Trading for Dummies

Savvy traders can make money in both up and down markets—and now you can, too! In Trading For Dummies, investors from every walk of life will benefit from sample stock charts, position trading tips and techniques, fresh ways to analyze trends and indicators, and all the latest information on trading stocks wisely in any type of market.

Taking the stress out of the stock market, this no-nonsense guide walks you through all the steps to trade with authority—and takes your portfolio to exciting new heights. Whether you're an investor looking for a clear guide to successfully trading stocks in any type of market, or an investor who has experience trading and are looking for new, proven methods to enhance the profitability of investments, you'll find a proven system for eliminating doubt, decreasing risk, and, ultimately, increasing return.

• Understand market cycles and choose a great broker
• Manage your risk exposure
• Build a balanced portfolio
• Develop your own custom trading strategy

If you're in need of basic strategies and stock valuation methodologies that let you make smart trading decisions, this book has it all!

Lita Epstein, MBA, is the author of more than 35 books, including Bookkeeping For Dummies and Reading Financial Reports For Dummies. Grayson D. Roze has worked in the financial services industry for StockCharts.com since 2012. He now serves as a business manager at the company. He is the author of Tensile Trading: The 10 Essential Stages of Stock Market Mastery.

Introduction 1

About This Book 2

Foolish Assumptions 2

Icons Used in This Book 3

Beyond the Book 3

Where to Go from Here 4

Part 1: Getting Started with Trading 5

Chapter 1: The Ups and Downs of Trading Stocks 7

Distinguishing Trading from Investing 8

Seeing Why Traders Do What They Do 8

Successful Trading Characteristics 9

Tools of the Trade 10

Taking Time to Trade More Than Just Stocks 10

Position trading 10

Short-term swing trading 11

Day trading 12

Going Long or Short 12

Managing Your Money 12

Understanding Fundamental Analysis 13

Getting a Grip on Technical Analysis 14

Putting Trading Strategy into Practice 15

Trading at Higher Risk 17

Remembering to Have Fun! 17

Chapter 2: Exploring Markets and Stock Exchanges 19

Introducing the Broad Markets 19

Stock markets 20

Futures markets 20

Bond markets 21

Options markets 22

Reviewing Stock Exchanges 22

New York Stock Exchange (NYSE: ICE) 22

NASDAQ 24

Amex (now NYSE MKT LLC) 25

Electronic communications networks (ECNs) 26

Understanding Order Types 26

Market order 27

Limit order 27

Stop order 28

Stop-limit order 29

Good-’til-canceled order 30

Other order types 30

Chapter 3: Going for Broke(r): Discovering Brokerage Options 31

Why You Need a Broker 32

Exploring Types of Brokers and Brokerage Services 32

Full-service brokers 32

Discount brokers 34

Direct-access brokers 34

Proprietary trading firms 36

Futures brokers 36

Services to Consider When Choosing a Broker 36

Types of orders supported 36

Data tools 37

Charts 37

ECN access 38

Knowing the Types of Brokerage Accounts 38

Cash accounts 38

Margin accounts 38

Options 39

IRAs and other retirement accounts 39

Choosing the Right Broker for You 41

Considering more than price 41

Doing a little research 42

Understanding how you’ll be paying 43

Getting to Know the Rules 43

Margin requirements 43

Settling trades 45

Free riding 45

Chapter 4: Putting Your Key Business Tool to Work: The Computer 47

Making Use of Your Computer 48

Identifying trading candidates 48

Managing your account 49

Improving your trades 49

Finding Price Charts 49

Checking out Internet charts with delayed prices 51

Considering Internet charts with real-time prices 51

Looking into charting software 52

Digging Up Fundamental Data 53

Accessing Analyst Reports 54

Selecting a Trading Platform 54

Browser-based trading environments 55

Integrated trading platforms 56

Features to consider 57

Determining Computer Requirements 58

Weighing Windows versus Mac versus Linux 58

Configuring your computer system 59

Accessing the Internet 61

Picking a browser 61

Securing your computer 61

Part 2: Reading the Fundamentals: Fundamental Analysis 63

Chapter 5: Fundamentals 101: Observing Market Behavior 65

The Basics of the Business Cycle 66

Understanding how periods of economic growth and recession are determined 67

Using economic indicators to determine the strength of the economy 68

Relating bull markets and bear markets to the economy 70

Employing a Sector Rotation Strategy 70

Early recovery 71

Full recovery 72

Early recession 72

Full recession 73

Sector rotation 73

Understanding Economic Indicators 74

Interest rates 75

Money supply 76

Inflation rate 76

Deflation 78

Jobless claims 79

Consumer confidence 80

Business activity 80

Using Data from Economic Indicators 82

Chapter 6: Digging Into Fundamental Analysis 85

Checking Out the Income Statement 86

Revenues 87

Cost of goods sold 87

Gross margins 88

Expenses 89

Interest payments 90

Tax payments 91

Dividend payments 91

Profitability 92

Looking at Cash Flow 93

Operating activities 94

Financing activities 95

Investment activities 96

Scouring the Balance Sheet 97

Analyzing assets 97

Looking at debt 98

Reviewing goodwill 99

Determining Stock Valuations 99

Earnings 100

Earnings growth rate 100

Figuring Your Ratios: Comparing One Company’s Stock to Another 102

Price/earnings ratio 102

Price/book ratio 103

Return on assets 103

Return on equity 103

Chapter 7: Listening to Analyst Calls 105

Getting to Know Your Analysts 106

Buy-side analysts: You won’t see them 106

Sell-side analysts: Watch for conflicts 106

Independent analysts: Where are they? 109

The Importance of Analysts 109

Tracking how a company’s doing 110

Providing access to analyst calls 110

Pointers for Listening to Analyst Calls 112

Understanding the analysts’ language 113

Developing your listening skills 114

Locating Company Calls 117

Identifying Trends in the Stock-Analyst Community 117

Part 3: Reading the Charts: Technical Analysis 119

Chapter 8: Seeing Is Believing: An Introduction to Technical Analysis 121

Understanding the Methodology 122

Finding everything in the price 123

Seeing that price movements are not always random 124

Balancing supply and demand 125

Understanding where you’ve been 125

Understanding where you’re headed 127

Answering the Detractors 128

Walking randomly 129

Trading signals known to all 129

Executing Your Trading Plan 130

Using StockCharts.com 131

Chapter 9: Reading Bar Charts Is Easy (Really) 135

Creating a Price Chart 136

Looking at a single price bar 137

Measuring volume 138

Coloring charts 140

Identifying Simple Single-Day Patterns 140

Single-bar patterns 140

Reversal patterns 142

Recognizing Trends and Trading Ranges 143

Discerning a trading range 144

Spotting a trend 145

Paying attention to time frame 146

Searching for Transitions 147

Support and resistance: The keys to trend transitions 147

Finding a breakout 149

Sipping from a cup and handle 151

Deciding what to do with a double bottom 152

An alternative double-bottom strategy 153

Looking at other patterns 154

Chapter 10: Following Trends to Boost Your Probability of Success 155

Identifying Trends 156

Supporting and Resisting Trends 157

Drawing trend lines to show support 158

Using channels 159

Trending and channeling strategies 160

Seeing Gaps 161

Common gap 162

Breakout or breakaway gap 162

Continuation gap 162

Exhaustion gap 163

Island gap 164

Waving Flags and Pennants 164

Withstanding Retracements 165

Three-step and five-step retracements 166

Subsequent trading ranges 167

Dealing with Failed Signals 168

Trapping bulls and bears 168

Filling the gaps 169

Deciding whether to reverse directions 169

Chapter 11: Calculating Indicators and Oscillators 171

The Ins and Outs of Moving Averages 173

Simple moving average 173

Exponential moving average 175

Comparing SMAs and EMAs 178

Interpreting and using moving averages 179

Support and resistance factors 181

Deciding the moving average time frame 182

Understanding Buy and Sell Pressure through Stochastic Oscillators 183

Calculating stochastic oscillators 183

Interpreting stochastic oscillators 184

Tracking Momentum with the MACD 185

Calculating the MACD 186

Using the MACD 187

Revealing Relative Strength 190

Calculating relative strength 190

Putting relative strength to work 191

Part 4: Developing Strategies for When to Buy and Sell Stocks 193

Chapter 12: Money Management Techniques: Building a More Robust Portfolio 195

Achieving Your Trading Goals with Smart Money Management 196

Managing Your Portfolio 197

Thinking of trading as a business 197

Recognizing the trader’s dilemma 198

Finding a better plan 199

Protecting Your Principal 201

Recovering from a large loss: It ain’t easy 202

Setting a target price for handling losses 203

Strategies for managing profitable trades 205

Understanding Your Risks 209

Market risks 209

Investment risks 210

Trading risks 210

Chapter 13: Combining Fundamental and Technical Analyses for Optimum Strategy 213

Seeing the Big Picture 214

Knowing when the Fed is your friend 215

Keeping an eye on industrial production 215

Watching sector rotation 216

Finding the dominant trend 220

Selecting Your Trading Stock 225

Trading Strategies 226

Trading the bullish transition 226

Trading in a bull market 227

Trading the bullish pullback 227

Trading the bearish transition 228

Trading in a bear market 228

Trading the bearish pullback 229

A hypothetical trading example 229

Chapter 14: Minimizing Trading Risks Using Exchange-Traded Funds 231

What Is an ETF? 231

Examining the advantages 232

Avoiding the flaws 233

Does Family Matter? 233

Market-weighted ETFs 234

Equal-weighted ETFs 235

Fundamentally weighted ETFs 235

Sector Rotation Strategies 236

Early recovery 236

Full recovery 236

Early recession 237

Full recession 237

Analyzing ETFs 237

Portfolio Construction 239

International trading with ETFs 239

Commodities and ETFs 239

Currency trading and ETFs 239

Leveraged ETFs 240

Inverse ETFs 240

Chapter 15: Executing Your Trades 241

Entering and Exiting Your Trade 241

Keeping straight the bid and the ask 243

Understanding the spread 244

Devising an effective order-entry strategy 244

Timing your trades: Entering orders after the market closes 247

Reviewing a week in the life of a trader 248

Selling Stocks Short 253

Avoiding Regulatory Pitfalls 254

Understanding trade-settlement dates 254

Avoiding free riding 255

Avoiding margin calls and forced sales 256

Avoiding pattern-day-trader restrictions 258

The Tax Man Cometh 258

Chapter 16: Developing Your Own Powerful Trading System 259

Understanding Trading Systems 260

Discretionary systems 261

Mechanical systems 261

Trend-following systems 262

Countertrend systems 263

Selecting System-Development Tools 264

Choosing system-development hardware 264

Deciding on system-development software 264

Finding historical data for system testing 266

Developing and Testing Trading Systems 267

Working with trend-following systems 267

Using breakout trading systems 270

Accounting for slippage 275

Keeping a Trading Journal 275

Evaluating Trading Systems for Hire 276

Part 5: Risk-Taker’s Paradise 279

Chapter 17: The Basics of Swing Trading 281

Selecting Stocks Carefully 281

Looking at Swing-Trading Strategies 283

Trading trending stocks 283

Trading range-bound stocks 287

Trading volatility 289

Money management issues 291

Using Options for Swing Trading 291

Getting a Grip on Swing-Trading Risks 293

Taxes (of course) 293

Pattern-day-trading rules apply 294

Chapter 18: The Basics of Day Trading 295

What Day Trading Is All About 296

Institutional day traders (market makers) 296

Retail day traders 296

Understanding Account Restrictions 299

The Fed’s Regulation T: Margin requirements 299

Settlement: No free rides 301

Strategies for Successful Day Trading 301

Technical needs 302

Trading patterns 302

Scalping 303

Trend traders 303

Recognizing That Risks Are High 303

Liquidity 304

Slippage 304

Trading costs 305

Taxes (of course) 306

Avoiding the Most Common Mistakes 307

Chapter 19: Doing It by Derivatives 311

Types of Derivatives: Futures and Options 312

Buy now, pay later: Futures 312

Wait and see: Options 316

Buying Options and Futures Contracts 321

Opening an account 321

Calculating the price and making a buy 322

Options for Getting Out of Options 323

Offsetting the option 323

Holding the option 324

Exercising the option 324

The Risks of Trading Options and Futures 325

Minimizing Risks 326

Chapter 20: Going Foreign (Forex) 329

Exploring the World of Forex 330

Types of currency traders 330

Why currency changes in value 331

What traders do 332

Understanding Money Jargon 333

Spot transactions 334

Forward transactions 334

Options 335

Looking at How Money Markets Work 336

Different countries, different rules 337

The almighty (U.S.) dollar 337

Organized exchanges 337

Taking Necessary Risks in the World Money Market 339

Understanding the types of risks 339

Seeking risk protection 342

Getting Ready to Trade Money 343

Part 6: The Part of Tens 345

Chapter 21: More Than Ten Huge Trading Mistakes 347

Fishing for Bottoms 347

Timing the Top 348

Trading against the Dominant Trend 349

Winging It 349

Taking Trading Personally 350

Falling in Love 350

Using After-Hours Market Orders 351

Chasing a Runaway Trend 351

Averaging Down 351

Ignoring Your Stops 352

Diversifying Badly 352

Enduring Large Losses 353

Chapter 22: Ten Trading Survival Techniques 355

Build Your Trading Tool Chest 355

Choose and Use Your Favorite Tools Wisely 356

Use Both Technical and Fundamental Analyses 357

Count on the Averages to Make Your Moves 357

Develop and Manage Your Trading System 358

Know Your Costs 358

Have an Exit Strategy 359

Watch for Signals, Don’t Anticipate Them 359

Buy on Strength, Sell on Weakness 360

Keep a Trading Journal and Review It Often 360

Index 361

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