Protect your trading capital
The most important rule when trading stocks, or anything else, is to always cut your losses short. You are simply not going to be right on every trade you initiate. This is a hard lesson to learn, because it goes against human nature. If you don't keep every loss small, sooner or later, you will suffer some very large losses. Not only will they be devastating to your trading capital, but your psychological capital as well. A sound principle is to always sell a stock if it drops 10% below the purchase price. If you bought shares at 40 dollars, you would automatically sell them at 36 dollars, no matter what. Many elite traders will sell sooner. You can make a fortune in the stock market being right only half the time, but you must keep all losses small. This is a key element you must learn for stock market success.
Methods of analyzing a stock
Basically, there are two major ways to analyze a stock, fundamental analysis, and technical analysis. Traders have debated for a long time, the merits of each method. I have found the key is to properly incorporate both methods. This will help put the odds solidly in your favor. Successful trading is based on probabilities, and sound money management. You want to put as many factors as possible in your favor, before taking a position in the market.
Fundamental analysis is about using real data, such as sales numbers, to evaluate a stock. This analysis is the foundation you need when acquiring a stock. It tells you about the quality of a stock. One of the most important factors is consistent earnings improvement. This is the fuel that can really affect the price of a stock. You want stocks with an annual earnings per share growth rate of 30% or more. Learning how to properly analyze a stock's fundamentals is crucial to winning in the stock market.
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity. This includes price and volume. Basically, you are studying market movement, mostly with the use of charts. This allows you to check the supply and demand for a stock. I use daily charts for timing purposes, and weekly charts for a longer term perspective. A key part of technical analysis is learning to identify historically proven price patterns. This will dramatically improve your stock market results.
After you determine the general market is in an uptrend, the key to big profits is picking superior stocks. Choose stocks with strong earnings and sales growth. Look for stocks in leading industry groups. Make sure stocks have formed sound price patterns, and break through key resistance with heavy volume. Once you properly learn the stock market, you could make yourself a fortune.