The way I like to trade stocks is very simple.
Stocks are probably the most simplistic of all the trading instruments out there. Others are just complicated by nature and I’m not going to go into those here. Mostly because I’m mainly a stock trader, and when you are just starting stocks are the easiest to get into and understand.
If you read other blogs and articles about how you must know technical analysis or you must know fundamental analysis. And the reality is you don’t NEED to know any of that. The bottom line is stock trading can be as simple or as complicated as you make it. And I find that so many people make it so much more complicated than it actually has to be.
Think about it like this, a stock price either moves up or it moves down. Simple as that.
There are arguments that the price can move sideways. But even if it moves sideways the price will still fluctuate up or down, even if it’s only pennies. It’s still up or down. All the analysis in the world simply tries to read if the stock will go up or down based on past performance. Again there are many arguments that it is much deeper than that, and it can be, but the basic simple bottom line is you’re trying to figure out whether or not the price of the stock will go up or down based on past performance.
It is so easy to get wrapped up in indicators that tell you because it did X in the past it’s more probable that it will Y in the future. It’s the same with knowing market cap size and what companies do during earnings that will most likely mean a certain end result in stock price.
But just remember nothing is foolproof and no one strategy is the only way to analyze stocks because every piece of analysis relies on a stock’s past performance, whether it’s through their past earnings and guidance based on past earnings to forecast future earnings. Or by going off of past price movement it’s all still based off of past performance, no one can tell the future so it’s all used to predict the future price movement up or down of a stock.
Now that I have beat that to death, there are some extras here you should know of, like why past performance is so important. For one stocks are cyclical. They always tend to repeat past trends. The reason for this is, human trends are cyclical therefore so is their buying habits on certain products. Yes, I understand that utility stocks are not cyclical by nature, but the environment in which they serve people from is. For instance, if we have a warmer winter than usual we will not use as much electricity or energy to heat homes causing less usage and less revenue for the company. So identifying past trends can be an aid in detecting new and upcoming trends.
A second reason why: if you know a company’s past and know that they are up and coming and are trending up while the company continues to grow along with it’s stock price, it’s most likely going to continue on that path and won’t end the trend abruptly. Though it’s growth will likely gradually slow, and you’ll be able to see that slowing and adjust position sizes accordingly.
A third reason is probability. By knowing what a stock has done in the past you can figure out what is most probable for the future. Like the example before, if a company has been steadily growing in the past year it’s more probable that the price will go up than it will go down. Now this isn’t on a day to day basis, but more so looking over the course of several days to weeks. Just because a stock may go down one day even though the overall trend is up, don’t let that dip in price fool you. There are several reasons for that to happen, which is why a trader can not go solely off of current pricing. A broader look at the past will tell you where a stock is most likely headed in the future. Not necessarily the next day but possibly weeks and months to come. That’s why I prefer to swing trade (hold stocks for more than 5 day up to a few months) it makes trading simpler and easier to grab an ongoing trend. While trading intraday (buying and selling within a day timeframe) makes that more difficult because like I said above, the price can go up or down with no reason just because of normal trade fluctuation. Looking at a bigger time frame makes stocks a little more predictable and simpler.
The main point I’m trying to make is, don’t get too wrapped up in indicators and different types of analysis. Because at the end of the day you are simply trying to make an educated guess on whether or not a stock’s price will go up or down.
Don’t let analysis paralysis set in, always go back to basics when you seem overwhelmed or find yourself overly concerned how certain indicators don’t align and give you the perfect buy signal. You’re not always going to be right, but when you are right, make it count. When you’re wrong, admit it fast and get out early to move onto the next trade.
If you need some help getting started and don’t really know where to get started. Let me help you, subscribe to the form below and get a 3 part lesson on how to get started trading the smart way.