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How To Trade Stocks


I've been investing in the stock market since 1984. I started trading stocks in 2005.

If you ask most of your friends if they invest in the stock market and you'll probably hear "no way" ... too risky.. etc etc. The truth is, anybody who has a Roth IRA or a 401k "IS" in the stock market.

Becoming a trader is risky and you can loose your money if you are not careful. Oddly enough I don't go to casinos as I consider that gambling and everybody knows that the house always wins. At least with stocks you can control your risk.

After you have funded your Roth IRA, your 401K, and have twelve months living expenses saved then you might want to consider trading stocks. You will probably only want to take 10% of your total investment money and put into a trading account.
Probably the #1 thing that I had to learn the hard way is the difference between being an investor and being a trader. I lost money on Apple when I tried to "buy and hold" their stock. When the 2008/2009 bear market got under way I kept buying Apple on the way down and never set any stop loss limit. I just figured it would go back up over time.

Wrong decision. Instead of going "long" on Apple I should have just shorted it all the way down from $190 to $70. There was nothing fundamentally wrong with Apple. There was no bad news out to cause the stock to drop that much. I was caught in the midst of a worldwide bear market that caused all stocks to go down. The confusing part was that one day it would be up then the next day it would go down twice as much. Most of 2008 and 2009 was like that.

Investors have now been through two of these steep market declines with the 2000 tech bubble and now the 2008/2009 housing bubble. The housing bubble would have never happened if the folks running the government would have required buyers to have 20% down payment. By dropping the interest rate to historic lows didn't help either. People were buying houses like a stock trying to flip them in 90 days. Informercials on cable promoting this didn't help either. Let's not forget all those Countrywide Financial TV/Cable ads encouraging homeowners to borrow against their equity for remodels. I could see that had "bad" written all over it going back to 2005. And now Countrywide isn't even around. It would be interesting to know if the top people at Countrywide were shorting their own company stock while it was going down in flames.


I recently watched an interview with Alan Greenspan and when asked what could he have done differently when he was the Federal Reserve Chairman, he acted like the Fed policy wasn't his fault but actually he and Congress caused this and then when the credit agencies such as Moody's were rubber stamping these "deriviatives" as A+ when there were really junk status then that made this bubble snow ball downhill much faster.

To make it worse then Wall Street repackaged these and sold them to the far corners of the Earth to unsuspecting buyers. Congress is made up of lawyers who should have known better what their legislation was going to do. History shows that we will come out of this just fine but now the issue is the incredible debt that is being forced upon all of us. You can't print money forever and borrow from the Chinese government. This is why I like to buy the gold ETF's. Gold is at the highest levels it's ever been which indicates that people are moving out of US dollar and into gold. Both gold and oil have become the new currency. There is even talk out there that the US Dollar Bill will be replaced with the Amero.



The days of holding a stock forever are gone. If you become a long term holder of a particular stock there will come a time when you wake up one morning and have just discovered that the stock you bought is now down 15% on news that the CEO has left the company. Then you think, ok I'll just hold on to it till it comes back but it never does. The "bears" have stepped in and are pushing the stock to zero value. 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. More on that a little later.


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.

Some traders thrive on taking a stock down to zero. But if a stock goes down to zero that company will more than likely go into bankruptcy or may go out of business which then leads to higher unemployment.

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.

Good explanation of the "Buy Low, Sell High" method of trading using stochastic's

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


QLD

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.


So for example, let's say you invested $4000 in this one. 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 money at all. Once you get your confidence up then you can go open a brokerage account and do it for real.

Yahoo ETF Center

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.


FXI

These are some new China based ETF's that have recently started trading - CHIQ consumer - CHII industrial - TAO real estate - CHIB technology - CQQQ technology - YAO All Cap and CHIE Energy.


I like trading the metal ETF's such as stock symbol GLD, GDX and XME. The first two are gold related and the last one is Metals and Mining companies.


Refresh the webpage to see the latest spot gold prices.




For example, GDX consists of the top gold mining companies. 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.
GDX

The latest metals news

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.
SLV

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.


MOO

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:)


Daily ETF results using the McClellan Oscillator

ETF Categories

ETF Search

These ETF's move in either direction at three times the normal ETF


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.

I don't trade Forex currency, stock options or the S&P mini futures as I have enough of a challenge just dealing with stocks in real time. It may sound "sexy" to trade those instruments but it's harder than you think. How can I trade futures when I don't even know what is going to happen "today"? But there are traders out there who only trade Forex and do not trade stocks. Somehow betting one countries currency against another seems difficult.



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


XRT

TGT

WMT


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.


JNJ

MCK

BIIB

ISRG

PFE

MRK

XLV ETF

XBI Bio Tech ETF

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. Thailand also has its own ETF which is stock symbol THD.


Vietnam ETF

Thailand ETF



Vietnam Stock Story

I think that Asia will outpace the rest of the world including the USA in 2010 powered by China. There is a nice little ETF that goes by the symbol ADRA that includes the top 50 Asia stocks all under 1 stock symbol. It averages around 18,000 shares traded daily which is a little low for me but it's still a one stop shop for the best of Asia.
Emerging markets were strong in 2009 and 2010 will probably be just as good. 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.


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.