledge about which stocks to buy and sell and to ensure the strategy you choose is suitable for your own personality and risk tolerance. Be sure to be realistic with your expectations. Trading is not a get rich quick scheme as many would have you believe.
Trading education needs to be comprehensive but can still be inexpensive. There is a lot of free educational material on the net by reputable companies such as E*TRADE. Remember – if you spend a lot of money on trading education you are reducing the amount of capital you have to trade with.
There are many strategies, techniques and unlimited ways to analyse companies, but research is usually broken down into either fundamental or technical analysis.
In its simplest form fundamental analysis can mean reading the newspaper to see what business journalists are writing about a stock. Based on this information you may decide to buy or sell your stock holdings.
More complex analysis would involve understanding what a company does and the sector of the market they are involved in (e.g. mining, banking, etc.), reading the company’s financial reports, deciding if you are happy with the company’s management team or Board of Directors, etc. Fundamental analysis is usually best used for longer term investors.
Technical analysis is the process of analysing historical data, recognising price patterns and determining which way a stock price is expected to move based on past performance. Technical analysts believe that a share’s price is the most important factor and that price is influenced predominantly by human behaviour and sentiment.
There are some great trading books on the market to get started. Here are a couple of my favourite ones:
- Trade Your Way to Financial Freedom by Dr. Van Tharp
- Trading in the Zone by Mark Douglas.
Finally, remember this very important tip: taxi drivers and friends are not stock market advisors.
If someone tells you that a certain stock is the next “sure thing” ask yourself , “What’s in it for them?” Chances are they currently own the stock and by telling you how good it is they are trying to reinforce the reason they bought the stock. Do your own research before jumping in.
Nick Radge heads a team of technical analysts at The Chartist, reviewing individual stocks and markets. AFSL 288 2000.
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