No matter which stock trading strategy you read about or try, they all share one fundamental principal, that is to buy low and sell high. Sounds simple enough, but then why do some 95% of traders manage to get in and out of the market at the wrong time, over and over and over again?
What over-powering force is in place which steers the 95% to do this? The answer is human nature and the counter-intuitive manner in which the stock market operates.
The 5% of traders who consistently make money in the stock market do so by buying when the masses are selling, and selling when the masses are buying.
They do this by following a dozen or so strategies, some simple, some more complicated. It is not in the scope of this article to go into each and every strategy, but here's one anyone can use.
The links at the end of this article point to the web page where you can see this strategy in the form of charts and graphs which make it much easier to understand. Take a look if you're finding it difficult to picture it.
The Ten Steps Strategy:
1. Study the 12 month charts of several reasonably well known companies and pick out stocks that have been in a steady UPWARD trend throughout the period. There are always plenty of them, even in a falling market.
No stock is ever a sure thing, but give yourself a head start by choosing one which is going in the right direction! Fundamentals don't mean anything if the price of your chosen stock is trending downwards. Don't care what the company is or what it does. This is irrelevant, you are just here to make money, period.
2. Check out the trading volumes and eliminate any which lack decent liquidity.
Avoid stocks with not much liquidity (not a lot of buyers/sellers) as you need to be able to get in and out easily and without effecting the price yourself.
3. Study the 3 month chart and check the recent levels of resistance. These are points where the stock price has peaked and then pulled back, before breaking new heights again.
4. Place a mental note to buy at a price just above the most recent top. Note you are not actually buying at this point, just making a mental note to buy when it hits this price.
The stock will need to reverse upwards again and 'break through' that last resistance level to effectively 'buy you in'.
If the stock price does not reverse but instead further drops away, simply lower your 'mental buy order' to just above the resistance levels going down and wait for the stock to turn back upwards again.
The great part is the more it drops the better as you have still not bought in.
If it is a well known company and there's temporary bad news surrounding it (anything except impending closure) you can be sure this stock will eventually bounce back and catch up with (or even temporarily over-take) its long term trend.
When it does it will catch up quickly, over a few weeks perhaps. Follow the next steps and you will be sitting on it all the way up to next top. Gains as much as 30% are common.
5. When the stock price eventually reverses direction back up and passes up through your buy order, immediately buy at market price.
6. Now set your stop loss. Study the last couple of months of the chart and check the rising levels of support. These are points where the stock has resumed its upward direction following a pull back.
7. Place a 'note to sell' at a price just below a recent support level. Not too close but not more than 5-8% below your buying price. Your sell order is now your stop-loss.
I cannot stress more - you MUST use a stop loss. Your stop loss will protect your capital if the stock unexpectedly reverses down again. You can always get back in later when it recovers from a very deep pull back (and make even more money in the process).
8. As the stock price movies up, but as soon as reasonably possible, move your stop loss (sell order) up to your buying price. Your stop loss is now your break even. Don't do this too soon as the stock price may possibly test the support level above your stop loss before heading up again. Give it a few days to do that if it's going to.
9. As the stock price continues up, keep trailing your sell order up with it to just below the support levels going up.
10. When the stock price reverses direction and passes down through your sell order, immediately sell at market price. Your sell order is now your stop gain.
On a final note, one of the greatest obstacles to success will likely be you. One of the hardest things to do is to actually sell when your stop is triggered. There's always the voice in the back of your head telling you to hold on a bit longer if the price moves against you. This could be the death nell of your trading because if the price continues to fall it will erode your trading capital.
To counteract this danger you should try to automate many of these processes. Set your stops and if the stop is triggered you can find out why afterwards.