Chapter 1

Introduction to Stock Trading

The stock market is an ever changing unit. Every day we are presented with unique scenarios and never are two days exactly identical. No two people are exactly identical but we all have something in common with someone else. We act out of habit, meaning that we repeat our behaviors. These habits are also reflected in stock movement since stock movement is a manifestation of people's ideas and attitudes.

New traders frequently lose money which causes them to lose confidence as losses accumulate. Emotions play a large part in the behavior of a new trader. Fear and greed can cause you to stay in trades too long and watch gains turn into losses, as well as risking more than you can afford to lose. Trading on emotion is a trait that must be broken if you are to succeed.

There are two types of traders; fundamental traders and technical traders. Let's examine them:

Fundamental Analysis

This is a trader who studies the factors that affect the well being of the economy, industry sector and individual companies. Fundamental analysis may include an expectation of the direction of a particular company, based on global economics, country economics and company reports that outline an expectation of the future of the company. As well, news plays a major role in this analysis. What are the analysts saying about the firm? How healthy are their order books? Is there growth in the profit and loss statements? What are the earnings per share? Is there a seasonal trend in the historical price of their stock? Finding a good stock takes considerable work but it's hard to not recognize the success of fundamental traders, such as Warren Buffet.

Technical Analysis

A simple way to describe a technical trader is a person who sits on a bench outside a store and watches what people are buying and then goes in and buys the same item as the majority of shoppers, whereas a fundamental buyer would study the performance record of the number of items that he may be considering before making a purchase.

Technical trading is a trader, attempting to identify an ideal entry and exit of a particular stock. There are numerous technical indicators that can be used to assist with this endeavor. Some of the more commonly used technical indicators are moving averages, MacD, stochastics and volume. We'll discuss these in greater detail in Chapter 3.