Everyone you talk to including your Uncle Dan has a winning system to make money in the stock market. It seems there are as many systems out there as there are people. The question is, how does a novice beginner make sense of it all. How do you mitigate the risks and how do you pick the correct stocks.

The first thing to do is to learn what works for you. Just because Uncle Dan has a can’t miss system, it may not be the best for you. Do some research. Try some ideas. Some sources advocate using paper trading sites to finesse your trading system. This is where you do not actually trade with your money. You are given some paper money and you go up against other traders to see how well you can do. This is a good process for deciding what will work for you. One drawback of this process is that if it is not your money, you have no emotion in the outcome. It is easy to pull the trigger when it is not your money. You may do quite well with play money and not so well with your money.

That brings us to the next part of the equation. After you determine how you are going to pick stocks, what will determine when you enter the market and what factors indicate to you to exit a particular stock, do not let emotions tug you in a different direction. You need to follow what has worked for you in the past. Too often when our personal financial stake is at risk, we fall apart and are unwilling to pull the plug or make the plunge. Leave your emotions in your back pocket when you invest.

In determining when you should buy a particular stock, you must first determine what type of stock you are investing in. Growth stock expect the high rate of stock price growth to continue. Value investors are looking for stocks that are undervalued for the amount of earnings the company has or is expected to have.

The p/e (price earnings ratio) which is calculated by taking the price of the stock divided by the earnings per share is a good determiner of the value of a stock. Some stocks may be a good buy even though their p/e is above 20 while others may not be a good buy with a p/e below 20. The thing you need to look at is how the company compares to other companies in their industry and what the historical p/e has been for the company. So the answer of when to buy a stock is when the p/e is lower than its peers and you can not find anything wrong with the company.

Proper analysis is the correct method to use when determining the stocks to purchase. Buying on speculation rarely wins. Someone gives you a hot tip. Run from that situation. If a stock is expected to boom but does not have the earnings background to support the expected price, it is not worth the gamble. It may go up but eventually will come back down. This is known as “pump and dump”. Those giving the tips are trying to pump the stock up so they can dump. Don’t fall for it.

So even though there are many different trading systems, probably the correct system is to determine the types of stock investments you want to concentrate in, do sound analysis, perform proper asset allocation in your investments and then go for it.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Technical analysis is nothing more than using the past history of a stock to predict its future. Traders use the axiom that “history repeats itself” to predict when to buy or sell a stock. Trend analysis is the reviewing of how the stock price is moving. This analysis uses both the movement of the stock itself and a weighted average method which serves to smooth out the daily movement of the stock.

There are three types of trends. They are uptrends, downtrends, and sideways. In reviewing the movement of the stock prices you can determine which direction the stock is moving. Predicting when the stock will reverse its trend is what trend analysis attempts to do.

Trend lines are drawn to determine the movement of the stock prices. For example a line is drawn connecting the stocks high over time. Another line can be drawn connecting the stocks lows. The space between these lines is known as the channel. Stock traders believe that a stock price will generally move between these lines or move within the channel.

Another set of terms that are used is support and resistance. Support is the lower level of the trend line. When the price of the stock comes close to the support price, buyers will come in and cause the price of the stock to climb. When the price comes close to the resistance, sellers will cause the price of the stock to go down. Thus it tends to move within the channel.

Traders believe it is important to understand the trends of a stock. Two important sayings are that the “trend is your friend” and “don’t buck the trend”

Once a resistance or support is broken, the roles get reversed. If the price falls below the support level, that price now becomes the resistance level. Conversely, if a price rises above the resistance level, that price now becomes the support level. This is important to remember when watching the movements of stock prices.

Support and resistance levels are important to observe since they can tell the trader when to buy or sell. If a stock continues to move within a channel, the trend of the movement will continue. However, if the channel is broken, either above the high or below the low, the current trend is suspect. It may be a sign of the need to make a decision on the stock.

Moving averages are another method to use to chart the stock trend. The calculation of a simple moving average is nothing more than summing the closing prices of a stock over a period of time and dividing by the number of days summed. A weighted moving average or EMA weights the latest days higher in the calculation. Thus the EMA moving average tends to be more accurate on the most recent trend than does the simple moving average.

Moving averages can be used to identify if a stock is in an upward trend or a downward trend. If the price of the stock is trading above the average, it is in an upward trend. If it is trading below the average, it is in a downward trend. Another way to discover a stocks momentum is by observing the short term (say 50 day) and the long term (say 200 day) lines. When the short term average is above the long term average, the stock is in an upward trend. When the opposite is true, the stock is in a downward trend.

Trend reversals can be predicted by two different methods. When the price of the stock moves across the moving average line and when it moves through moving average crossovers. For example if the price of a stock falls through a 50 day average, it is a sign that the stock movement is reversing. Another type of signal is when one moving average crosses another moving average. For example, if the 15 day average moves above the 50 day average, the stock is said to be reversing to an upward trend.

Moving averages are a useful method of determining the trend of a stock. They help smooth out the stock prices and are used by traders to attempt to predict the stock momentum.

This all sounds rather well and is a method of trying to predict a stock movement. I have always been an advocate of buy and hold rather than trying to predict the movement of a stock. However, when evaluating a stock that has fallen to an abnormal stock price, this method could be useful in determining when to purchase the stock.

Another problem with this method is the influence of the outside world. If a stock is beginning to look like it is reversing its trend and something happens to cause uncertainty or exuberance in the stock market as a whole, the signal could be disturbed. This is important to keep in mind. There is always the possibility of a bump in this theory. The rule is to be careful when investing in any theory that sounds foolproof.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.