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Cheat Sheet

Trading For Dummies

From Trading For Dummies, 3rd Edition by Michael Griffis, Lita Epstein

Trading in the stock market can be challenging and lucrative. To be a successful trader, you need to know how to identify and invest in bear and bull markets, and you need to know how to use market analysis tools to help develop your own trading system. And, with the embarrassment of riches available on the Internet, you need to know the Web sites that offer the most help.

How to Identify the Beginning of a Bull Market

If you’re into trading stocks, bonds, and other funds, being able to identify the signs of a bull market can help you plan your trading strategy for maximum benefit. Signs that the market is entering a phase of investor confidence are in the following list:

  • Bull markets begin before the economy starts to recover.

  • Interest rates are low.

  • Industrial production statistics are inching higher.

  • Technology and cyclical stocks are starting to rise.

  • Weekly chart of S&P 500 shows higher highs and higher lows; the MACD (Moving Average Convergence / Divergence) line is above the trigger line and rising.

  • Bullish percent index indicator shows bull alert or bull confirmation pattern.

How to Identify the Beginning of a Bear Market

As you trade stock on the market, you need to know when the market is taking a downward turn — becoming a bear market. The signs in the following list indicate a bear market is approaching, so adjust your trading strategy accordingly:

  • Bear markets typically begin before the economy starts to decline.

  • Interest rates are rising.

  • Industrial production is starting to fall.

  • Basic material stocks, energy stocks, and consumer staples are performing well.

  • Weekly chart of S&P 500 shows lower highs and lower lows; the MACD (Moving Average Convergence / Divergence) line is below the trigger line and falling.

  • Bullish percent index indicator shows bear alert or bear confirmation pattern.

How to Trade in a Bear Market

When the market is reflecting investor fear and uncertainty — is a bear market in other words — your trading strategy should focus on looking to sell or short fundamentally weak companies with the following characteristics:

  • With poor earnings or no earnings.

  • In a weak sector.

  • In a declining economy.

  • While the stock is approaching a technical sell signal on its bar chart and performing worse than the average stock with low relative strength.

How to Trade in a Bull Market

In a bull market, when investor confidence is high, the sound approach to trading is to look to buy fundamentally strong companies with the following characteristics:

  • With earnings that are growing faster than average.

  • In a strong sector.

  • In a growing economy.

  • While the stock is approaching a technical buy signal on its bar chart and performing better than the average stock with high relative strength.

How to Develop Your Own Trading System

To be a successful trader, you have to have good judgment and a solid trading system. Follow the steps in the following list to develop a system that works for you and that reflects your priorities and tolerances.

  1. Select system development tools.

  2. Gather historical data to test your system.

  3. Develop and test your system design.

  4. Identify system optimization pitfalls.

  5. Test with blind simulation.

  6. Account for slippage.

  7. Keep a trading journal.

  8. Frequently evaluate your trades.

How to Use Fundamental and Technical Analysis in Trading

As you develop and perfect your trading strategy, you need to make use of the analytic tools available to help you. Use the steps in the following list to use technical analysis tools to your benefit:

  1. Determine economic cycle position.

  2. Determine position within sector rotation.

  3. Decide which sectors are ascending.

  4. Determine leading stocks in the ascending sector.

  5. Evaluate the Fed position.

  6. Confirm economic cycle with index charts.

  7. Determine whether leading sectors are range bound or trending.

  8. Determine whether leading stocks are range bound or trending.

  9. Enter the trade only if the stop-loss point is nearby.

  10. Trade within your preferred time frame.

Trading Web Sites

As a trader, you make use of all sorts of tools, including those available on the Internet. The following list offers links to Web sites that offer general trading education and information, analysis of companies, and trading tools and advice. Use at your discretion!

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