How To Trade Stocks and Exchange Traded Funds (ETF's)

With help and support from my wife:)



I've been investing in the stock market since 1984 through mutual funds and tax deferred annuities. I started trading individual stocks and Exchange Traded Funds(ETF's) in 2005.

Trading individual stocks and ETF's is not easy as everything depends on which direction the market is going. At times it is easy and other times you will just shake your head and want to give up but with that said it is what makes the world go round. You will probably only want to take 10% of your total investment money and put into a trading account.
Nothing in the financial market is done by accident and there is a lot of manipulation of data that causes the market to move up and down. Those that control the financial levers can move sectors up and down which ultimately affects your 401K investments so it's good to start learning how to make money yourself by controlling your own portfolio. The idea is to set a goal of making 1% a day on your portfolio through a combination of buying 1 stock, 1 ETF and maybe one Currency ETF. Further down I'll go over that.


Probably the #1 thing that I had to learn the hard way is the difference between being an investor and being a trader. I was so use to putting money into mutual funds for long term that I tried doing that with individual stocks and got burned. So now I no longer hold stocks for more than a few days. That is probably the most important concept to understand. You may have a favorite company's stock that you like then one day you read the news that the CEO has left the company and then the stock crashes 20% and then takes months to come back to where you bought it.


So don't be an investor but be a trader. Don't get married to a particular stock as it is not your friend. It is only a vehicle to make you money. It's extremely difficult to know which direction an individual stock or sector is going to go. When a stock has good news it always seems like it sells off. When a companly lays off people then that causes the stock to move up. Somehow that just doesn't make sense. Because of all of this that is why I like trading Exchange Traded Funds or ETF's.


You've probably heard traders talk about shorting a stock. Shorting a stock is basically betting that the stock will go down in value. I've never been a fan of shorting a stock as it can change direction quickly and go up instead of down and still leave you out in the cold. So I would rather just buy on dips and sell the rips as they say on stocks or ETF's that are in an upward movement channel.

Most people reading this probably have a full time job and can not sit there and watch the market for six hours a day. So that is why you will want to do your research and find out where the stock has been in the last 200 days and then find where it reached its high and low price. Make up an Excel spreadsheet to track your findings.

The saying "buy low and sell high" does work but there is no guarantee that even getting a stock on sale will go back up. It could keep going down and break the support level so you have to be careful and watch the stock for a week before you buy to get a feel for it. I would recommend anybody reading this to start with just $7000 and trade 1 stock and 1 ETF. Remember this is money that you can afford to loose and still be able to sleep at night.



An ETF is a basket of individual stocks that trade under one symbol. For example, QLD is an ETF that holds stocks of the Nasdaq 100 such as Apple, Cisco, Google, Intel, Microsoft, Research in Motion(the Blackberry maker).




By buying this one stock symbol you get all those companies in one stock and you will be able to sleep at night not having to worry about huge drops in the stock pricing. But since it is two times the QQQQ then you either gain 2x or loose 2x.

ETF's are kind of like mutual funds except with these you can trade them like individual stocks. I use the QLD to gauge how the tech sector will trade throughout the day. You can pair this one up with Microsoft MSFT or Cisco CSCO. If you want to get more specialized in the tech sector then you can trade the networking ETF which traded under the symbol IGN.



If you want to trade just software related companies then take a look at IGV.






So for example, let's say you invested $4000 in QLD. You have to hold this overnight but can sell the next day under the "pattern day trading rules" which basically means that since you don't have $25,000 in a brokerage account you can't repeatedly buy and sell a stock in the same day but you can buy it and hold overnight and sell the next day which is what I do a lot. It works pretty good. If the QLD increased the next day by 1.5% then you have made $60 less brokerage commission. If you bought an individual stock and not an ETF and it went up 5% the next day then you would have generated $200 less commission. If it went down 5% then you just lost $200.

For traders with less than $25,000 you are allowed by SEC rules to do up to three day trades a week in any given five days. What this means is that you can buy one stock and sell it the same day but you can not buy and sell that same stock throughout the day. It seems a little complicated at first but once you understand the rules then it's easy to follow. Now if you have a brokerage account with more than $25,000 in it then you can buy and sell the same stock over and over in a day. You account value has to be above $25,000 at the end of the day to do this so it's best to put more than $25k in your account.

Another way to get experience at trading stocks is simply to just "paper trade" them which means you do your research and then pick where you would buy a particular ETF or stock and then pick where you would sell it and do that for 90 days to see how successful you are. This way you don't have to invest any real money at all. Once you get your confidence up then you can go open a brokerage account and do it for real. I personally use Scottrade since they have local offices that you can go into to open your account. They charge $7 when you buy and $7 when you sell for any number of shares. They provide charts, news and a nice software program that let's you see what sectors are moving based on criteria that you input.



One ETF that I really like is stock symbol FXI. It's the exchange traded fund for China which consists of 25 of the largest and most liquid Chinese companies.



You have probably seen the commercials on TV urging you to buy gold coins. A better way in my humble opinion is simply to buy the Gold ETF stock symbol GLD. Rather than hording gold coins in your home and then having to figure out how to sell them later it is easier to just buy the Exchange Traded Funds that track gold.




Refresh the webpage to see the latest spot gold prices.




Another ETF that tracks the top gold mining stocks is GDX. What's nice about ETF's is that you don't have to be an individual stock picker trying to find the best single company stock to buy. When you buy an exchange traded fund you are buying many companies in that specific sector which makes it a lot safer and you'll be able to sleep at night. But they can go down in value so make sure you watch it and if it moves up to where you want it to then just sell it and start the process all over again with something else. Most of the time I buy and hold for one or two days then sell.




For those new to investing, you might enjoy buying silver and the easiest way to do that is to buy the Silver ETF which is stock symbol SLV and then you could buy an individual silver stock such as CDE or HL.


Refresh the webpage to see the latest spot Silver prices.




I've had four to six percents gains in those two stocks. Most of the time I try to keep my individual stock picks to no more than $4000 and then set a 2% stop loss which means I'm willing to loose a maximum of $80 on this trade setup.


The metal stocks are easy to understand and when that particular sector is moving they all generally move in the same direction.



I like the Agriculture sector and the best way to play this one is with the ETF stock symbol MOO. It is a basket of stocks that includes John Deere, Monsanto, Potash, Archer Daniels and Mosaic. Again rather than trying to be an individual stock picker, this holds the best of the best for this sector then when you get a little more experience you can buy stock symbols POT, MOS, MON.


The great thing about ETF's is that you don't have to be a stock picker to figure out which single stock is the best at any particular moment. And while you won't make 20% on an ETF by holding it overnight, you also won't wake up one morning to find you have lost that 20% and then get into arguments with your spouse:)






I like to watch the Australia stock market and you can buy the Australian Exchange Traded Fund stock symbol EWA and then follow that with the Australian currency ETF symbol FXA. Australia has a lot of mining companies including BHP Billiton Ltd., stock symbol BHP, who mines aluminum, copper, coal, iron ore, nickel, manganese, metallurgical coal, oil and gas, and uranium, as well as gold, zinc, lead, silver, and diamonds. I've had good luck in the past with a combination EWA and BHP investment and then include the currency FXA.



Canada and the USA do a lot of trade with each other and you can buy these two Canadian ETF's here in the USA.


I don't trade Forex, which is trading currency pairs, but do trade the currency ETF's such as the Canadian dollar FXC as well as the Euro FXE and the 2x Euro ULE. There are die hard Forex traders and that is all they trade. The nice part about Forex is that is just currency. It doesn't deal with individual stocks and meeting analyst goals.

Like Warren Buffett says "if you don't understand it stay away from it". I wish I had the time to learn Forex but I have my hands full with ETF's and select stock picks. You can't master everything so pick something that you like. I also do not trade options or futures.

I have enough of a challenge dealing with day to day rather that trying to figure out where a stock or index will be at in 2 months. There is a lot of money to be made in trading options but it does not click with me:) I've known people who lost their rear end trading that.



Here is a good combination for trading. Pair up the Retail ETF which is stock symbol XRT with Target (TGT), Wal Mart (WMT)


If you like Oil/Natural Gas and the Oil Services Industry then consider these two ETF's.









I like to follow the bio/health care stocks such as JNJ, MCK, BIIB, ISRG, PFE, and MRK. You can pair up those stocks with the health care ETF which is stock symbol XLV. The biotech and pharma ETF's are XBI, IBB, PPH, and BBH.


Another country that I recently began following is emerging market Vietnam. It has its own ETF which is stock symbol VNM which launched in August of 2009.




Asia has been strong for several years powered by China. There is a nice little ETF that goes by the symbol EPP that includes the top Australia, Hong Kong, New Zealand, and Singapore stocks all under 1 stock symbol.






This next ETF is one of my favorite ones to trade. It tracks the market volatility. It is risky so be careful with this one. When there is fear in the market this one blasts upwards.




Emerging markets should be considered also. Check this ETF out for diversification.




For the brand new stock trader who is looking for defensive stock plays might consider the following: Microsoft (MSFT), Johnson & Johnson (JNJ), Coca Cola (KO), Altria (MO), Philip Morris International (PM), Clorox (CLX), Procter & Gamble (PG), Avon (AVP), Alberto-Culver (ACV), Kimberly-Clark (KMB), Molson-Coors Brewing (TAP) and Unilever (UL). When the stock market is going down you will discover that these stocks hold up well.


One thing you will notice is that no matter what stock you buy it will go down right after you buy it. The folks on the other end are just trying to yank your chain and scare you out of your position. If you have done your homework then have the confidence to stay in your position and of course set a stop loss.


On stocks such as Goldman Sachs (GS), Apple (AAPL), Blackberry (RIMM), Google (GOOG), Garmin (GRMN) they will move up and down a lot. These are the stocks that the hedge funds like to play in. If you are gonna step into their sandbox, be prepared to strap yourself in your chair with duct tape and hang on as you will get whip sawed around. At the same time if you have over $25,000 in your account then you can "scalp" these stocks and do very well when they dip down through out the day and then move back up.


If you are trying to supplement your current income to help pay the bills then this is still the best game in town. It puts you in total control and let's your inner entrepreneurial spirit run free. If you set a goal of just trying to make an extra $40 per day then you will have generated an extra $800 a month less taxes to net out about $560 of disposable income. By the end of 12 months you'll have made an extra $6720 take home.


When you take a look at what happened to the market in 2008/2009 and you watched your account go down each week that should have been your wake up call to find a different way to profit from Wall Street. I started in 2005 trading stocks and ETF's and it's been a fun ride so far. It's dynamic and no two days are the same. If you like to play poker or go to the casino this might suite you.

Disclaimer: This website may include stock market analysis. Any ideas or opinions expressed by me is for informational purposes only. Trade at your own financial risk as we assume no responsibility for your investing decisions in the markets.