A brief meaningful insight in stock trading
Stock trading is one of the sector with some high return in investments. With right knowledge and skill, you can earn really good money in stock trading.
But, it also comes with risks. So, no pain no gain; similarly stock trading is also full of pain of risk of losing assets. The high return of investment compensates for risk associated with stock trading.
Before we jump deeper into stock trading let us discuss some basic ideas/terminologies behind stock trading.
What is a stock?
Imagine there exists a company called “XYZ” in the shape of a pizza. And a person wants a slice (STOCK) of the pizza (company XYZ). The baker would could cut it into slices. That each slice would be considered as a STOCK. The more slices that pizza has, the more volume of stocks that company would have.
Indirectly, when we buy a stock of a company, we own a slice of that company.
Why companies open stocks for public?
Because companies need fund to expand their business, to do researches, to add assets/products in their portfolio and ultimately share the risk with public.
NOTE: Before a person decides to do stock trading, a goal has to be set; What % of earning we are aiming for?
Banks do provide 5-6% of interest for depositing large sum of money in their banks. So, aim of earning higher than 5-6% per annum shall be considered before jumping into the ocean of stock trading.
What is the basic foundation of charts in stock trading?
You might have seen charts with various moving lives, bars, changing numbers and changing colors. To an eye seeing it for the first time could be horrible. So, we shall learn about basics of a price action chart in stock trading.
Candle Sticks are basic building blocks of a price trend of any individual stock or company.
Note: Please check various types of candlesticks as well as chart pattern too; Harami candle stick, Doji candle sticks, Hammer candle sticks etc.
Major indicators to follow before execution = To make the best decision in stock trading buy/sell.
Note: Always use a combination of indicators and price action to make a decision. Individually, not a single indicator is the best, always in combination
a. Moving averages
The best moving average is exponential moving average because it addresses the problem of LAG in price trend; large gain or large drop in price trend. Normal setting is 5,10, 20, 30, 50 and 200. But, for better results and smooth appearance, it is advised to set them to 4, 8, 18, 30, 50 and 200.
Note: Most of the normal price action would happend between 10 and 20 OR 8 and 18.
b. Stochastic
Conversion and diversion of lines in Stochastic is very helpful to make better decision along with other indicators. If, you want a sensitive stochastic, then try 5, 2, 3 values in setting.
And, if you want a smooth Stochastic, then try 9, 2, 2 values in setting. You can add 2-3 stochastic indicator for yourself to get better prediction.
c. Bollinger bands
Bollinger bands follow the price trend as well as volume of stocks. A wider Bollinger bands means higher upper and lower price as well as accumulation of volume of stocks. Note: A narrow bollinger band means a change is going to happen soon; either down or up. Keep a closer Watch for the narrow bollinger bands.
d. Mobo bands
Mobo bands could help a trader to identify the point of “BUY” or “SELL”. They are little less sensitive than stochastic, so it is suggested to use them along with other indicators.
e. Support, Resistance and Middle lines
These are one of the very important lines in a price chart of any stock. These lines would help trader extensively to estimate “How much a price would go up or how much a price might fall down“.
How to draw these lines – 1. Open price chart for 1 week and then go to price chart 2-3 years old. 2. Find as many support and resistance points in that time period. 3. Draw Red lines at the points of resistance and green lines at the points of Support 4. The, Draw a white dotted middle line between every resistance and support lines.
f. Fibonacci Retracement and Fibonacci Extension
This indicator works nicely to predict the level of extension and retracement in price change over time. Fibonacci Retracement is used in case of Bearish trend whereas Fibonacci extension is used for Bullish trend.
g. John carter’s studies: TTM-Scalper alert
It is shown as an arrow to determine “PIVOT HIGH” or “PIVOT LOW“.
Note: Pivot High Means- Sell signal & Pivot Low Means- Buy signal.
Note: you can use or add as many indicators as you like your trading platform, up to the stock trader’s preference.
1st step to start stock strading
Paper Trading – Always start with paper trading, if you have any dream of entering in real stock trading. Use a trading journal to keep records of your paper trading.
- Make your own journal or get any template from the internet. If, you plan to get a template from the internet, make sure to modify it to adjust with your preferences and experience.
- Write every details of your buy or sell in that template; name of the stock, buying/selling date and price, reasons for buying/selling, result, conclusion etc.
- Trade as many varities of stocks as you can during paper trading in your trading journal. Test you strategy and check how many losses and win you have in those tradings.
- Never miss to add the percent of commission on buy and sale of stocks. Enter only when your strategy is showing a good profit after covering for commission charges. Normally, platforms and brokers charge 1% of commission on buy and sale of stocks.
Note: WIN/LOSS ratio of 2:1 or 3:1 is appreciable. Again, your annual profit earning shall be atleast 7% because this the reason you are into stock trading business where you want to make more than what banks, hedge funds and other institutions pay as an interest in investment. Otherwise you shall deposit your hard earned money in banks or fund which provide good interest rates.
Thank you for reading the blog.
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