The Tools of the Stock Trader - dummies

The Tools of the Stock Trader

By Paul Mladjenovic

Successful trading as an investment technique requires lots of diligent attention. Because stocks can go all over the place, the trader uses various tools to determine entry and exit points.

Technical analysis for stock traders

The most common tool of short-term speculators and traders is technical analysis. Technical analysis looks at the recent price movements and volume of trading for particular securities and commodities. The price movements are depicted on charts, so “charting a security” is a common practice among those who use technical analysis.

The technical analyst uses some useful short-term indicators, including

  • Moving averages to gauge the general trend for a particular stock. Typical moving averages are the 10-day, 20-day, 50-day, and 200-day averages. Stocks that stay above these averages tend to be bullish, whereas stocks that keep falling below these averages tend to be bearish.

  • Relative Strength Indicators (RSI) to see whether a stock is considered oversold or overbought. A technical analyst sees an oversold stock as a buying opportunity and an overbought stock as a selling opportunity.

Technical analysis is a complex topic. Serious traders should do some extensive research on the topic.

Technical analysis can be remarkably useful over a period of a few weeks or months. However, it’s not that useful for long-term investing. You can use it to maximize or time an entry or exit point, but over the long haul, a company’s fundamentals are the primary drivers of the stock’s price. It’s no accident that most of the consistently successful investors in history use fundamental analysis and value investing.

Brokerage orders

Because trading in the market’s short-term gyrations can be a fast-moving activity, it pays to get proficient with brokerage orders and trading triggers to help you manage your trading portfolio and take advantage of the market’s swift moves.

The moment after a diligent trader buys a stock or an option, she’ll enter her next order very quickly — often even before the stock has made a major move.

For example, if she buys a stock for $50 at 10 a.m. on a weekday morning, she may enter a stop-loss order at, say, $45 at 11 a.m. and simultaneously put in a sell order at $60. That way she can limit the loss to $5 per share and maybe catch a $10 profit on the upside.

These moves are possible now due to the sophisticated technology that most brokers have on their websites. That’s just an example of what you can do with brokerage orders.

Advisory services

You don’t have to go it alone with your trading strategies because the world is filled with advisory services, newsletters, and websites that cater to the art and science of short-term trading. Some notable ones include Elliott Wave International and Roger Wiegand’s Trader Tracks. A monthly publication that covers the realm of trading is Futures Magazine.

Of course, you can do your own diligent research at the library and on the Internet.