What
is Stock?
The word stock simply
refers to a supply. In the financial market, stock refers to a
supply of money that a company has raised. This supply comes from
people who have given the company money in the hope that the company
will make their money grow.
Basics of Stock Trading:
Develop a winning strategy and trade often. A small daily profit can provide
a large annual return.
Trade only stocks with the highest growth probabilities.
Do not hold stocks when their probabilities of growth are close to the average
value. Switch to
more profitable stocks.
Be sure that expected return
is larger than the transaction cost.
Avoid risk as much as possible. Do not put all your trading capital in one
stock. Diversification is the only way to survive in the market.
Winning strategy is a strategy with the lowest risk/return ratio.
Basic trading strategy:
Every day after the market closing you perform
the market analysis to generate the list of potentially bullish stocks.
Before market closing on 1st day one should check the prices of all stocks
from the list and buy two stocks with maximal % price drop during day the first
day. This condition substantially increases the probability that the selected
stocks will be oversold in all important time frames.
During the next two days i.e. second and third day, one should hold the stocks.
At the market opening on the fourth day these stocks should be sold.
On analysis of this strategy and found
a high profitability using this method. An important part of this strategy
is dividing the trading capital between stocks.
Second and third days are the days of holding stocks which were bought on the
first day. If you do not buy other stocks during these days you will lose possible
profits. So as to be able to buy stocks every day the trading capital should
be divided into three equal parts. Every part of the capital should be used
to buy two stocks.
Low risk trading strategy:
This strategy is similar to the Basic Trading Strategy, but you have to buy
two stocks from the list with maximum price drop (in %) only if their prices
dropped more than 5% during the first day.
To reduce risk one should be very selective choosing stocks to buy. The simplest
idea is to buy stocks with some level of price drop during day the first day.
In the basic Trading Strategy one buys stocks with maximum price decline during
the first day. Sometimes the maximum price drop is not large. Usually this
is an indication of strong market growth during first day. You can avoid buying
stocks if they do not decline significantly.
Sell short trading strategy:
It is close to a negative image of the Basic Trading Strategy.You
sell short two stocks from the list of potentially bearish stocks with maximum
price rise (in %) at the market opening at the first day and buy back at the
closing at the third day. Criteria of selection of potentially bearish stocks
are stronger than criteria for potentially bullish stocks.
Combined trading
strategy:
This strategy is a combination of the Basic and Sell-Short Trading Strategies.
One can spend 50% of the trading capital to trade stocks using Basics Strategy
and 50% to trade stocks using Sell-Short Trading Strategy.
The Combined Strategy has lower risk and better risk/return ratio than other
strategies. However, one needs a larger trading capital to minimize the influence
of the brokerage commissions.
The two main strategies
in stocks or any other assets are
Buy cheap - sell high
Sell high - buy off cheap
To avoid any loss caused by your rush in market you should define some principles
of taking trading decisions. This will be your strategy.
There are two types
of factors, which affect price and your decisions as well.
Fundamental factors
Technical factors
Fundamental factors affect price in long and middle term periods. These factors
were reviewed in different economic theories related to Macroeconomics.
Technical factors can not be recognized as factors as well. But in short- term
period they can help you with definition of future moves of the market. |
