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Stock Trading for Beginners

The below guide to online stock trading for beginners will walk you through selecting a discount broker, how to research stocks, and introduction to technical analysis.

Although there are many people who make money from stocks, there are also a lot of people who lose all their money. It is helpful to do your research before you start trading.

Best Stock Brokers

Choosing a stockbroker is one of the first and most important decisions you'll make as an investor. Every trader has a different investment style so it is necessary that you do your research to find the best online broker for you. When choosing an online broker, you will need to consider the commission per trade.

You will want to find a low commission for the securities that you trade the most. For example, if you mostly trade options, you may want to find a broker with the lowest option fees. If you only trade stocks, you probably want to find a broker with the lowest commission per trade for stocks. Some brokers also charge a fee to buy mutual funds and index funds.

Often times, you'll find that brokers that have the lowest commissions on stocks usually don't offer any commission-free ETFs, and vice versa. This is why it is important to know which investments you plan on purchasing most to help you determine the most cost-effective broker.

There are other account fees to watch out for, including annual fees, inactivity fees, fees for research and advanced trading platform.

Some active traders may want to look for a broker that offers an advanced trading platform, analysis tools, and relevant research and data. There are plenty of online brokers that offer these tools and research for free.

Some of the most popular online brokers include Ally, E-Trade, Scottrade, Fidelity, and TD Ameritrade.

There is no single best online broker for everyone. What works for one trader may not work for another due to different investment styles.

How to Research Stocks

Once you pick a stock broker, it is time to learn how to research stocks. We recommend these top 10 trading books to get started. There are two main methods that traders use to choose stocks: fundamental analysis and technical analysis. We focus mostly on technical analysis but let's talk about both methods.

Fundamental Analysis

Traders who use fundamental analysis look at a company's financial statements, public statements, yearly and quarterly earnings, and news releases in an attempt to measure its intrinsic value. They also study macroeconomic factors such as overall economy and microeconomic factors like company management.

Fundamental analysts look at anything that affect's a security's value to see if it is undervalued or overvalued. Their goal is to find fundamentally strong or weak companies from key qualitative and quantitative factors and economic indicators. They go long on the strong companies and short the ones that are weak.

Technical Analysis

Traders who use technical analysis look at stock charts and analyze trading activity such as price movements and volume. Unlike a fundamental analysts whose goal is to determine a security's intrinsic value, a technical analyst believe that past trading activity and chart patterns are better indicators of a security's future price movement.

Technicians believe that the market discounts everything and that all information, whether past or current, is already reflected in the security's price. Thus, they study stock charts and use technical indicators to find patterns and the best trade entry and exit points.

Technical analysis can be applied to any security, such as stocks, futures and commodities, fixed-income securities, forex, and more. There are different types of stock charts but the most popular ones are bar chart, line chart and candlestick charts.

Read more to learn how to read stock charts.

Top Technical Indicators

Technical indicators are used to analyze price movements in an attempt to predict future price movements. They are useful for identify good entry and exit points.

There are two main types of indicators: leading indicators and lagging indicators.

Leading indicators precede price movements and are used to predict future price movements. They are most helpful when there are sideways or non-trending trading ranges because they can identify breakouts or breakdowns. A few of the popular leading indicators include the Relative Strength Index and Stochastics Oscillator.

Lagging indicators follow price movements and are more useful during trending periods. They are used to confirm whether a trend is still in place or if it is starting to weaken. Common lagging indicators include MACD, and Bollinger Bands.

Technical indicators are used to form buy and sell signals through crossovers and divergence. Crossovers appear when the indicator passes through an important level or a moving average of the indicator. It signals that the trend might be changing. Divergences appear when the price trend is moving in the opposite direction of the indicator. This signals that the price trend may be weakening as the momentum is changing.

What is Swing Trading?

A lot of traders using technical analysis like to swing trade. Swing trading is a short term method used for trading securities. Unlike day trading where positions typically last only one day, swing trading positions can last from anywhere between two days to three weeks.

Swing traders use technical analysis and study chart patterns to make predictions on future price movements. They disregard fundamental analysis and aren't interested in the intrinsic value of stocks. Instead, they look for stocks with short-term momentum that can allow them to capture gains in just a few days.

Some swing trading strategies include trading along with the trend, trading breakouts, and trading after a price gap. Another strategy that swing traders use is candlestick charts to find patterns. You can read more about swing trading strategies.

Candlestick Trading

Many technical analysts love to use candlesticks as part of their trading strategy. It is helpful to know how to read candlestick charts because they reveal many insights.

Candlestick charts show the open, high, low, and close prices. They have contrasting colors, which help traders make fast visual interpretations. Compared to traditional bar charts, candlesticks are visually appealing and reveal emotions surrounding a stock.

There are more than 100 candlesticks and candlestick patterns. Some of the top candlestick patterns include the doji, engulfing patterns, harami, hammer, inverted hammer, shooting star, hanging man, and dark cloud cover.

Tips for Trading Stocks

Below are tips for beginner traders.

Don't invest money you can't afford to lose - When you invest in the stock market, remember that there is always a chance that you can lose all of your money.

Make sure that the money is truly expendable and not needed to pay for your kid's college tuition or paying rent.

Don't be too eager to invest all of your money thinking that you will having gains.

Instead, invest what you can afford and once you have realized gains from your investments, you can reinvest those gains.

Research - Don't trade if you don't plan on doing any research. Stock trading should be treated like a part-time job.

Whether your method of trading is based on technical analysis or fundamental analysis, you can start by reading these top trading books.

It is also helpful to read the latest news and financial reports of the companies you want to invest in. If you don't have time to do research, you can consider investing in index funds instead.

Have a strategy - When looking for a stock to invest in, have a set of criteria to comply to and consider its risk and reward.

Schedule limit orders so that you do not get emotional.

Have a plan and stick with it.

Know why you are buying a particular stock, the expected return, and have an exit strategy.

Practice - Test a trading idea or method before using real money. You can paper trade and backtest to historical data.

If backtesting shows good results, you can execute the plan in real trading.

Set stop losses - A stop loss is a predetermined exit price. A stop loss limits the trader's exposure and helps to prevent you from becoming emotional.

Exiting all trades with a profit is unrealistic. Using a stop loss ensures that your losses and risk are limited.

Control your emotions - Don't get emotionally involved with any of your stocks. Short-term movements are often driven by speculations and emotions rather than logic.

It is important not to get affected by the market's emotions. You should have a good reason for buying a stock and establish the point at which you will exit your holdings.

Having an exit strategy before you enter the trade helps you execute that strategy unemotionally.

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