Learning stock market basics is essential to be a successful day trader or swing trader. Jumping into the market and making trades without a thorough understanding of market dynamics is considered high risk.
While it is true that you must take risks to earn rewards, you must also learn self-discipline and risk management. The following tips will help you understand stock market basics so that you will know how to manage your portfolio carefully.
- Start with a trading idea about a stock, ETF or other security
- Consider the time of day (open, close)
- Observe the overall market and sector performance
- Read financial news that is affecting the market
- Pay attention to high volume stocks and ignore low volume stocks
- Stay away or be careful of midday trading when volume dries up
Mechanics of Trading
There are various types of order types. Use limit orders if you want to execute trades at specific prices. Only use market orders if you want to instantly jump into a high volume stock with a tight spread. The standard lot for trading is 100 shares, but many day traders like to trade 1,000 shares at a time to maximize profits. Only traders with big accounts valued over $100,000 should think about larger lots. The bigger the lot, the higher the risk. Use software alerts that trigger buy or sell signals based on your trading philosophy.
Support and Resistance
A major key to stock market basics is support and resistance levels. Support is the low end of a trading range that can be seen in weekly or 52-week trading charts. Resistance represents high end peak levels for a stock price. Common trader wisdom suggests that stocks breaking above 52-week average trend lines will continue to move higher until the stock appears to pullback from peaks. Conversely, stocks falling below 52-week support levels can be short opportunities.
Charts are the basis of technical analysis. They come in several forms, with the most popular being bar, candlestick and line charts. Decide which type of charts help you understand support and resistance patterns most effectively. Learn the names of basic patterns and what they mean such as:
- double tops
- double bottoms
- triple tops
- triple bottoms
- table tops
- rounded bottoms
Do not assume that what goes up or down will reverse in the same day. Look for other evidence, such as increasing volume and news stories regarding the stock. Sometimes stocks make one big move in pre-market and stay flat the rest of the session. Stocks that gap up on bad news can sometimes reflect “short covering rallies.”
Searching For Trades
Stocks often rally or decline immediately following the release of quarterly earnings reports. Develop your own calendar of earnings dates so that you are prepared for possible breakouts and plunges. After a stock has a big run-up, expect a certain amount of pullback. In a choppy market day traders often sell strength and buy weakness or simply back off trading. Create stock lists that you can monitor throughout a session so that you are aware of multiple opportunities.
- Look for stocks starting to break out of a sideways pattern
- Buy stocks that gap down at the open, but not in a bear market
- Short stocks that gap up at the open in a bear market
- Look for stocks that break above downtrends
Be aware that not every trade you make is going to be a winner. To protect your capital set limits to declines using “stop loss orders.” For small accounts avoid losses greater than $200 in one session.