See today’s S&P 500 Index chart below, and references at the end of this article about our proposed demonstration series on how to build and paper trade a “Small Funds Portfolio”, in real-time. Meaning how to begin with a small amount of start-up capital.
There are many ways to trade in the stock market, mine is a rather simple approach that is easy to follow for beginning traders who are trying to learn the stock market basics. At the beginning, real trading while learning can be an expensive process and many traders lose their entire stake very quickly because of not knowing some of the basic stock trading guidelines that are referenced in the posts on this site.
The requirement for stock trading is mainly to learn how to select promising stock candidates and follow some basic trading guidelines when it is comes time to buy stocks, monitor their progress, and to sell stocks. It is the objective of the “Small Funds” portfolios, mentioned below, to take stock market basics beginners through those processes, trading in real time in response to the market action as it takes place. Ate beginning, we cannot know what will happen and the results will be a measure of the effectiveness of the approach we use.
I hope that readers of this Stock Market Basics website will follow my suggestions to become familiar with stock charts, introduced a while ago in the post titled About Stock Charts, because the patterns of price and volume fluctuations in the market place can so easily be recognized by even a brief glance at the relevant stock chart for the index or issue under consideration. We look for particular patterns in stock price movement that we know frequently precede an increase in stock price over the following few weeks and months.
In the early days of trading, when still learning the stock market basics, the charts are a great aid in helping to determine when to enter or exit a trade. An introduction to charts can be found on this site at About Stock Charts.
For instance, let us take a look at the chart , shown below, for the S&P 500 stock index for the close of this week’s trading, Friday March 25, 2011. The action portayed on the chart alerts us to the possibility that the mini correction may be ending and the next uptrend may be about to start.
Where to obtain stock charts
For your own use, one of the best sources of free stock charts is StockCharts.com, I recommend you bookmark that site. If you do begin to trade — or perhaps practice trading first by paper trading, as we recommend and demonstrate in our own stock plays on this site, you will be using charts for reference every day. I use them here, with the kind permission of StockCharts.com.
What have I left out? Perhaps the financial problems of Portugal and the European Union may also have a part to play, that or any uncertainty can contribute to an interruption of the existing trends.
So what to do until a definite trend is confirmed?
Get ready, build, update, and research the Watch List to identify the most promising candidates to which to make a trading commitment and buy stocks.
Stocks need to be selected, their potential price points of entry identified and their target prices defined — together with the exit strategy if the stock takes a hit, doesn’t perform as expected, or makes a good gain. We need to know when to exit, the objective is to obey the standard guideline of “Cut losses quickly, let the profits run.”
As cited elsewhere on Stock Market Basics, I like to quote the great trader of long ago, Bernard Baruch, who is claimed to have said: “Even being right three or four time out of ten should yield a person a fortune if he or she has the sense to cut their losses quickly.”
It hurts to take a loss, but every trader does — just don’t allow working capital to dissipate by being indecisive, follow the guidelines and exit at the pre-established percentage of tolerable loss — usually around 8 or 9 percent, also discussed elsewhere on this site. By the way, sometimes it can be quite euphoric when you are sitting with a huge gain on a stock, but follow the guidelines, there is no actual profit until the position is sold.
How we can demonstrate with our “small funds portfolios”
Here on this site in our new series for establishing a $5,000 and a $1,000 paper trading portfolio, and perhaps a $10,000 portfolio to allow greater diversity, we will follow the above suggestions on what to do while we await the signal to enter an up-trending market and buy stocks.
The coming weekend may allow enough time to get started researching the watch list, a few I have in mind right now include AKAM, XRX, EMC, MO, and HLIT. A small amount of trading capital is limiting and does requires that we concentrate on low priced stocks trading on good volume, preferably a million shares daily or more — but no stocks at less than $5. There will, I hope, be an opportunity to take an option position or two.