Trading for Beginners 

Trading used to be the purview of institutional and corporate entities that

had direct access to closed securities trading systems. Recent technical
advances have leveled the playing field, making securities trading much
more accessible to individuals. After the stock market crash of 2000, when
many lost large sums of money because professional advisors or mutual fund
managers didn’t protect their portfolio principal, investors chose one of two
options — getting out of the market altogether and seeking safety or finding
out more about how to manage their own portfolios. Many who came back
into the market ran from it again in late 2008 when the market saw its worst
year since the Great Depression.
The concept of buying and holding forever died after that 2000 stock crash; it
saw some revival from 2004 to 2007, but then suffered another death in 2008.
People are now looking for new ways to invest and trade. While investors still
practice careful portfolio balancing using a buy and hold strategy, they look
much more critically at what they are holding and are more likely to change
their holdings now than they were before the crash. Others have gotten out
of the stock market completely.
Still others have moved on to the world of trading. Many kinds of traders ply
their skills in the markets. The ones who like to take on the most risk and
want to trade as a full-time business look to day trading. They never hold
a position in a security overnight. Swing traders hold their positions a bit
longer, sometimes for a few days or even a few weeks.

Don’t get the wrong idea; trading in securities always carries risks. You

should never trade with money that you can’t risk losing. That means trading

with your children’s education savings isn’t a good idea. If you want to trade,

set aside a portion of your savings that isn’t earmarked for any specific use

and that you believe you can put at risk without ruining your lifestyle.

Obviously, we plan to show you ways to minimize risk, but we can’t promise

that you won’t take a loss. Even the most experienced traders, the ones who

put together the best trading systems, don’t have a crystal ball and periodically

get hit by a market shock and accompanying loss. By using the basics of

fundamental and technical analyses, we show you how to minimize your risk,

how to recognize when the market is ripe for a trade, when specific sectors

in the market are the right places to be, how to figure out which phases

economic and market cycles are in, and how to make the best use of all that

knowledge

Foolish Assumptions: 

We’ve made a number of assumptions about your basic knowledge and

stock-trading abilities. We assume that you’re not completely new to the

world of investing in stocks and that you’re familiar with the stock market

and its basic language. Although we review many key terms and phrases as

we explore the basics of trading, if everything you read sounds totally new

to you, you probably need to read a basic book on investing in stocks before

trying to move on to the more technical world of trading.

We also assume that you know how to operate a computer and use the

Internet. If you don’t have high-speed access to the Internet now, be sure you

do have it before trying to trade. Many of the resources we recommend in

this book are available online, but you’ll need high-speed access to be able to

work with many of these valuable tools.

Gathering Your Tools: 

Trading is a business, and just like any other business, you need to put

together a good set of tools to be successful. In Part I, we talk about the

basics of trading, introduce the markets and the exchanges, discuss various

alternatives for finding a broker and setting up your brokerage account, and

describe the minimum computer hardware and software necessities you

need to succeed as a trader. We also discuss your Internet needs and point

you to some good basic resources on the Internet that can help get you

started.

Fundamental Analysis:

Many traders don’t use fundamental analysis. They believe technical analysis

is the only thing you need to understand. We don’t agree. You can gather

plenty of valuable information about the economy, markets, sectors, and

individual stocks that can help you excel as a trader. We start you out with

the economy, the basics of the business cycle, sector rotation, and various

economic indicators, because they can help you make your calls. Next we

show you how to delve into financial statements to find the crucial information

you need to pick the companies whose stocks you want to trade. Finally, we

talk about analysts and what information you can get and use from them and

what you shouldn’t use. We also explain how you can listen in on analysts’

calls to get the most current information about a company and how executives

perceive their company numbers.

Technical Analysis:

You can’t even begin to think about trading if you don’t understand technical

analysis and how to build and read charts so you can pick entry and exit

points when buying and selling stocks. We take you step by step through

the process of building a chart, and we describe how to identify trends and

distinguish between transitions from one trend to another. In this part, you

find out how to recognize bull and bear patterns and how to differentiate

between a stock that is range bound and one that is trending. 

Developing Strategies for

When to Buy and Sell Stocks:

After finding out how to use the tools of fundamental and technical analyses,

you’re ready to develop strategies for your own trading. First you need to

explore good money discipline to avoid taking major losses and be around

to trade for another day. You also need to determine when to stay in a

position and when to trade out of it. You certainly want to take your profits

at the right time, but you also want to avoid standing idly by as a profit turns

into a loss. Next we talk about how you can gather key information through

fundamental analysis and then add the results of your technical analysis to

build an optimum trading strategy