There is always a degree of inefficiency in the stock market. Traders seek to anticipate price changes and by their trades create changes. A herd mentality often accompanies but bull and bear markets. Smart traders buy and sell in such a way as to make money trading stocks. Just what does a stock trader do to derive an income from the markets? Here are the ABCs of stock trading, the basics that help traders limit risk while searching for profits.
Fundamentals Ultimately Determine Value
The basic price of a stock is determined by how much money a company makes after all expenses and it has to do with expectation of value. In other words will the company be able to make money and increase how much money it makes year by year? This later quality is called intrinsic value. There are companies that reliably make the same sort of money year after year with the same slow and steady increase in their income streams. These stocks typically have very stable prices. Then there are stocks like biotech startups that are not making at money but have potential cancer cures in the research pipeline. Since fundamentals ultimately determine value and one stock is very stable so is its price. The other stock will fluctuate as news of its progress developing a new product surfaces. The first of our ABC of stock trading is to learn how to determine how to calculate intrinsic stock value as a base for just how much a stock should be worth.
Seeing the Future
There are small companies that few if any analysts follow. Thus these companies often surprise the market when they post their quarterly profits. The second of our ABCs of stock trading is to learn to seek out stocks that are not commonly followed by most other traders. When there is good news in the pipeline a trader can buy such a stock at a low price and sell when good news drives the stock up. This approach takes a little research but can be a key to successful stock trading.
All in the Patterns
Long ago in Japan when there were still Samurai there were men who traded rice in the rice markets. Smart traders charted the prices of rice day by day, week by week, month by month and year by year. It became clear that certain price patterns repeated themselves. It also became clear that it was possible to simply consult the most recent trading patterns and predict where prices would go next. This was possible without even thinking about fundamental factors that drove rice prices. This approach became known as Japanese Candlestick trading. It is one of the early forms of technical analysis and is used to day in trading stocks, commodities and currencies. This is the third of our ABCs of stock trading. Many traders simply day trade stocks using statistical pattern analysis. They use pattern analysis to determine whether to buy and when to sell. They extract small profits from the market as it stutters up and down throughout the day.
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