How to Study the Stock Market?
The stock market is a complex financial entity with many forces at work. When you trade stocks on the market, you are competing with professional traders and institutions, many of whom have decades of experience. For this reason, it is necessary to study the stock market carefully before putting money to work in risky investments. Fortunately there are tools and concepts that can greatly enhance the learning curve. With focus and determination, anyone can study the stock market for ultimate success in their investing goals.
(Difficulty: Moderately Challenging)
- Open a simulated stock market investing account. Many brokers provide virtual trading accounts that behave exactly like a real account. There are also online games where traders compete with each other using virtual accounts. These accounts allow anyone to study and practice the techniques of trading without risking a penny.
- Create price charts for stocks of interest and analyze past behavior in each stock. Trading platforms provide professional stock charts, but websites also exist for this purpose. Use daily charts where each tick, dot or bar on the chart represents the closing price for a single day of trading.
- Analyze the stock charts for components of Dow Theory in action. The Dow Theory is a century-old concept for defining trending behavior. As prices fluctuate up and down, trends emerge if the up swings are stronger than the down swings. Look for a series of “higher highs and higher lows” or “lower highs and lower lows” on price charts. These are moments when stocks are trending and provide excellent trading opportunities.
- “Buy” stocks using your virtual trading account. In an uptrend, purchase stocks after they have declined from a recent high to form a new low that is higher than the prior low.
- “Sell” the stock in your virtual trading account if it fails to reverse from a decline and move toward a new high. Usually this will be when the stock forms a new lower low than the previous low, rather than a higher low. If this happens, the trend pattern is broken and tyou should no longer hold the stock.
- “Sell” all or some of your virtual stock position if it becomes profitable. Many traders will sell a portion of shares after some profit is achieved and hold the rest for greater profits ahead. However, if prices reverse, sell the entire position so the losses do not overwhelm any gains already realized.
- Buy and sell stocks in the virtual account until you are consistently profitable. Eventually other techniques will surface for you as you develop your own trading style. Do not put real money to work in the stock market until you have studied the charts and trading process thoroughly in this manner.