3 Keys to Flawless Execution
Thursday, August 20, 2009
Monday, October 1, 2007
Stock Trading - An Overview
Introduction
So many people have asked me, “What do I need to do to trade stocks in Kenya or here in the United States.” While I do not claim to be the resident expert, I have been trading long enough to narrow this answer to four main phases: READ, PLAN, FUND, TRADE.
Phase 1: READ
In my opinion, this is the first place to start. In addition, throughout your stock trading career, you will need to come back to this phase repeatedly. Read everything you can about stock trading. Start with the book Stock Investing for Dummies by Paul Mladjenovic. I still reference this book many times. This book provides a great overview of the Stock world.
Phase 2: PLAN
This is probably the most important phase. There is the old adage that says “if you fail to plan, you plan to fail”. This means that you need a trading plan. Think of this as your business plan (unless you are treating this as a hobby, then you should not even worry about following these phases). Your trading plan should include answers to the following:
What is my goal for trading stocks? Knowing this helps you set clear expectations. For example your goal could be to make a 15% return monthly on trading; or it could be greater than that – to make xxxx amount of money through trading in xxx amount of time. Whatever your goal is, write it down. Remember a goal needs to be SMART – Specific, Measurable, Attainable, Relevant, and Timebound
What type of Stock Investor am i?. In other words, am I a day trader, a short-term trader, or a long-term investor.. To understand what type of investor you are, you need to think about your appetite for risk. In other words, how much money are you willing to lose? Another way to think about the type of investor you are, is considering whether you are aggressive, prudent or speculative. Aggressive traders want short-term gain. This comes with great risk. Prudent Investors want long-term gain. This comes with less risk. Speculative treat stock trading as a hobby!
What is my trading Strategy? Each one of the categories mentioned above require a different strategy. Your trading strategy will include a determination of three things:
- When to buy
- What to buy
- When to sell
This is involves knowing your entry and exit strategy, the frequency of your trades, and a systematic process to review each stock before you trade it.
Note: Traders will lean toward the technicals while Investors will lean toward fundamentals. An understanding of both is important.
Over time, you may need to review and update your trading plan. For example, once you know what strategies work for you at different times (bull and bear, seasonal, monthly etc), you will need to incorporate them in your trading plan. Think of it as a “breathing, living” document
You may also need to test different strategies before you use them. Because you do not want to test these strategies using your own money, consider opening a paper trading account that allows you to use paper money.
Phase 3: FUND
To trade you will need to fund an account. Determine how much money you want to start with. Remember that stock investment is a risk, so do not use your school fees, rent money, or car note in the hopes of making money quickly. Do not use all your savings either. People lose money easily and quickly in the stock market. In addition, decide whether you want to use an online broker or a regular phone broker. The phone broker is more expensive. Online brokers are great because you can fund your account anytime and trade anytime for a minimal fee. Examples of good brokerage firms are, Scottrade, E-Trade, TD Ameritrade, TradeKing etc. They charge commission fees between $7 and $20 per trade. Finally decide on how much money you will be transferring to your trade account and how often. I have seen people start with a little as $500 and build it to 5-10k.
Phase 4: TRADE
Finally, trade and make $$!. To find stocks to trade, use free stock screeners on websites like www.finance.yahoo.com. Also visit websites like
- www2.barchart.com (click on the signals tab to review a list of top 100stocks for that day)
- http://clickcharts.com (Provides a listing of free stock charts)
- finance.aol.com
- finance.google.com
Consider using a tool that does most of the work for you. There are plenty of tools out there. I recommend two of them – VectorVest (www.vectorvest.com) and Dreamtai (www.dreamtai.com). You will need to purchase either or both based on what you are trying to accomplish. Do not let these tools make the decisions for you. Do your research always!
Review the stocks based on your trade strategy criteria. Set up the trade through your brokerage company online, and monitor it the trade. I recommend you spend at least one to two hours daily reading, and reviewing your trades and any trades you intend to purchase. In addition, watch financial news programs like CNBC. Read and understand the news and ask – what does this mean for my trades?
Before you trade make sure you understand STOP-LIMIT orders and how to set them up for EACH trade. In addition, make sure you understand STOP-LOSS orders and how to set protective stops for EACH trade.
Note: This article reflects mainly US based stock trading. In addition, this article is for educational purposes only.
So many people have asked me, “What do I need to do to trade stocks in Kenya or here in the United States.” While I do not claim to be the resident expert, I have been trading long enough to narrow this answer to four main phases: READ, PLAN, FUND, TRADE.
Phase 1: READ
In my opinion, this is the first place to start. In addition, throughout your stock trading career, you will need to come back to this phase repeatedly. Read everything you can about stock trading. Start with the book Stock Investing for Dummies by Paul Mladjenovic. I still reference this book many times. This book provides a great overview of the Stock world.
Phase 2: PLAN
This is probably the most important phase. There is the old adage that says “if you fail to plan, you plan to fail”. This means that you need a trading plan. Think of this as your business plan (unless you are treating this as a hobby, then you should not even worry about following these phases). Your trading plan should include answers to the following:
What is my goal for trading stocks? Knowing this helps you set clear expectations. For example your goal could be to make a 15% return monthly on trading; or it could be greater than that – to make xxxx amount of money through trading in xxx amount of time. Whatever your goal is, write it down. Remember a goal needs to be SMART – Specific, Measurable, Attainable, Relevant, and Timebound
What type of Stock Investor am i?. In other words, am I a day trader, a short-term trader, or a long-term investor.. To understand what type of investor you are, you need to think about your appetite for risk. In other words, how much money are you willing to lose? Another way to think about the type of investor you are, is considering whether you are aggressive, prudent or speculative. Aggressive traders want short-term gain. This comes with great risk. Prudent Investors want long-term gain. This comes with less risk. Speculative treat stock trading as a hobby!
What is my trading Strategy? Each one of the categories mentioned above require a different strategy. Your trading strategy will include a determination of three things:
- When to buy
- What to buy
- When to sell
This is involves knowing your entry and exit strategy, the frequency of your trades, and a systematic process to review each stock before you trade it.
Note: Traders will lean toward the technicals while Investors will lean toward fundamentals. An understanding of both is important.
Over time, you may need to review and update your trading plan. For example, once you know what strategies work for you at different times (bull and bear, seasonal, monthly etc), you will need to incorporate them in your trading plan. Think of it as a “breathing, living” document
You may also need to test different strategies before you use them. Because you do not want to test these strategies using your own money, consider opening a paper trading account that allows you to use paper money.
Phase 3: FUND
To trade you will need to fund an account. Determine how much money you want to start with. Remember that stock investment is a risk, so do not use your school fees, rent money, or car note in the hopes of making money quickly. Do not use all your savings either. People lose money easily and quickly in the stock market. In addition, decide whether you want to use an online broker or a regular phone broker. The phone broker is more expensive. Online brokers are great because you can fund your account anytime and trade anytime for a minimal fee. Examples of good brokerage firms are, Scottrade, E-Trade, TD Ameritrade, TradeKing etc. They charge commission fees between $7 and $20 per trade. Finally decide on how much money you will be transferring to your trade account and how often. I have seen people start with a little as $500 and build it to 5-10k.
Phase 4: TRADE
Finally, trade and make $$!. To find stocks to trade, use free stock screeners on websites like www.finance.yahoo.com. Also visit websites like
- www2.barchart.com (click on the signals tab to review a list of top 100stocks for that day)
- http://clickcharts.com (Provides a listing of free stock charts)
- finance.aol.com
- finance.google.com
Consider using a tool that does most of the work for you. There are plenty of tools out there. I recommend two of them – VectorVest (www.vectorvest.com) and Dreamtai (www.dreamtai.com). You will need to purchase either or both based on what you are trying to accomplish. Do not let these tools make the decisions for you. Do your research always!
Review the stocks based on your trade strategy criteria. Set up the trade through your brokerage company online, and monitor it the trade. I recommend you spend at least one to two hours daily reading, and reviewing your trades and any trades you intend to purchase. In addition, watch financial news programs like CNBC. Read and understand the news and ask – what does this mean for my trades?
Before you trade make sure you understand STOP-LIMIT orders and how to set them up for EACH trade. In addition, make sure you understand STOP-LOSS orders and how to set protective stops for EACH trade.
Note: This article reflects mainly US based stock trading. In addition, this article is for educational purposes only.
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