How To Trade Stocks for Beginners

Most people are drawn to stock trading when they see headlines of the latest “hot” stock up 300%. While stock trading can be extremely rewarding, it still takes time to learn the “ropes” and treat it like a profession. Since I have never really done a stock trading for beginners post, I thought I would provide some steps on how to get started in trading.

Step 1 – Determine Your Trading Style

First off, there are many types of traders such as day traders, directional trend traders, income traders, ecetera. There are hundreds of methods and systems that people follow for their trading discipline and it can be overwhelming trying to figure it all out. I think the most important lesson starting out is to match your investing risk tolerance with your trading style.

I mean that if your personality can’t handle trading intraday moves and you don’t like watching your screens intraday during the market hours, then day trading or scalping is not for you. (Trending trading is probably a better fit). If you like the idea of limiting risk and trying to control your income each month then you might prefer option income trading(selling premium) rather than waiting for your stocks to move.

Determining your trading style will help with your time horizon for what you are trading. You don’t have to make trades every single trading day to be considered a “trader”. Directional traders can end up owning positions for years if the trend remains intact and some day traders can be in/out of the same stock 10 times in a single trading day.

Most beginners to stock trading will just start with trend trading or swing trading. I would highly recommend reading these two books 1 & 2. (Both books are highly respected and do a great job of explaining important stock trend trading concepts in understandable terms…..You can also check your local library for those books as they are very popular).

Step 2 – Stock Trading Charts

Now that you have figured out the trading style that you are comfortable with you need to gain at least a basic understanding of stock charts. There are lots of free stock chart sites and almost every online broker provides some type of stock charting program. It is important to learn the key fundamentals to charting so that you can have a way to analyze where a stock has been, where it could go, and get a basic picture of supply and demand levels for a stock. There are hundreds of stock patterns but there are a handful of patterns that tend to be more reliable. You can read my post about best stock chart patterns or see a good summary explanation of popular chart patterns at this site.

It is important to not get overwhelmed by chart reading as many people over complicate their charts and get distracted with endless indicators. Learn to focus on price and volume patterns and understanding support/resistance levels on a chart. Most indicators are based on price and volume so those are the keys to understanding charts. Using moving averages are also useful just to understand certain well-followed support levels. The most popular moving averages are 20day, 50day, and 200 day simple moving averages. For analyzing the market you can also reference my post that shows useful resources for evaluating the health of the overall stock market as most stocks will follow the direction of the overall market.

Step 3 – Find Stocks to Trade

Trading is all about following the trend in the market so that the odds are in your favor(the majority of stocks follow the overall stock market trend). Therefore, you want to find stock that are leading the market higher.

My favorite free resource for evaluating leading stocks is Finviz.com which quickly allows you to see the leading sectors in the market based on recent performance and then the leading stocks within those sectors. Within Finviz.com you can reference the homepage to see leading stock that day and also they have a screener you use to narrow down your stocks to follow(try the Top Gainers dropdown screen to be able to quickly see which stocks are breaking out. As mentioned a couple sentences ago, I like the Group screener on Finviz to see what the leading sectors are doing and then being able to see the leading stock within those sectors. You can also reference MSN Stock page for list of top rated stocks to build a watchlist or visit Investors Business Daily homepage everyday to see the leading stocks seeing strong moves that day(if you are a subscriber to IBD you can see all their top picks).

Understand that before every popular household name stock(Walmart/Apple/Microsoft) or recent biggest gainers(Bidu/Priceline) was known, they all started out as relatively unknown stocks at low prices. If you keep diligent with tracking which stocks were breaking out and have strong fundamentals then you will find these future big winners before they become well known big winners. (Again, I would reference the 2 books I mentioned above for teaching you proven techniques for finding winning stocks/stock patterns and how to trade them)

For swing traders or day traders or trend traders then you are more concerned with sticking with the momentum and letting the market tell you which stocks are worth trading. Once a stock has broken out within your watch list and a trend is in place, then you just follow the trend until the charts tell you otherwise.

Whatever trading style you choose to follow, the biggest lesson to learn is to follow the “elephants” or in other words, follow what the big institutional investors are doing. You want to be buying stocks breaking out on large volume. Big investors leave clues with what stocks they are buying or selling so if you stick to understanding price and volume you will have a focused group of stocks to follow and trade.

Step 4 – Implement your Trading Plan

Now that you have 1) Chosen your trading style/plan, 2) Learned to read charts(so that you know your enter/exit levels), and 3) Chosen your stocks to watch……You need to implement your plan.

Now you have a list of stock you are following with specific price levels that you would like to buy at. You check your watch list each day to see if any have triggered your buy levels and if so you enter the trade (Make sure to either start with very small positions or papertrade initially until you feel comfortable with you trading plan).

The best advice that almost every trader will say is to keep a trading journal where you document each trade so that you can keep track of why you bought each stock and know before entering the trade exactly where you will exit your trade. This is important to be able to learn from your past mistakes and to be able to have a defined trading plan in place. 

Make sure you have defined stoploss levels prior to entering any trade and allocate your trade size dependent on how much you are willing to lose on a specific position.

 If I missed something or you would like me to clarify something, please comment below and I will add to this post.

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