stock trading, investing, stock market-6525084.jpg

How to Trade Stocks The Easy Way [101]

Trading can be a profitable venture if you know what you’re doing and have put in the time to study, learn, and develop the skill.

However, many people enter the market without any knowledge of how to trade stocks. This can lead to costly mistakes and losses.

To become a successful trader, you need to learn the basics first. This includes understanding the different types of orders, how to read stock charts, price action, volume analysis, and risk management.

You’ll also need to develop a trading strategy that fits your risk tolerance and investment goals.

Trading can be profitable but it’s important to learn proper trading techniques first.

Today we’re going over the basic knowledge you need to get started on your trading journey.

  1. What is Trading?
  2. The types of orders
  3. The difference between stocks and options
  4. How to read stock charts (Price Action + Volume)
  5. Placing the Trade (entry, stop loss, take profit)
  6. Risk management
  7. Psychology of Trading

 

What is Trading

Trading can be defined as the buying and selling of financial instruments to make a profit. There are two main types of short-term trading that most traders prefer – day trading and swing trading.

how to trade stocks

Day Trading is buying and selling stocks (or options, futures contracts, crypto, forex, etc.) to profit from short-term price fluctuations. Day traders typically hold their positions for minutes or hours, and rarely overnight. 

Their goal is to take advantage of fluctuations in price during the day and end the day with a profit.

Swing Trading is buying and selling stocks (or options, futures contracts, crypto, forex, etc.) to profit from medium-term price fluctuations. Swing traders typically hold their positions for days or weeks, and sometimes longer. 

This style of trading is less volatile than day trading and can be done around a day job, thus newer traders often prefer swing trading so they can get accustomed to the market’s behavior.

 

Types of Orders

The two main types of orders that most traders use are market orders and limit orders.

A market order is an order to buy or sell a security at the best available price. This is the simplest type of order and is used when you want to buy or sell immediately.

A limit order is an order to buy or sell a security at a specific price or better. This type of order is used when you want to buy or sell a security but you’re not willing to pay the current market price.

market vs. limit order

When trading, you can either buy the stock, or “short” sell the stock.

Shorting a stock simply means that you borrow it from your broker and sell it to another party, and when you buy it back, you’re able to profit from the difference.

This allows you to profit when the price goes up or goes down. Imagine making money during the 2008 stock market crash. Many traders made money during that time because they knew how to short-sell the market and make money on the way down.

To be able to short a stock though, be aware that you need a margin account and can only make three day trades per week until you have a $25,000+ balance (then you can make unlimited trades per day).

Difference between Trading Stocks and Options

Many newer traders are enticed into the markets when they hear about options traders doubling their money in one day. And while it’s true that you can double your money in one day via options (IF you win the trade), you can also lose it all if you lose the trade.

With that said, the great thing about trading is that once you learn the fundamentals of trading, you can fairly easily transition between trading the different financial instruments — the way I teach people to trade is universal. This applies to stocks, options, crypto, futures, and forex. The fundamentals of price action & volume trading are universal.

Price action & volume is all you need (because they are based on human behavior and not on an indicator), and those are both the same across the board.

The main difference between stocks and options is that stocks represent ownership in a company, Options are contracts that give the holder the right but not the obligation to buy or sell a security at a specific price on or before a certain date. 

When short-term trading options, the main benefit to them is the leverage they provide.

With stocks, for a $1 move in the stock, you gain or lose $1 per share which if trading a $100 stock is a 1% gain or loss.

With options, a $1 move in the underlying stock could represent a 100%+ gain in the contract price depending on the contract chosen.

For new traders, DO NOT try to trade options. 

They are much more complicated, and just like you can gain 100% quickly, you can also lose 100% just as quickly.

Options may be tempting for new traders, but wait until you have at least a few years of trading experience before you venture into options trading.

Trading is hard enough by itself, the last thing you need to add to that in the beginning is the complexity of options (if you don’t understand expiration dates, delta, theta decay, gamma, and vega, then don’t touch options).

How to Read Stock Charts

When you’re day trading or swing trading stocks, it’s important to be able to read stock charts. This will allow you to see the price trend and determine where the stock is likely headed. 

There are two main components to reading stock charts – price action and volume.

stock chart candlesticks and volume bars

Price Action is the movement of a security’s price over time. This can be measured in terms of candles, bars, lines, etc., but my preference is for candlestick charts because they provide the easiest-to-read data. Price action is what you use to determine the bullish (the stock increasing in price) or bearish (the stock decreasing in price) sentiment of a security.

The basics of price action include the candlestick itself, as well as the formation of groups of candlesticks and how they form over time.

Candlesticks

Candlesticks show where the price opened in the given time frame (candlesticks can form every 1 minute, 1 hour, 1 day, 1 week, and every timeframe in between based on what you want to see), where the low of the price and high of the price was, and where the price closed at the end of the timeframe.

Understanding basic candlestick patters will give you a firm grasp on the strength of the trend, whether buyers or sellers are in control, and allow you to take high probability setups based on the pattern being shown.

These patterns work because other traders are seeing the same patterns and trading the same things as you.

bullish vs bearish candlestick

Volume is the number of shares or contracts that have been traded over a given period. Volume is used to measure the intensity of buying or selling pressure. 

When volume increases, it shows that traders are becoming more interested in the security and when volume decreases, it shows that traders are losing interest.

Combining Price Action and Volume together will help you get a better understanding of what’s happening with a security and help you make more informed trading decisions.

Price Action Basics

Price action is the study of how price moves and how to trade off that information. There are three main concepts that you need to understand when reading price action: trend, support & resistance, and momentum.

Trending markets move in a particular direction while ranging markets move back and forth between two or more price levels.

downtrend, ranging, uptrend markets

To determine which market you are in, you need to look at the highs and lows made over a given period. If the highs are getting higher and the lows are getting higher, then you’re in an up-trending market. 

If the highs are getting lower and the lows are getting lower, then you’re in a down-trending market. If you are getting the same highs and same lows, you’re in a ranging market (consolidating market).

price action reading

Price moves from trending to consolidating, to trending back to consolidating again. This cycle repeats itself over and over again.

Higher highs and higher lows indicate bullish momentum, while lower highs and lower lows indicate bearish momentum. 

You can use these concepts to enter trades in the direction of the trend or against the trend, depending on your trading strategy.

Reading Volume

Volume is one of the most important aspects of day trading or swing trading. It can be used to confirm trends, identify reversals, and measure the strength of a move.

In order to read volume correctly, you need to understand how it is measured. 

Volume is typically measured in terms of shares or contracts traded. 

For stocks, this would be the number of shares that changed hands over a given time period. For futures and options, this would be the number of contracts that changed hands.

Volume is also measured in terms of time. 

This is known as volume bars or tick volume. Volume bars are measured in terms of the number of trades that occur in a given time period (whatever time period the chart you are watching is in). 

Tick volume is measured in terms of the number of ticks that occur in a given time period (usually one second).

The volume on a chart can be used to help you determine the strength of a move. When volume increases, it means that more traders are getting involved and that the move is stronger. 

When volume decreases, it means that fewer traders are getting involved and that the move is weaker. You can use this information to help you decide when to enter or exit a trade.

You should also pay attention to how the volume changes over time. 

When volume increases during an uptrend, it shows that buyers are still in control. When volume decreases during an uptrend, it shows that buyers are losing steam and that a reversal may be imminent. 

When volume increases during a downtrend, it shows that sellers are still in control. When volume decreases during a downtrend, it shows that sellers are losing steam and that a reversal may be imminent.

It’s also important to note whether the volume is spikey or smooth. Spikey volume occurs when there are a lot of trades within a short period of time This usually indicates volatility and/or manipulation. 

It is important to be aware of the levels of volume because it helps you gauge buying/selling interest, and newer traders should avoid highly volatile times of trading as they are more unpredictable.

Imagine yourself at an auction house. If the auctioneer opens the bidding at $5, and 100 hands fly up immediately to signal they want to buy, the price will get bid up very quickly. 

This is the same as when there is a lot of volume in the markets. Price can get bid up extremely fast if there are many interested parties in that direction.

On the other hand, if the auctioneer opens the bidding at $5, and 1 hand flies up after a few minutes of silence, the price will stay at $5 until someone else raises their hand. If another person raises their hand, they may offer $5.01 since they aren’t having to compete with many other people. 

It’s the same thing in stocks — the less “bidders” there are (volume), the less the price moves.

Support and Resistance

support and restistance

In trading, one of the most important things to keep in mind is support and resistance. Often you will see the price “bounce” off of previous areas of support and resistance. 

You can see in the photo above that you got several rejections and bounces off of the yellow lines (major support & resistance).

This is because other traders are watching those levels, expecting either a rejection of that level again, or a breakthrough and backtest of that level for continuation on.

It is important to be aware of areas of major support and resistance, and also the support and resistance of the previous pivots (the higher highs/lows and lower highs/lows).

These are areas that you will often find price turn around, at least temporarily.

Placing the Trade

There are a variety of ways to place a trade, but we’ll focus on the most basic ones here. 

1) A pullback buy

This is when you buy stocks after they have pulled back from an uptrend. 

To do this, you’ll want to wait for the stock to break above the previous high and then buy on the next pullback. 

You’ll want to use a stop loss order to protect your position in case the stock reverses direction.

2) A breakout trade

This is when you buy stocks after they have broken out of a downtrend or consolidation period. To do this, you’ll want to wait for the stock to break below the previous low and then buy on the next breakout. You’ll want to use a stop loss order to protect your position in case the stock reverses direction.

3) A reversal trade

This is when you buy stocks after they have reversed their trend. To do this, you’ll want to wait for the stock to break above the previous high, and then sell on the next reversal. You’ll want to use a stop loss order to protect your position in case the stock reverses direction again.

4) A trend trade 

This is when you buy stocks after they have broken out of a consolidation period and are trending in one direction. To do this, you’ll want to buy on the breakout and use a trailing stop loss order so that you can lock in your profits as the stock continues to move in your favor.

Managing Risk

manage risk

Risk management is one of the most important aspects of trading.

You need to understand how to control your risk and protect your investment. One way to do this is by using stop loss orders. A stop loss order is an order to sell a security when it reaches a certain price. This helps to protect your investment in case the stock price drops suddenly. You can also use a stop loss order to protect against large losses in case the stock trade goes against you.

Another way to manage risk is by using position sizing. Position sizing is the amount of money you invest in each trade. 

You should always have a plan for how much money you can afford to lose on each trade. 

This will help you stay within your risk tolerance and protect your investment.

Trading Psychology

trading psychology

One of the most important aspects of trading is psychology. 

You need to have a plan for how you will handle losses and profits. When you experience a loss, it is important to stay calm and not make any rash decisions. You may want to cut your losses and get out of the trade, but this could lead to larger losses in the future.

When you experience a winning trade, it is important to stay disciplined and not over-leverage your position. 

This could lead to large losses if the trade reverses. It is also important to have a plan for when you experience a losing streak. A losing streak can be very emotional and can lead to bad decision-making. By having a plan, you can minimize the effects of emotion on your trading.

Some key concepts to proper trading psychology:

  • Every trade is unique
  • Don’t trade if you’re in a bad emotional state
  • Accept the risk before you take the trade
  • Let your profits run until the price action tells you to exit
  • Think in terms of a series of trades, not one trade at a time
  • Emotional control is what separates successful traders from failures

Action Plan for Beginner Traders

You must take things slowly when learning how to trade. If you jump in too fast, too soon, you can ruin any chance of you succeeding in this in the long term. 

Set an expectation with yourself that it will take you 3-5 years of study, practice, and live trading with small amounts before you can do this full-time.

Here are the basic steps to get you started.

1. Open a Brokerage Account

The first step to learning how to trade stocks is to open a brokerage account (if you don’t have a computer or laptop, you’ll want one if you’re serious about trading). This will give you access to the stock market and allow you to buy and sell stocks. There are a variety of brokerage accounts to choose from, so you need to find one that fits your needs. You’ll also need to deposit money into the account in order to buy stocks.

2. Set up Paper Trading

The second step is to set up paper trading. This will allow you to trade stocks without using real money. This is a great way to learn the basics of trading and how the stock market works. You can also use paper trading to test out different strategies before risking your money.

3. Study Trading Books

The third step is to study trading books. There are a number of books on trading that can teach you the basics of stock trading. These books will help you understand how the stock market works, how to read charts, and how to formulate a trading strategy.

Here are the absolute best trading books to build your trading foundation.

4. Watch Trading Videos on YouTube

Another great way to learn how to trade stocks is to watch trading videos on YouTube. There are a number of videos that can teach you the basics of stock trading. These videos will help you understand how the stock market works, how to read charts, and how to formulate a trading strategy.

Some of my favorite YouTube channels to learn trading are:

5. Study Charts

In order to trade stocks successfully, you need to understand how to read charts. Charts can give you insight into the current trend of a stock and help you make trading decisions. You can learn how to read charts by studying trading books and on Youtube, but nothing beats studying charts yourself to learn how price behaves.

6. Begin Paper Trading

Your first steps into the trading world should be done with paper trading (placing trades with virtual money). You must first practice trading with virtual money before you place any real money at risk.

Buy a stock in your paper account, and watch how the charts and price movements fluctuate over time. Pay attention to how big of a position you have (how many shares you bought/sold) and how much money you gain or lose by that position size. The stock’s price could only move $0.10 against you, but if you have a massive position with a lot of shares, it could result in a $10,000 loss.

Managing your risk is everything in trading — if you lose 50% of your account, you must earn 100% back in order to get back to where you started.

  • $100 * 50% = $50
  • $50 * 100% = $100

That is why keeping your losses small is everything. Paper trading will help you learn proper trade execution so you can keep those losses small. The key with paper trading however is to treat it just like you would a normal trade.

Your entries and exits should be the exact same as you would take in a real account. This builds the habits in you of proper trade management, which is absolutely essential if you want to be profitable long-term.

Conclusion

stock trading

Trading can be a profitable venture and you can generate income through trading, but it is important to learn the proper skills first. 

If you start trading with no plan, no strategy, and no skills, you will lose and you can lose A LOT of money quickly.

In this article, we have covered some of the most important basic concepts you need to know to trade stocks successfully. These include price action, volume analysis, psychology, and risk management. 

By understanding these concepts and using them in your trading strategy, you will be able to control your risk and make more informed trading & investment decisions.

Husband of 10+ years, father of 4, and savvy in all things (ok, let’s be modest, most things) personal finance. My aim is to help free a generation from the chains of dumb money habits destroying lives. I’ve made my fair share of mistakes along the way, but through a slightly obsessive pursuit of financial freedom, I’ve learned a thing or two. Now I’m here to share it.

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