Because you are here reading this on our website I will assume you understand the basics about how and where to trade shares...
So for the purpose of this article I will go into a couple of basic ideas which are used widely by investors to pick individual stocks or sectors for trading and some simple chart ideas to get you looking at price action on your favoured picks.
Trading With The Trend
Firstly, it's a well-known fact that to profit from a movement in a share price you need to be investing in a market that is moving upwards (unless you are short selling of course!). If you are new to all of this it's essential to understand when the sector that your potential investment belongs to is trending upwards. Buying into a company whose sector is not in favour, well, it's like swimming against the tide. You may make a move forward if your analysis was correct, but the tide will sooner or later sweep you back to shore again.
At this point you need to look at what drives the sector the company is involved in. You may be looking to invest in oil exploration companies or shares of mining companies. If this is the case take a look at the price of oil or the price of gold, is it going up? Sideways? Down? Zoom out on a 6 month chart and see if there is a trend. If you are not sure, overlay a 50 and 100 period moving average. If the price is above the indicators and looks like it's making new highs then chances are it's trending up. As the price of oil hugely influences shares in this sector it's a good bet that share price of companies who have solid accounts and prospects will benefit too.
The same principle can be applied to most sectors. Maybe you are looking to invest in a company who imports goods or stock from the USA. Check the trend on the US Dollar. If the price of importing is getting cheaper the share price of the company could well enjoy a good run.
After analysing the driving force of a company or sector you need to check on the sector itself. Using the same idea as above you can find a chart for the sector index. See if the sector has already made significant moves, maybe it's already had a prolonged strong run and is due a correction. In this case it may be best to wait. Possibly you can see signs that a sector is about to "breakout". You may see a new high being made above the highs of the last 6 months or year. Once you have identified a sector that looks like it's moving in a positive direction you need to analyse the companies within it. I will leave fundamental analysis for another article, but at this point you need to find some strong companies with solid fundamentals.
So you have identified your target companies to buy shares in. You have been monitoring the sector and driving forces behind it. You can see a clear picture of where it should be heading. Right, monitor the charts over a 6 to 12 month period and make a note of the current support and resistance areas. This will be the high and low areas where it has touched at least twice and turned away from. See the chart below for an example of support and resistance.
The Entry Method
When the share prices of any companies break free above the resistance, or turn strongly from a support it could well be the time to trade. There are a few ideas for entering a trade using candle stick patterns which are popular. Take a look into inside or outside day breakouts. An inside day is when the range from high to low of the current day does not exceed the previous day high and low. (See example below). This is usually caused by uncertainty, a period of indecision on where to go next. When these types of patterns breakout to the upside they can often be the precursor to a new trending move.
Active traders use these and other chart patterns to refine their entries, and also to limit their risk. For instance if you buy after a turn near a support, and use an entry signal often traders would place a stop loss below the support just in case of unexpected falls. This will protect most of their capital. In this trading game you never know what news is around the corner, expect the unexpected and prepare for it as sooner or later you will experience this if you buy shares!..
As always only trade with money you can afford to lose, always have a plan for entering and exiting a trade and always, always paper trade your ideas first for a while to make sure you are confident your strategy works.
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