Unless You Like Throwing Away Money, Follow These Steps
If you want to get into equity trading, there are a number of different directions you can take.
Ultimately, traders get into the market because they want to profit. But how do you want to make that happen?
You could take the old “buy low, sell high” approach. Or, you could try your hand at short selling and try to gain profits as stocks go down in value.
Regardless of your approach, there are some nuts and bolts that remain constant, so let’s go over those.
Opening a Trading Account
Even though you may be the investor in a given stock, you’re usually not conducting the transaction directly. Instead, it’s handled through a brokerage account, which is the entity that facilitates trades.
At one time, you would have to phone or meet with a broker. These days, however, there are a lot of different options, and for the convenience factor most traders will use online brokers.
There are plenty of different online brokers. While this is a good thing overall, it can make the decision tricky because the many options can lead to decision fatigue.
Don’t lose heart, this is the first step, but it is an important one.
Unfortunately, I can’t tell you one specific broker that would be better than another, because the type and volume of trading you do means that the broker that is right for me, may not be best for you.
Start with some of the bigger names, TD Ameritrade, or E-trade, and take a look at their trading fees, mobile apps (they make trading on the go like I do much easier), and other amenities. If you don’t like what you see, it may be that a company like RobinHood is more your speed.
Check out your options!
Equity Market Analysis
Fact: There’s no such thing as a ‘sure thing’ in investing.
When it comes to equities, there’s an inherent level of risk at all times, no matter what stock you choose. That risk level will go up depending on how volatile the stock is, but there’s never a point at which there’s zero risk.
Higher-priced stocks from large-cap companies will generally have a lower level of risk as they are more “proven.” However, this also means that they may not deliver returns that are as big or as quick as the stocks offered by small- or micro-cap companies.
My specific approach is to target lower priced and more volatile stocks, and that’s the strategy that I recommend to anyone.
Generally, these lower-priced stocks are seen as riskier than many higher-priced stocks, because the companies are not as proven and are listed on exchanges that are not as highly regulated.
However, I’ve found that this level of risk is what allows for the potential opportunities!
Because all investments carry a level of risk, it’s important to perform research before buying any stock.
However, it’s particularly vital with lower priced stocks, as they move faster and you want to mitigate risk in any way you possibly can. This means that as a trader, you need to do your research.
Usually, you’ll start by making a watchlist of stocks that are moving, then narrowing down your choices and getting into analysis.
Technical and Fundamental Analysis
Both technical and fundamental analysis are key modes of research for investors. Neither is more important than the other. They rely on each other and by doing both you can get a better picture of whether or not you’re choosing a good investment.
This the numbers part of the game. Here, you’re looking at a stock’s past performance based on charts and numbers.
You’ll review historical data to determine the stock’s performance over time. This can help you see if there are trends or patterns that could be predictable, meaning that you can gain an advantage in terms of timing your trade and setting appropriate entry and exit points.
When you perform technical analysis, you’ll look at things like the price action or how the price of the stock has moved over time. Does it have a history of gaining at a particular time of year, for instance?
It’s not 100%, but when a stock performs a certain way, it usually will do something similar again in the future. By looking at the stock’s historical data, you can look for patterns or spikes that can help you take advantage of the trade.
This is the part that is a little bit more like being a private eye. It’s where you research the company offering the stock to determine if they are on a trajectory that could potentially affect the stock price.
With fundamental research, you’re looking at things like the company’s earnings reports, press releases, news, and analyst reports. Basically, you’re looking for any buzz around the company that might indicate that the stock price might go up (or down).
By combining technical and fundamental research, you can seriously get a much better feel for the investment.
Finding Key Patterns
Show me the money? Nah. Show me the pattern, when it comes to equity trading.
Your analysis will help you make sense of and identify key patterns.
I rely on patterns when trading equities. I like to find things that I can predict — I don’t like to gamble.
When I invest money, I want to make money.
Even though I don’t win all of the time, no one can, I can at least try to put myself in a good position whenever I make a trade.
Patterns help me make decisions based, partially on, what has most reliably yielded profits.
For example, one of my favorite patterns is what I call the “stair-stepper.” This is a stock that gradually and incrementally rises and then falls in price, so that when you look at the chart, it looks like the shape of a staircase.
When you see this stair-stepper pattern where the stock is rising and falling then has prolonged periods of little price movement, you can better plan your entry and exit based on when you think the next price rise or fall will take place, either buying or short selling.
Of course, with the stair-stepper you have to be very careful, because if the “steps” become too steep it can be very hard to time out.
That’s just one pattern, though. There are plenty of patterns that you can look for to inform your investments so that you get in and out at the best time for each trade.
Importance of a Stock Portfolio
Rarely does a trader just buy or sell one particular type of stock or a stock issued from one company and call it good.
For one thing, your earning potential is limited. For another, it’s kind of like putting all your eggs in one basket — if you only invest in one industry, and there’s a bubble that bursts, you could lose big.
This is why it’s important to have a diverse portfolio of stocks, featuring different industries, sectors, and that follow different trends.
If you have a diverse portfolio, it minimizes your personal risk as a trader. But it also balances things out. For instance, one part of your portfolio might go down while another one goes up. These fluctuations are natural, and having the diversity will help keep things even over time.
The Bottom Line
If I’ve said it to you once, I’ve said it a million times.
Study. Study Hard. Learn. Keep Learning. Never Stop.
It’s the single most important lesson that I can give you. If you want to be a successful trader you need to put in the time to do the technical analysis and the historical analysis for your trades.
You need to put together a diverse portfolio and watchlist.
You need to be sound on your fundamentals and technical approach. If you don’t dive deep into all of the nitty gritty stuff, you’ll never pull off the wins that you see me and my students getting.
On Monday, I’ll go over some hot trading tips for equities to help you get started with achieving your financial goals.
Editor, Penny Stock Millionaires