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Sunday, 20 July 2008

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Trading Basics: Why Trade?

Looking at it from the outside-in, day trading can seem intimidating. Day trading has paved the road to riches for many but you wouldn't know where to start. Even if you did, day trading is for someone else - not for you. Day trading is intimidating, and rightly so, but you probably have many of the misconceptions that those new to trading typically have. In fact, many of these misconceptions might be keeping you from day trading for the wrong reasons. In any case, those who decide to day trade or swing trade and those who decide not to inevitably asked themselves the same question: "Why Trade?"

Trading High Priced Stocks

Many people have a hard time sticking to their stop-loss on stocks priced above the $60 to $70 range. These stocks can suddenly move 25 cents or more in a few seconds, triggering and speeding beyond the stop-loss.
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Trading in Partnership

Trading together with a friend can have its advantages. If one of you has more experience and the other more money, you can help your friend through your experience and he can help with margins. Together, you can trade larger size and perhaps make more profits. However, unless you both agree to the same line of action and what the possible contingencies might be, it is essential that you decide which of you is to execute the trades. It is more difficult reaching trading decisions together than on your own.

Many investors fail to use a Stop Loss Order to protect themselves in case they end up buying a stock at the wrong time. In his book "How to Make Money in Stocks" William O'Neil states even the most successful investors maybe wrong about 50% of the time when choosing stocks to invest in. The key is to cut your losses early when a stock fails to follow through to the upside and minimize your losses. However many investors fail to do so and allow a small loss to turn into a much bigger one by not using a proper Stop Loss Order.

There are several Psychological Market Indicators investors can use to help them determine when a Market Bottom or Top is nearing. One of the more important ones is the Bullish-Bearish Indicator which shows the % of Bullish and Bearish Investment Advisors. This data is available from Investors Intelligence and is also published by Investors Business Daily as well.
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