h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

Entry: getting started in (stock) trading - A2176869
Author: Gardener - U196976

Some tips on how to get started in stock trading.

Not a few people have already noticed particularly beguiling pop-ups offering small or no commission stock trades while surfing the Net for business-related information. Some might even given lingering second thoughts to the idea of being stock trader in your own right.
The Sky is the limit.
That is not for nothing that the idea looks so (seemingly) exciting: the average ceiling of daily profitability for Nasdaq- quoted shares was 9,81% in 100 business days immediately preceding the commencement of October 2003.( Valutny Speculant magazine, 50th edition p.42) That is to say that you had the potential to get the returns of 700000% at the end of this period! ( 7000 times the sum of initial investment)! Other popular markets, like foreign-exchange (Forex), that one can also access on-line easily enough, are dwarfed by that performance, e.g. analogous returns of Forex for that period afforded only 0,6% daily growth.(To compensate for that “anemic” performance ,however, Forex brokers provide enormous leverages (explained close towards the end of the main body of the guide entry) of up to 100, as opposed to 1,5-2 for stock-trading marginal accounts.). Besides, speculations with assets of different nature had long ceased to be morally reprehensible. The prospect of getting suddenly rich fed investments into railroad-building mania of 1840s in Britain. The exciting atmosphere of how stocks used to be traded in those days of yore by unfathomable gentlemen exquisitely dressed in black and crowned with top hats is drolly portrayed in “A million pound note” –the movie starring Gregory Peck.

Many are the stories that relate how one can get golden riches that do the rounds of the modern world: some are quite ancient dating back to the days of East-Indian company , Nathan Rothschild jobbing gilts et al, others sprout daily here and now bringing to prominence a sort of taxi-drivers –cum-NASDAQ traders mouthing glittering assurances that the occupation herein described is one of a stable and reliable kind.
Is that worth it?
This researcher thinks that trading stocks (or bonds) is or should be purely professional occupation. One that requires apart from a good grounding in investment - related subjects the willingness to sit daily near computer hours on end gleaning and analyzing news as they break live and read at least one trading book and magazine a month. Even then it will take months and years to become an experienced trader that tries to leave nothing to chance (as much as it is possible on the stock market). But today stock-market is open for all and everyone is invited of those that have 10000$ or so free money on them
Some may argue that once the market is booming( as might be expected these days since the market revival is out of the cold with Dow Jones touching nostalgic 10000 mark again) and shares fall on a steady upward trend , being bullish is the recipe, and excessive investment wisdom, though desirable, doesn’t actually add up much.
That is reasonable. What is even more reasonable is that the investor sharing such sentiments is strongly recommended to go and by some shares of or participation in that or another investment fund, the declaration of which they feel they understand. Investment funds, being tools of “communal” investment, are specifically created for people who believe that stock or bond markets could bring them success in cashing in profits, but who, having other calls on their time, lack necessary competence (or confidence) to invest themselves. Stock trading is essentially an exercise in short-to-medium term holding strategy or speculation.
These tips are intended for those who trusting their own luck and courage are determined to cut out unnecessary middlemen and pit their wit and energy against ever-undulating ever-unpredictable fabric of deep and boundless sea, the stock-exchange, undercurrents of which are teeming with sharks and Gordon-Geckos of the world, and sun-lit glitter ends in unexpected puzzling gulf or tsunami ; yet the warp –and –weft of this mercantile maritime world is simple: buy low, sell high.

Changing outlook- develop a fitting psychology
This is how trading stocks may represent itself to a person who just starts, yet days or weeks into the business this cheery and romantic outlook will be washed away, will be supplanted by one more technical and pragmatic: “What is media telling about prospects of economy… Oil prices might slump, yet OPEC is determined not to give ground. What is the latest twist in how a government agitates against oil magnates… Let me look up that company’s graph .. Is that recent rise a correction or the beginning of a new trend , should I react ?» - such will be daily conundrums besetting the minds of those who actually do trades. That is bound to be their daily fare, should they press ahead. It is said (about other adjacent market – foreign exchange, though) that only 3 beginners out of 100 move on to their second consequent year in business, others are forced to discontinue. Not because they lose all their trading capital (it is only in exceptional circumstances like in a crash that one becomes broke), they are more likely to find that they simply cannot control, cannot attune to the rapidly changing environment of the trading place. They were successfully keeping their position in shares , reveling in their decision to pick up that stock , placing expectations that it will outperform the market , yet presently they return from the walk with their dog to see most of their gains eaten away by unexpected change on the market. (Note that stock-markets, unlike foreign-exchange , especially if you trade illiquid shares, are prone to gaps. That is the reason why technical indicators (or averaging lines) are not fully useful in their application: Gaps will shatter the required continuality of data input implied in the design of those indicators. This fact is often omitted in the books about general technical analysis). Some gain might be left. Some weeks you will earn 130% annualized, only to find that 60% of it were gobbled up next week because market was to volatile then. You are apparently disappointed, you suffered no financial loss, gain only, but most of your cherished efforts and expectations have already evaporated. Half the planning has gone down the drain.
Lets say you already have your own purportedly reliable risk-management strategies and technical analysis drills by then , you simply have no time to apply them consistently. Loads of meaningful information appear on the market, by the time you get home from daily living-earning most of it is already too outdated to represent any potential for you. You are again disappointed. The more greedy you are the more so. (In fact the most helpful tip, hopefully, which this researcher intends to provide , is not to be excessively greedy .Some trading books contain the wisdom to the following effect: “ Greed is like a fire. You keep too close to it, it will scorch you. You subdue it, it will warm you”. One shudders to think how often a trader becomes a victim of this clearly irrational passion. Not only is it irrational, it is destructive. To be a successful trader one needs not only to subdue the flame referred above, but to completely extinguish it . Such an advice might be welcome for self-disciplining purposes at the outset: Donate, 70% of your gains to charity. Thus , though having a real-world entanglement with the market , you will achieve the moral detachment requisite to be a successful trader. Should you make losses, however, do not attempt any wrangle with the charity. Odds are they will think you to be either lunatic or a morally deranged person. In the latter case, it is plausible, they will direct you to read Hudson’s Statue by celebrated T. Carlyle (obtainable from www.victorianweb.org/authors/carlyle/Hudson) . Which is a splendid read for those attempting to trade stocks.) Gradually the realization dawns upon you that for all your real or apparent worth as a (prospectively) successful trader, the trouble is not worth the effort. Thereupon , you lose enthusiasm, becoming a passive investor, merely sitting on your portfolio of shares, not trading them. All the fizz and sparkle evaporates from the glass you thought you will be treated to. No bubbles issue forth from the glass, or the opportunities presented by their elevation are lost for want of interest Even then you are highly likely to earn something if the market permits, though your yields will be lesser than those you would have reaped from investment funds . Not a year to the day you started you game with shares, you contemplate fetching your money to investment –funds industry and shortly after become their loyal client. Therefore, your days as the trader are over. You well-nigh learned the new skill; it is now not so burningly romantic, but deploringly informationally over-saturated. The job for lonely and possessed wolf only. Odds are that you will have found the following wisdom availing by then: “ Some say that time is money. It is more than that. It is life. And he who spends much of it on money or what the money can buy makes the wretched bargain and will be bankrupt at the end”.(H. Thoreau) Thus end those 97 new-comers to the field out of 100. Only 3 persist determinedly through, since they know that ill-taught is worse than untaught. They are on the way to discover the thing that will fascinate them for years to come. After all, no pleasure is comparable to that of having systems made pliant, of trying to second-guess their next development, trying to ride cusps and troughs triumphantly were one supposes them to be without falling into traps. If you happen to love this pleasure, may be trading is the thing for you.
From the word go.
All have to start from somewhere and mostly from scratch. Those who have studied natural sciences in university may found the business much easier to approach, for they already know a thing or two about statistics , variations ,averages, normal distributions etc. The balance of opinion among traders is that price variations of shares are distributed normally. It is also the standard assumption of different models in the field, like CAPM and APT. Knowledge of betas, volatilities and squared –Rs naturally flows out of these models. And it is desirable that one at least intuitively feels the meaning of these measurements for they are very helpful for the initial stock screening purposes, which are necessary to stake out those shares that look attractive to you and which you actually intend to trade. Even when you already selected shares for your portfolio, measurements noted above will allow you to differentiate among your shares in portfolio and evaluate which shares fare better in given market conditions, so as to keep a sharper eye on them than on others. Never trade with one share only. Your tradable portfolio should at least include 3-4 shares. If one of the bunch falls sharply, open positions in others will at least compensate for it. Portfolio theories should, therefore, be a starting point.
Technical analysis- illusion or reality?
Move over to the technical analysis then, you might also want to learn how actually trades happen in the interim, and what is the difference between stop, limit and market orders. It is recommendable for that purpose to open up some demo-account through the Internet even in unrelated field , for example , foreign- exchange demo account . Not only will you learn a little about currencies and order-placement, the account will also provide the testing ground for your ideas about technical analysis. It will teach you how to plot lines and indicators. That is why it is important to seek out for a good internet trading platform ( use Google). Modern brokers now provide their services via internet-based trading platforms with built-in extensive capabilities for technical indicators . Nobody uses telephones any longer for retail trading, except in the case of a contingency when your computer breaks down.
Technical analysis is all about lines of resistance, support , figures , indicators, their interpreations etc. Thing complex and apparently logical. But how useful? There are many books published on this account. Do not start with excessively thick and comprehensive opuses. The Reuters book on technical analysis is a good place to get your feet wet. How useful and how logical indeed? This researcher thinks that technical analysis is like a good set of maps. Think of the exchange as a hostile territory. Imagine also that you got lost there and it is getting dark. Miraculously you have the set of maps with you. But what map corresponds to where you are? It is not easy to determine. Only when morning comes, will you be able to determine your position. In our case the benefit of the hindsight equates with the onset of the next day. Maps are maps, they are not the territory. Thus technical analysis will peg out the lay of the land, hitherto unknown , to some notional concept that will be engendered in your mind with the help of technical analysis tools. You will create your map. Will it be the territory, though? No, no, no… To be a good map- builder, you have to travel extensively , you have to know the land first-hand , understand what tools to employ to draw first-class map in the given case. But has one ever seen the whole of the land? Nobody of us can, even the most experienced, even the most maturated trader. Information a stock graph provides is not sufficient. Therefore, rather than expecting to have a good map, you end up with gerry-built abstraction.

But others may retort that it works. They have built their own technical mechanical systems, and seen them work and disgorge profits. May be … After all, the black box with no technical system inside, will yield you 50% chance of success. Their systems, with luck, may be 60-70 per cent accurate. Not a considerable attainment that.
The technical analysis might really work. But it hardly works per se. Would you like the idea that it works because the map itself becomes a reality? I believe that it is what actually happens. The usefulness of technical analysis is directly proportionate to how many people entrust their judgment to rely on it. That is called the positive feedback. If people invent the rules of a game and them follow them, then, sure enough, the game will turn where the rules lead it to. If many traders heed the calls of technical indicators and take account of their signals, then the market will move to were those technical indicators “predict” it to go. For that reason, those indicators are most predictive, that are most widely used (MACD, STOCH, RSI , Bollinger bands and some others) .
Why this researcher values the technical analysis then? Map, however imperfect, is better than no map at all. If the map is beautifully illustrated it becomes yet more appriciable. It is for illustrative purposes that the technical analysis is at its most valuable. Especially such strategies like candlesticks analysis, which laconically and elaborately illustrate tensions in the tug-of –the-war between buyers and sellers that the market encounters –do not overlook that skill.
If we assume that technical analysis predicts anything, than the more information we use the better. For that reason combine different indicators together, but remember their weights that are proportionate to their popularity . Think of the balance of opinion they produce. There is no such a thing as the ultimate indicator. When you use oscillators, think of applying those ones that combine within their framework both data and volume information ( OBV, A/D, OSC Chaikin etc) . Do not skip those if you meet them in your technical analysis book. Volume information is often the key, since volumes are market-drivers. The more liquid the market , the better. When you actually start doing trades, do so with only well-known shares.
To sum it up, technical analysis might be helpful. It is not panacea. It should be always used, but only in conjunction with other means of analysis (fundamental analysis) to which we move over presently.
Fundamental analysis forms the anchor base…
When one hears about the fundamental analysis of shares, one is tempted to believe that financial ratios, balance- sheets and cash-flow statements are implied. This is precisely the notion contained in various state-approved licensing examinations. Accounting and financial analysis is important and wide-ranging thing often met in various sources of business information. But one can surely make do without it on initial stages of their trading experience.

Firstly, balance sheets etc. are revealed only on a quarterly basis, and do not change in between. It is the expectation about the future performance of a company (and consequently projections and speculations about its next financial documentation) that drives the markets in the meantime. And the average of all expectations of market participants is (usually) reflected in a market price.

Secondly, when expected (and unexpected) information hits the markets, be sure that you will almost never be the first to get it. Other market participants (banks, investment funds) will accommodate it instead and become the first-movers. Therefore, it follows that the best strategy, especially for beginners, is simply to follow the market wherever it goes (that, in turn, is often called the “trend is your friend” approach). Being in the wake often helps, for market forgives any mistake but one that concerns your choice of direction.
...but all sorts of news matter
One aspect of fundamental analysis is simply the balance of news that break everyday and affect the equlibrium between demand and supply on the market in a major way. All kinds of news count, be they political, economic, especially if you happen to work on emerging markets that are , of right, purely speculative, that is, prices of different shares floating on them move in unison without distinct separation between the sectors.

Being in touch with what is going on not only within your chosen sector in which you invest, but with the whole market and political trends in general might, therefore, prove the essential skill.

Tracking how your shares and the market in general react to different occurrences, even seemingly unconnected, is a rewarding and often surprising experience. Follow the behavior of the market and analyze it even before you embark on your first trade. Couple of days will be enough to get the initial feedback between your prognostications and how events actually pan out .It is important to develop this kind of knack, which is mostly based on inner intuition .

So first task in hand is to find reasonably reliable sources of information on the Internet that provide comprehensive and up-to-date coverage of business news. Whenever you watch TV, always try to reflect on the information you receive within the context of how it is going to impact on the market of your choice. But when you hear overtly upbeat or downbeat speculations be cautious, rely only on the hard facts. If the market seems to rely on those speculations, however, do not ignore them. As a rule of thumb, market is generally more effective (knows more) than you do. Trust it. But when the behavior you observe becomes too complicated, stay out of the game!
It is but surprising to see how often market analysts cite historical precedents of how prices moved in the past as the ground for their future forecasts, often even in technical sense. Some even opine that to be the great trader you should be a great price historian. Studying historic price movements years in the past may be interesting in its own right, but to infer from that information what expects one in the future is misleading. Should you become over-zealous in technical analysis, think of that.
Opening the account.
Having mastered the fundamentals of technical analysis and basic understanding of how markets react to news (this will take you approx. about a month or two providing that you stretch your mind and imagination fully and truly and use up all free time available. ), open your real account. Ask for authoritative opinion which Internet –trading platform in your country is most informative. Do not opt for easy-to-use service providers or brokers. It is of vast importance to choose proper platform. Remember that once you take your choice, you are virtually stuck with it for the time to come.
Open a marginal account if your broker (bank) permits you. If your trading account is marginal, it means that you not only invest your own money, but you can also borrow funds from the broker. In some countries the proportion (“leverage&#8221 of funds which you can borrow from your broker to the money at your disposal deposited to your investing account is 2 -3 , which means that twice or thrice the initial deposit value is available for your investments!
This type of account will allow you to make large relative gains (and incur proportionately higher losses), it will also provide the possibility for ‘short sales”, that is, you will be able to sell stocks even if you do not initially own them!
Do not invest all your trading capital first! Say you apportion 10000$ for investment in shares. Deposit only a fraction of this sum on your account (e.g. 1000$). That will make you comfortable on first stages of your market experience. Also open a demo –account with your Internet-system, so that you can easily experiment with different screen buttons and various types of orders. Only when you feel that you are already finding your feet successfully, deposit the remainder.
Concentrate only on a couple of most popular companies initially all belonging to industries you feel you understand, so that you may have the benefit of a time in learning how financial statements work, what different financial ratios mean and capitalize on portfolio theories and risk-management. Profit is not your goal on this stage! Even it would be good if you were to pick up some shares with lack-lustre performance (though liquid and popular!).

Should you keep to this strategy, year to the day you start, it is to be hoped, you will become a person who knows what the trading is about. Odds are that you even may become the successful trader. You will definitely earn something if you approach the market in the time of boom. But it is by your performance in lean years or periods ,when market is volatile or uncertain in its direction, that you may judge what your skill is really worth.
What is the contribution of different factors to your success?
Elucidation of that question might help you to work out your learning rationale, so this researcher thinks it necessary to capitalize on it. It is hard to trace your success to a single decisive component, whole multitude of factors are engaged in their subtle interplay. But, roughly, researchers of the subject (V. Tvardovsky , S. Parshikov; Secreti Birshevoi Torgovli , Alpina Publishers Moscow 2003 p.458) point out to the following picture:
1. Correctly chosen trading strategy and suitable trading plan account for 20% of success
2. Reasonable risk-management – 30%
3. Patience, self-discipline, adherence to the plan- 15%
4. The skill to be in the right place at the right time – 15%
5. Luck- 20%.
Some comments:
Trading strategy means that you should form in your mind ideas of where you expect market to move. Little wonder than that you trade in that direction. Even if your strategy is short-term, figure in your long-term evaluations. However if the real situation develops not in accordance with your plan, step out of your position voluntarily, or let your properly designed stop-loss order (the major instrument of risk-management, which is simply a kind of order which lies torpid if the situation is favorable to you, or closes your initial position when market is adverse to your plans and designs. A trader himself sets up this latent orders) do it for you unhampered.

Risk-management is the set of rules, which stipulate how to limit market risks and potential losses from them and explain the way to achieve a trade-off between potential gains and losses. This is, as we see, the most important single contribution to success. It is your duty to know and understand those rules when you trade. But some of those rules are a bit too absolutist. Some even might be ignored. But never let those rules out of mind.

As might be observed from the recapitulation above, Luck itself is too insignificant a contribution to be your guiding star. It is too fickle, ephemeral and capricious. Always utilize your knowledge and understanding to the best of your ability, only then will it be translated via intuition into luck.
Omit one of the factors above from your strategies and all your trading becomes the mugs’ game, a casino of sorts. Not the thing for a reasonable person to take up in hand.
Cutting the long story short…
One day you may make profits, another day will herald losses. Both things are similarly agreeable. It is out of our losses that experience is extricated in the first place. And experience is always useful even in the sunshine. No man can forestall the market. Not a greatest mind or system will avail. Sir Isaac Newton once noted that he can predict the precise position of planets billion years from now, but is unable to tell where prices would move next under the influence of the shouting mob.
Reasonable profit (being the profit comparable with the performance of a market index , like Nasdaq or Dow-Jones, that illustrate market behavior in general) out of the stock market is the wholesome expectation. Expecting something better when you trade, like potential returns of 700000% mentioned above, is close to insanity. Conservative portfolio structure coupled with proper stop-loss ordering and risk-management is the key to success.

Oops! You've put the conversation in the entry and the entry in the conversation.

First thing: I would advise you (unless you're prepared for spam) to take out your email addresss, of put it as "myname at address dot domain" rather than "[email protected]" which will be picked up by a roving bot.

I think the author has left the building - back to entry?

Hmmm?

Interesting subject - I tried to find anything related to the stock market or stock trading the other day and didn't find anything appropriate.

The entry is promising but rather unstructured, some headers would greatly improve the whole thing. In its current state it is a case of 'information overload' which makes it rather difficult to follow. Also, some of the mentioned terms (buzzwords) would have to be explained to make it more accessible for stock market dummies like me.

Interesting though, an improved GuideML-version of the entry is available at A2178669, see the conversation at the bottom of the entry, but Gardener hasn't adopted this version yet.

I'm sorry for sounding this negative, but the entry as it is, in my opinion, is not ready for PR. Since the author seems to have left the building, I'd recommend moving it to the Flea Market eventually.

SchrEck Inc.

Given the interest that SchrEck has expressed (not that I take the as any indication that you would pick it up), I propose a move to the Flea Market.


Geggs

I second that

*looks pointedly in SchrEck's direction*

Are you ready then?

Me?

I think I'll have a second look at it once it sits in the flea market.

Was this one going somewhere?

I have not left the building, as you say! I indeed am very respectfull of our galaxy. but I hardly have the time to improve upon my contributions. I have been making up an entry about Hurgada, Egypt. I got off with the promising start in February and did 2/3 of it. But then hands stretch to leaven cakes and honey in the first place , and other matters claimed my imidiate attention. And this entry is as it has been left off- still in the works.( wry smile)