Tuesday, November 10

Make Money Online Stock Trading

Make Money Online Stock Trading

How to Trade Stocks Online - Swing Trading

Trying to make money from online stock trading ? Then you need to decide a strategy. For beginners the easiest way to get started is probably swing trading. Swing trading is basically trading stocks for a short period of time, usually a few days or weeks, after which time hopefully you will be in profit and you can sell (or buy back if you were shorting).

When swing trading, however, it helps if you know which stocks to trade. Picking stocks with a pin might seem an attractive option if you are lazy, but even if you decide to do that then you should still follow certain basic trading rules.

First, go for a stock that is in a trend i.e. heading higher or lower, but not going sideways. Swing traders look at stock charts to discover repeating and predictable patterns. If a stock is in a predictable pattern then you have a chance of seeing when it is likely to make a 5 or 10% move that you can profit from. Once you have found such a pattern then you need to calculate the risk/reward ratio. Basically, if the risk is high and the potential rewards are low then you don't make the trade. Only buy stocks online when the risk is in your favor.

When swing trading there are a number of criteria to be met.
  • The stock price needs to be over $10
  • The daily volume needs to be higher than 500K shares. The reasoning behind these criteria is that market makers find it easier to manipulate the prices of low volume and low cost penny stocks.
In addition, you need to be able to read basic stock charts to identify potential stocks. The charts most traders use these days are so-called candlestick charts, these are analyzed in combination with with 5-day, 10-day, 20-day, 30-day and 50-day moving averages.

As mentioned above, the stock you decide to trade needs to be in a trend. For an uptrend the closing price must be above the 10-day and the 20-day simple moving average and the 10-day moving average needs to be above the 20-day moving average. If this means nothing to you then don't worry it is simple enough to see on any finance site with charts such as Yahoo. One final point on moving averages - if the 5 day moving average of a stock is pointing down then it is not a good idea to buy that stock, wait until you find a stock with the 5 day moving average pointing up (and all the other criteria in place too).
A simple 3 month line chart of Barclays showing 5, 10, 20, 30 and 50 day moving averages.

There are a number of tips to be taken into account when swing trading to enable you to limit your risks and maximize the rewards.
  1. Buy the stock you have chosen in stages. If a stock gaps up 1% to 2% as soon as the markets open, then buy using half the amount of money you intend trading with. After this you wait to see what happens to the stock price. If it continues to move up then you can increase your position.
  2. If the stock price gaps up 2% to 3% as soon as the markets open, then only trade a quarter of the amount you intend trading.
  3. If the stock price gaps up more than 3% as soon as the markets open, then the trade is not worth it, the risk/reward ratio is too high so forget it and look elsewhere.

    The objective when swing trading is a profit of around 5% to 10 %. The reasoning being that once a stock in a trend has moved up 5 or 10% then it will probably move back down again before reversing and moving back up. So you close your trade and if necessary buy back after the price has fallen back.

    If the stock price does not move up after you have bought the stock then close the position anyway and look elsewhere.
  4. Stop losses are important. When trading stocks online you will always make some losses,it is important therefore to limit your losses and ensure that your gains are greater than your losses. This is why you need stop losses. You set your stop loss when you place the trade. A stop loss means that if the trade moves against you then you automatically sell after the price has fallen back around 4%. The actual percentage may vary but it is generally around 4%. This means that you have a profit objective of around 5-10% but you are only willing to risk 4%.
In addition to these basic swing trading tips you will also need to spot specific stock chart patterns. The charts used are generally candlestick charts and the main bullish patterns which you will need to recognize are the Engulfing pattern, the Hammer Candlestick Pattern, the Harami Candlestick Pattern, the Piercing Candlestick Pattern and the Doji Candlestick Pattern. Good luck, online stock trading is not the easiest way to make money online but if done correctly holds a lot of potential.