- 1). Learn basic economic and trading theory as well as terminology by reading important daily market publications and using the resources below for information sources. Keep a diary of what is happening in the stock and bond markets and predict where markets will be in the future. Review your predictions and learn from your mistakes. Be fluent as to why either bear or bull sentiment will determine market direction. Most importantly, understand how interest rates affect both bond and stock markets.
- 2). Learn to use fundamental analysis, which tries to examine, via balance sheet data and industry trends, the ability of a company to grow revenues and profits. Know the implications of different measures of profitability such as price-to-earnings ratios, book value and price-to-book ratios in order to evaluate a company's prospects.
- 3). Use technical analysis to gain timing expertise when buying and selling stocks. Technical analysis uses price and volume statistics to determine buy and sell points. Learn to trade using a 200-day moving average for intermediate and long trends. Use stochastic oscillators to confirm turning points in trends. Confirm the strength of a bull price move by watching volume rise as price rises and volume falls during periods of retrenchment.
- 4). Use free resources such as Yahoo screener, historical data downloads and charting facilities to practice trading theories. Never invest real money without practice trading for an extended period of time. Practice with different time frames, different profit objectives, under bull and bear market conditions. Practice using short and long positions. Examine the use of margin and leverage to increase profits. Decide whether you are comfortable with your decision-making when levering your assets.
- 5). Trade stocks with sound money management. Money management is the use of stops to protect trading positions by having an absolute sell point that a trader will not violate. Use discipline to enforce stops. Learn to create stops to prevent a new position from turning into a loss. Use stops to take you out of trades when the trend turns. Know that money management is at least as important as picking good stocks.
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