This our third consecutive  weekend of looking at a chart to gain an insight into what has happened since the previous week’s close.  It was a week ago that we  looked at the chart for the general market, represented by the S&P 500 index, for the close of trading March 18, 2011.

One of the objectives of Stock Market Basics is to encourage readers to become accustomed to examining stock charts and to learn how they can be of value in decision making when buying stocks and assessing trading possibilities.

So now, one week late let us again check the chart for the S&P 500 Index to see what it can tell us, especially about the reversal of trend that started about a month ago and appeared to be coming to an end according to last week’s chart.

Here are both the March 18 and March 25 charts: (Click on the charts to enlarge slightly for better clarity)

S&P 500 March 19, 2011

S&P 500 Chart March 25

What does the March 25 chart tell us?
The chart shows that the markets have reversed nicely from their recent lows, continuing the possible turn in trend that was indicated when we examined last week’s chart — and what we were hoping would take place. The return to a bullish trend is not yet totally confirmed, although the S&P has closed above the possible resistance level of the 50 day moving average, shown by the line in blue. A little more time and continued action is needed to show that the new move will be sustained. Traders who watch the charts know there is often a second dip before it’s over but the situation should be resolved next week or soon after, in time for the start of the new season when corporate earnings and forecasts are released. Remember, it is earnings that really drive the market in the long term, if they are mainly good, as they have been for the last year or two, you can count on an upward trending market that should be of good duration and an ideal time to be buying stocks.

As an exercise of your own, I suggest you check the charts of the other most watched major stock indexes, the Dow and the NASDAQ — go to Stockcharts.com, a great source of free charts, and when the home page appears enter $INDU for the Dow in the box at center top (next to the box that says SharpChart), press return (or enter) and that will bring up the chart for you to examine. One thing to look at is the supplementary chart of the MACD below the main chart — do you see how the lines are crossing over one another and are beginning to move upward? They are the default MACD lines of moving averages.

For the next chart, the Nasdaq, go to the box at top left and replace the existing symbol there with $NDX, press enter and that will bring up the required chart for your perusal. Note the slightly different pattern of the Nasdaq, representing the different activity from the Dow — but the overall picture conveys the same general information. While there, other stock symbols can be entered, Another index consulted by many is the Russel 2000 small cap index, Symbol $RUT, which should convey the same story. For myself, I mostly just check the S&P 500 Index ($SPX)

While awaiting confirmation of the change in trend upward, and earnings season, we will start building a watch list, referred to in other recent posts on this site, in preparation for a new sequence of real-time paper trades, similar to those for AGCO and ASYS (detailed elsewhere on this site) that we have done previously on stock market basics for illustrative and learning purposes of the stock market beginners who want to learn about buying stocks and trading in the stock market.

From 5 months ago, time for an update — how did we do?
We were successful, see details at the end of this post.

Yesterday was March 25th and it was 5 months ago on October 25th that I wrote an article on this Stock Market Basics website called “Leaps for the Small Trader” that suggested how a trader could take a speculative position in some of the high priced issues and instead of buying stocks, buy a very long term option known as a LEAP (Long-term Equity Anticipation Security).

Here and now
An explanation of LEAPs and the full text of that article can be found with this link: About Leaps. But here and now I just want to see how the values of the LEAP options mentioned may have changed to see whether my suggestion of buying leaps really was a good alternative to buying stocks.

Suggested paper trades as of October 25
The trades were based on quoted prices for that day, they were all Calls, “in the money” by a small amount with expiration date of January 2012.

Please Note: Options terms are explained elsewhere on this site, check the List of Topics under the subhead “Stock Options” for more information on this very interesting form of lower-cost trading alternatives to buying stocks when working capital is limited.

Showing the then and now quoted prices, the stocks referred to on the October 25 post were:

Apple (AAPL stock at @ $308) $300 call @ $52.50 Now $73.10 = + 39%

Amazon (AMZN stock at @$169) $160 call @ $34.00 Now $29.20 = – 12%

AutoZone (AZO stock at @ $235) $220 call @ $34.00 Now $44.30 = + 30%

International Business Machines (IBM stock at @ $140) $135 call @ $16.00 Now $30.25 = + 90%

Netflix (NFLX stock at @ $167) $165 call @ $40.00 Now $82.26 = +
105%

Conclusion
I believe the results of our paper trading confirm that the strategy of buying options instead of buying stocks is a worthwhile approach to trading high priced stocks.

4 out of 5 show very good gains, with just 1 loss in the group at this date. But even on that one, it is too early to exit and take a loss. Before the recent downturn, which looks as if it might be ending, AMZN was at its high of the last 52 weeks at around $190, and a quick look at a chart – our major trading tool for guidance — shows that AMZN looks to be resuming its upward trend and should then rejoin the others in the plus column.

Not all are winners
But before we conclude that it’s an easy and automatic winning alternative to buying stocks that are expensive, I have to say that in my original post of October 25 I was fortunate to be able to select particular stocks that later have turned out to be winners — but a lot of other possible high-priced stocks that I could have added to the list have not done so well — for instance Google then a $616 now 580, Goldman Sachs then $157 now 158, Mastercard then $245 now 248. However, it is still early in the life of the LEAPs, they expire in January 2012, and I do believe that when the market resumes its upward trend, the Google, Goldman, and Mastercard stocks and their LEAPs will provide good gains for anyone who holds them — perhaps we should review in a few months time.

Please note, the above listed details refer to “paper stock trades” used as examples only but not be actually traded with real money, however the details are valid, exactly as they would have been for real trade, only the broker commissions have not been factored in, a relatively small cost. In the course of learning the basics of stock market trading it helps to define specific real-time trades in this paper trading way as part of the learning process.

Also, there is much more basic stock market information available in the accompanying posts on this Stock Market Basics Guide website. This information can contribute to building a knowledge base for the beginning trader. Other articles can be found on the List of Topics for this site.
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How to find options prices on the internet — it’s free
To find a list of options prices, referred to as the Option Chain:

1. Go to http://finance.yahoo.com/ and enter the desired stock symbol in the blank box at the top left of the Home Page, for example, AAPL
2. Click the Get Quotes button which will take you to the up to date summary page of Apple Inc.
3. Next, on the sidebar at left, click on Options (about the 3rd or 4th entry down) and that will take you to a table of options for the next expiry date which is always the third Friday of the month, if it is past the current month’s third Friday it will be that of the next month. The expiry date of the table displayed is highlighted at the top.
4. Options are available for various lengths of time and the several expiry dates are listed at the top of the table. Click on the date required, in the case of the LEAPs discussed above the Jan 12 would be clicked which would then take you to the complete list of quotes for that stock’s options.

The Jan 12 refers to the month and year, January, 2012, the actual expiry date is the third Friday of that month, entered on the table as “Expire at close Friday, January 20, 2012”.

See today’s S&P 500 Index chart below, and references at the end of this article about our proposed demonstration series on how to build and paper trade a “Small Funds Portfolio”, in real-time. Meaning how to begin with a small amount of start-up capital.

There are many ways to trade in the stock market, mine is a rather simple approach that is easy to follow for beginning traders who are trying to learn the stock market basics. At the beginning, real trading while learning can be an expensive process and many traders lose their entire stake very quickly because of not knowing some of the basic stock trading guidelines that are referenced in the posts on this site.

The requirement for stock trading is mainly to learn how to select promising stock candidates and follow some basic trading guidelines when it is comes time to buy stocks, monitor their progress, and to sell stocks. It is the objective of the “Small Funds” portfolios, mentioned below, to take stock market basics beginners through those processes, trading in real time in response to the market action as it takes place. Ate beginning, we cannot know what will happen and the results will be a measure of the effectiveness of the approach we use.

I hope that readers of this Stock Market Basics website will follow my suggestions to become familiar with stock charts, introduced a while ago in the post titled About Stock Charts, because the patterns of price and volume fluctuations in the market place can so easily be recognized by even a brief glance at the relevant stock chart for the index or issue under consideration. We look for particular patterns in stock price movement that we know frequently precede an increase in stock price over the following few weeks and months.

In the early days of trading, when still learning the stock market basics, the charts are a great aid in helping to determine when to enter or exit a trade. An introduction to charts can be found on this site at About Stock Charts.

For instance, let us take a look at the chart , shown below, for the S&P 500 stock index for the close of this week’s trading, Friday March 25, 2011. The action portayed on the chart alerts us to the possibility that the mini correction may be ending and the next uptrend may be about to start.

Where to obtain stock charts
For your own use, one of the best sources of free stock charts is StockCharts.com, I recommend you bookmark that site. If you do begin to trade — or perhaps practice trading first by paper trading, as we recommend and demonstrate in our own stock plays on this site, you will be using charts for reference every day. I use them here, with the kind permission of StockCharts.com.

For a slightly enlarged and somewhat sharper view, click on the chart below.

S&P 500 Chart March 25

Most traders view the recent reversal of trend and the mini correction, if that is what it proves to be, as a welcome pause from the prior 3 months or so of upward trending action, when the market was beginning to become overbought — and in fact many traders were expecting it to take place and that it would have occurred about now even if it has been amplified by the sad events of the earthquake, tsunami, and partial nuclear meltdown and, of course, the political unrest in the middle east.

What have I left out? Perhaps the financial problems of Portugal and the European Union may also have a part to play, that or any uncertainty can contribute to an interruption of the existing trends.

So what to do until a definite trend is confirmed?
Get ready, build, update, and research the Watch List to identify the most promising candidates to which to make a trading commitment and buy stocks.

Stocks need to be selected, their potential price points of entry identified and their target prices defined — together with the exit strategy if the stock takes a hit, doesn’t perform as expected, or makes a good gain. We need to know when to exit, the objective is to obey the standard guideline of “Cut losses quickly, let the profits run.”

As cited elsewhere on Stock Market Basics, I like to quote the great trader of long ago, Bernard Baruch, who is claimed to have said: “Even being right three or four time out of ten should yield a person a fortune if he or she has the sense to cut their losses quickly.”

It hurts to take a loss, but every trader does — just don’t allow working capital to dissipate by being indecisive, follow the guidelines and exit at the pre-established percentage  of tolerable loss — usually around 8 or 9 percent, also discussed elsewhere on this site. By the way, sometimes it can be quite euphoric when you are sitting with a huge gain on a stock, but follow the guidelines, there is no actual profit until the position is sold.

How we can demonstrate with our “small funds portfolios”
Here on this site in our new series for establishing a $5,000 and a $1,000 paper trading portfolio, and perhaps a $10,000 portfolio to allow greater diversity, we will follow the above suggestions on what to do while we await the signal to enter an up-trending market and buy stocks.

The coming weekend may allow enough time to get started researching the watch list, a few I have in mind right now include AKAM, XRX, EMC, MO, and HLIT. A small amount of trading capital is limiting and does requires that we concentrate on low priced stocks trading on good volume, preferably a million shares daily or more — but no stocks at less than $5. There will, I hope, be an opportunity to take an option position or two.

Below, I will give an opinion to deal with that question. But first I must make the comment that, other than the requirements set by the brokerage company of choice to open an account, which in some cases is nil, there is no specific answer to the question “How much money do I need to start?”.

In reality, it only takes sufficient to buy the stocks for the first trade plus the added stockbroker’s commission. However, on a practical basis, having only enough to buy one stock won’t take you very far for very long, even if that first purchase makes a handsome profit and enables you to buy two stocks next time. And on the other hand, the first stock may not be such a great success or it may turn out to be a loser.

Well, how much then?
However, it is a frequently asked question, especially when start-up capital is limited and when a person is enthusiastic and eager to start to trade. So, from that point of view, when capital is limited and a person is just wishing to start, I will answer by giving an opinion of what I would do — with the added preliminary comments and cautions that we are talking about trading, not investing (we’ve discussed the difference elsewhere on this stock market basics site on several occasions). Trading in most cases is an approach to buying stocks and holding them for relatively short periods of time, maybe a few months, and making a profit with them as quickly as possible through a rise in their stock market price.

Caution
It should be noted that trading in the stock market, also called speculating, is accompanied  by a lot of risks related to events that cannot be foreseen and can very quickly deplete capital — even when the stock market basics guidelines are followed.

For instance, who could have foreseen that a week or so ago that Japan would suffer an earthquake, followed by a tsunami, followed by a nuclear plant meltdown? Such instances and others, such as the political unrest in the middle east, not totally anticipated in the first of the several occasions, do have an affect on the market and some stocks take a big hit and a stockholder suffers a loss — even though their stocks may have had great prospects when chosen.

Yes, but how much?
Others may have different opinions, but for my own case I would not be afraid to start stock market trading with one thousand dollars or less — and I would be prepared to buy just 100 shares of just one $10 stock to start. A lot of quality high-priced  stocks would not be available, so to obey my own guideline of “no stocks under $5″, would require a search for candidates between 5 and $10. I would definitely consider also an options position. I have written quite a lot about options on this website, my views are given in 6 articles that can be found by scrolling down to the category sub-heading “Stock Options” that can be accessed at List of Topics.

But a larger stake provides so many more opportunities
Obviously, starting up with more cash provides many more trading opportunities. Based on each trading position being bought and sold in about a 3 or 4 month period, starting with just one stock position provides only 3 or 4 trades in a year — and there will be some losses, not all trades will be profitable. Compare that with an 8 or10-stocks portfolio, turning over at that same rate of about 3 or 4 month would provide 30 or 40 trading opportunities, again there will certainly be some losses, there always are.

$10k, $5k, $1k, the trading guidelines are the same Whether starting with $10, 000, $5,000, or $1,000, the same trading guidelines apply and we will discuss those in the next post, tomorrow, when we can begin our new paper trading series in which the plan is to run a 5 or $10,000 starting portfolio and a $1,000 portfolio side by side, in real time, picking current stocks that, careful as we are, may not turn out to be winners, but should teach us something.

A new Series:   The need to learn stock market basics trading principles
The purpose of this paper trading approach is to be able to present and illustrate stock market basics principles by using real stocks and real data in real time — we will pick the stocks and see how they trade in the marketplace as time passes. Although they will be simulated trades, we will follow the “house” guidelines. We will make our buy and sell decisions and monitor the stocks as if they were real trades  and in this way, according to the objectives of Stock Market Basics Guide, anyone who should follow along will be able to make their own judgements, learn and heed the positive things, and discount what fails.

Afterthought
Our two previous single-stock paper trades, for AGCO and ASYS, on separate occasions late last year, were very successful and are summarized at ASYS, How did we do? and AGCO Update and those articles are preceded by the earlier related articles on this website that tracked the progress of the simulated trades as they progressed from time to time.

It was a week ago, on March 12, that we last looked at the chart for the general market as conveyed by the S&P 500 index and as described in this post: March 12, S&P 500.

Since one of the objectives of this series of posts dealing with stock market basics is to familiarize visitors with the use of stock charts and how they can be of value in decision making when buying stocks or assessing trading possibilities, let us take this opportunity, now a week later, to see how the general market is currently evolving and what the charts convey if anything.

Here are both the March 12 and March 19 charts: (Click on the charts to enlarge slightlty for better clarity)

S&P 500 Chart March 12, 2011

S&P 500 March 19, 2011

What does the March 19 chart tell us?
Well, the 50 day moving average line, shown in blue, that we had hoped the market would “bounce” off, did not hold and was penetrated, probably partly due to the market’s continued response to the geopolitical events of the middle east and the natural disaster of the earthquake in Japan and the tsunami that followed, an unusual event with no warning that could not have been foreseen by any chart watcher.

The market continued on down for the  next few days, but as mentioned previously when the trend is down we would not have considered a play in the market, especially on the long side, and we would have continued to observe from the sidelines — but ready to exit any positions we may already hold if their safety stop-loss sell levels were reached.

It would not have been because we had lost faith in such stocks or because we believed they could no longer reach their original much higher price objectives, but we would have exited to obey our “house rules” or guidelines that govern our trading. Guidelines that are adopted because they have  been shown in the past, on numerous occasions, to reduce our risk of losing much larger sums of money. As the great stock market trader Bernard Baruch (and many others) stated long ago: “Even being right only three or four times out of ten should yield a person a fortune if he (or she) has the sense to cut their losses quickly.”

Let me interject a little preachy personal comment here:
It has already been emphatically expressed in earlier posts on this stock market basics site, that such simple guidelines as the foregoing are important in the learning process on how to buy stocks and trade in the market. If they are followed by the greatest stock market traders, and they are, they can prove to be of value and contribute to your future success and lower the risk of losing working capital. Those are among the lessons to be learned at stock market basics guide that I hope someone can personally benefit from.

To continue . . .
The March 19 chart does also show that there  has been a two day reversal to the upside to close out the week — which was also monthly options expiration day, often a day of uncertainties. It does not yet provide more than an alert, but on seeing it the question immediately arises: Will this upward blip prove to be the end of the mini-correction that started early in March?  The bullish traders hope so, they are looking for a renewal and continuation upwards of the interrupted trend to provide new trading opportunities.

If that hapens, we will join them and paper trade a new portfolio geared to simulate the trades that might reasonably be made by a beginning trader with just a small amount of working capital, following guidelines and routines that we can explain on this site as we go along.

But meanwhile we cannot know whether we are experiencing a short-term mini-correction or whether something more significant is developing. We must wait and see, but it is necessary to remain cautious at this time — and follow the guidelines: “Don’t trade against the trend.”

Get ready, prepare for a new sequence of real-time paper trades for illustrative and learning purposes
While we await the development and watch for a confirmation that the trend is upward, if that is to be, we can start anyway by working on the process of selecting stock candidates that precedes buying stocks. We will then, at the appropriate time, commence to buy stocks (and options) and monitor their progress until they are eventually sold, at various stages, to complete the cycle. The question as we go will always be “Will we make a profit, even if it is only on paper?” But it must be authentic, it is a learning process isn’t it?

Buying stocks
With an online brokerage account opened, buying stocks and selling stocks online is a simple process involving a number of pertinent entries to the online order form that your new broker can explain when setting up an account. It’s a “mechanical” entry process that becomes more familiar with use when buying or selling stocks with some frequency — after the initial period of hesitation and uncertainty in specifying symbols, prices, quantities and conditions relating to the stock of choice.

For some brief general introductory comments on buying stocks and a little background on the Stock Market, Wall Street, and Stock Exchanges, please check out our earlier post Objectives and scroll down to “First Things” part way down that first page.

Before the stock purchase
Placing the order is the easy part, but there’s a lot of work to be done before that can happen and a lot goes into finding and qualifying stock candidates to trade first. It’s the more creative process of picking stocks and then the steps to follow to trade them that this stock market basics guide is mainly concerned with.

To begin to gain an understanding of the market we should probably begin to use some of the jargon of the market, often called Wall Street, or just “the Street”, (to name the first two) — so let us do so as we introduce at random some of the basic background information we need to know at the beginning of our stock market basics experience.

First, we need to know the trend
To trade successfully it is necessary to acquire an understanding of how the market works and to interpret changes that constantly occur. So let us start with the need to know how the  market is currently performing and what is the trend, since we follow the guideline “Don’t trade against the trend.”

Most successful traders are students of the stock market and know how to interpret the meaningful changes that take place as the trading day progresses and the prices, volumes, and averages trend in response to the pressures of supply and demand.

The trend
The trend, once established, is background information of longer term and we will watch for changes that normally take quite a while to develop. To find the trend right now, we can check out a chart of the any or all of the market indexes, the DOW Jones, the Nasdaq, or the S&P 500, covering the period since the last major trend change.

Here for instance is a weekly line chart of the S&P 500 for that period, it shows the market has been mainly up trending since March of 2009 (with an intermediate interruption starting March 2010) — click on the chart to enlarge it slightly for a sharper view:

To bring us more up-to-date, the shorter period daily chart of the last 4 months shown below, shows that a change in trend started about 17 February of 2011 at around 1340 (the values on the right vertical side and which for now we will call a resistance level) and continued down to about 1260, a possible new support level, and then has reversed slightly for the last 2 trading days. We will discuss Support and Resistance more fully later, in a separate post.

So now we know the general trend, up mainly for quite a long time now, since the previous mini retreat ending around late June of 2010, that’s about 7 plus months (we will keep that in mind and maybe the next “leg of the uptrend, if it occurs, will be of equal length, it’s just a possibility, but patterns tend to repeat themselves and that is a basis for a lot of interpretation and forecasting — that patterns repeat themselves ).

Conclusion
The recent change in trend, short as it is, to date has not been resolved as yet by the last 2 days of reversal, so for now, being cautious and to minimize risk, we don’t trade long against the current downtrend so we will stand on the sidelines and observe.

But if we currently hold stocks we should follow our established guidelines (to discuss again later for newcomers to this site) that  require us to exit a position if the market falls to given point. See our recent post: Know When to Sell.

Market Summary Index Prices and short term market performance
Next we’ll deal with the short term market performance summarized by the closing values for the main indexes, the Dow, the Nasdaq, and the S&P. You can find them on the MARKET SUMMARY box on the Fianace.Yahoo.com at top left — or they are given on CNBC television at the running head at the top of the screen as they change moment to moment throughout the trading day. There are several other indices that we could discuss later elsewhere on Stock Market Basics, but the 3 mentioned here are the main ones referred to so that’s enough for starters. Here are the closing values for yesterday, Friday March 18, 2011.

While the main objective of this stock market basics website is to introduce trading routines, explain how trades can be made and the considerations leading up to entering or exiting a stock position, it should also be pointed out that there is much additional background information and market lore that is not directly related to actual specific trades but is, nevertheless, worth knowing.

Know what is happening in the “market”
To stay up to date on what is happening in the stock market, I recommend the day be started with a brief visit to one of the financial information websites such as SmartMoney.com, MarketWatch.com, Finance.Yahoo.com or any similar site that provides the latest breaking financial news and comment.

In addition to news and comment, those sites also have sections dealing with personal finance and investing, stock quotes and stock picks and much more.

Why I like Yahoo
My personal choice is the Finance.Yahoo website where I can find much information of value every day, too much for me to summarize here but I will mention two resources I especially appreciate: one is where I can track my portfolio of stocks and my watch list of stocks — they are summarized in detail and updated constantly throughout the trading day. And the other is the Quote Box that provides updated prices of the 10 stocks for which I have most recently requested quotes, and that’s really convenient and saves me the time it would otherwise take to enter their stock symbols individually.

And centered right at the top is the box headed “TOP STORIES” with links to about 10 or more significant articles — check it out for items of interest.

Check out all the sites mentioned above, at least once and settle on whichever site you prefer for your suggested henceforth daily visit. As a beginner wishing to learn the stock market basics, you would do well to access some of the articles, lists and summaries on current financial activities that can build your foundation of general stock market knowledge.

I am not suggesting the content be studied, but merely a quick glance at articles and other financial information displayed from which you can select whatever seems of interest or piques your curiosity as you begin to become a little better informed about the stock market, as you will, and as you adopt your preferred routine.

For the next post
What I really want to discuss when it comes the stock market news is How the News Can Affect Stocks – I think that will be the title of the next post on Stock market basics guide, hopefully tomorrow, while I have some specific examples in mind. I especially wish to refer to news about AKAM which we could also consider as one of the stock and options trades in our next paper trading series to start in a few days  — although taking a position will depend on the chart factors that we will establish and discuss, I will also post the AKAM chart.

 The objective of this stock market basics website is to provide information that will help the stock trading newcomer gain some basic knowledge and an understanding of how the market works, essential for success — where success in the market is measured by profitability.
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Latest Posts: (Click Title to Access) 

After the Breakout, What Next? (Feb 06, 2012)

January Breakout Confirmed – An Update

Still Waiting for the Breakout

Introducing Trading And The Stock Market For Dummies

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List of Other Introductory articles (Click Title to Access)

About Being Successful in the Stock Market — Show Me the Money!

How Much Money is Needed to Start?

The Stock Market Basics Approach to Buying Stocks

It Takes More Than Just Being Able to Pick Good Stocks

Finding Stocks to Trade, the Watchlist, Trade Selection, Setting Objectives

A Case for Buying Options Instead of Buying Stocks
Stock Options Explained – Part 1
Stock Options Explained – Part 2

For the Small Trader, An Alternative to Buying Stocks

Trading the NASDAQ Index with ETFs and Options as an Alternative to Buying Shares
Buying Stocks or Buying an ETF (Exchange Traded Fund)

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With special emphasis on

Short-term Trading in the Stock Market

For the beginning trader, or would-be trader, with the purpose of explaining essential trading guidelines that have been shown in the past to reduce risk, capture maximum gains, and limit losses.

It assumes the beginner is starting out with only a small amount of trading capital to risk, so the simulated paper trades, portfolios, and suggestions referred to on this site do take that into account.

About Articles on this website

Inevitably, since the stock market changes hour by hour and day by day, some of the older articles posted a while ago on this website will become outdated, although the reasonings given for some of the particular activities covered in those posts may not at all be obsolete. For that reason most of them will be left in place for the time being.

Referenced here are guidelines developed by some of the greatest and most successful traders of the past and present. Take advantage of their knowledge and experience. Emulating a successful trader who started out in a small way may be one of the best ways to succeed.

Stock charts are used for illustration and simulated trades of current stock issues are used where possible to track and explain, and for the reader to observe, what happens in the life of an individual stock trade — in real time, as it happens and while it happens.

For a more extensive introductory page, see Stock Market Basics Guide — Our Objectives.

Monitoring stock market activity and portfolio performance

This website is written with the beginning trader in mind, hence the stock market basics reference in the title. It occurs to me that anyone who really is wishing to learn the stock market basics, might like to know how a small trader, with positions in about 10 stock and options issues and trading for the short term, might approach the trading day. For myself, I rely a lot on the Finance Yahoo site for up-to-date information, as discussed below.

Trading for the short term
By trading for the short term, I mean that the selected stock or options positions are expected to achieve their price targets within about 4 months. By that time they would likely be sold. with some reaching their initial price target and beyond, which in my own approach is a 25 to 30% gain or more. Or they may have gained less than the target percentage or made a small loss but will be sold in keeping with a guideline I like to follow. One of those guidelines is that they should not be held through the next earnings announcement date — or in the case of options, they must be sold about one month before expiry date when there would probably be a little time value in them.

Earnings announcements
Perhaps earnings announcements season, that takes place every quarter, should be discussed elsewhere in stock market basics but my personal experience is that a good stock can plunge in price when earnings are announced because they may have missed the Wall street stock analyst’s earnings forecast by a cent or two. Or the price may go down because a different issue in the same sector or type of business has taken a hit for whatever reason — see the reference to JDSU, below.

But to return to the trading day possible routine. I like to know what is happening during the day and, as time and opportunity permits, I try to check the stock indexes, the DOW, Nasdaq, and S&P, once or twice a day, especially when things get volatile, as they have been in recent days after the earthquake and tsunami in Japan and when the market is taking a big hit to the downside — not that much can be done in these situations, other than stay on the sidelines and watch, knowing that in most cases there will be a partial or full recovery, sooner or later.

It may not be typical of what other non-professional and small traders (let’s call them “part timers”) do to keep up to date but I like to try to gain an understanding of what happens during those extreme events, knowing it will happen again on some other occasion in the future — and the experience might guide me when it does happen. And when things are less chaotic, I like to know anyway how my stocks and the market are performing.

Trading, as opposed to investing, involves a much shorter time horizon during which volatility in the daily market place can affect issues very quickly and for me, being aware of what is taking place is part of the necessary due diligence.

I usually wait to see the end of day closing prices to assess whether any action on my stocks is necessary — if they are in good shape and rising in price — or not falling in price — I need not worry, if they are falling in price I need to know how close they are getting to my mental 9% stop loss value, small fluctuations in price don’t matter. It’s the big and sudden drops such as that of JDSU and others that occurred last week that require a response — as described on last week’s post: What to Do When a Stock Falls in Price. Those are the times that require careful consideration — especially since my stop loss values are not left as instructions with the broker but self-actuated, meaning I have to process the sell instruction myself online.

The value of Yahoo portfolios — how I keep updated
It’s pretty simple really. For my stocks and my watch list, I check online by logging into Finance.Yahoo.com — where I can quickly review the lists of stocks (only about ten or so) that are stored on the Yahoo site, it’s quick and easy and more convenient than checking with my brokerage account. The individual stock activity taking place, and the  overall summaries of gain and loss, are constantly being updated. Also, easily accessed at the same time  on the Yahoo site are other relevant news items of interest.

How to set up a Yahoo Portfolio
In the next post to this website, I must provide instructions on how to set up a portfolio on Yahoo. Useful to anyone in the stock market basics learning stage who may wish to build a watch list or do some stock market paper trading to gain experience without actual trading for real.

See JDSU chart at end of this article for reference.

A basic urging proclaimed on this Stock Market Basics site is “Know when to sell!”

Guidelines are formulated to help make appropriate decisions when situations arise that directly affect your stock holdings, decisions about which you might otherwise be indecisive. They are a safeguard that helps manage risk and once established they should be followed.  Especially in the early days of trading, when you are still becoming familiar with the stock market basics, you will be unsure of what to do and when that happens it can be a costly experience.

For Example:
You may hold a stock that falls unexpectedly in price, closing perhaps as much as 8, 9, 10 percent or more from it’s recent high. It happens from time to time, sometimes over several trading sessions or longer and sometimes in a single day. (Below I will briefly detail one of several that just happened, a few days ago on March 9, 2011 — with the chart of JDSU added to illustrate the event.)

And it happens to every trader, sometimes frequently and in many cases the fall in the price of a stock is not directly connected with the fundamental properties of the stock which may not have changed. And quite often a good case can be made for continuing to hold. As a stockholder, we might tell ourselves that perhaps there has been an irrational reaction to some situation unrelated to the stock and the stock itself has merely encountered a temporary setback and will soon resume its upward path to reach the higher price that was the potential target established when the trade was originally entered into.

That sounds right, doesn’t it? And that may well be what will happen before too long passes — and that is the rationale that guides many “amateur” traders or beginners — who have not yet become familiar with the guidelines suggested in Stock Market Basics and other information sources.

It is hard to take a loss, but  follow the guideline and sell !
Trading is a highly speculative activity and to achieve success it is necessary to follow basic guideline that can help manage its inherent risks and to limit losses to within a tolerable range — but at the same time, without exiting a position too soon, allow the capture of a significant amount  of any gains that may occur.

Before a trade is entered into, one of the basic guidelines for trading is to know the exit price, based on and dictated by any price reversal from the most recent achieved high price, whatever that price might be. Perhaps that might be more clearly expressed by stating:

When the stock price falls and closes lower by a pre-established percentage amount, or more, from its most recent high, place an order to exit the stock position. Always follow this guideline.

A frequently used percentage is 8% or 9%, but whatever the number chosen, do not deviate, if the stock price falls by 8% or whatever, sell it!  Many beginning traders become indecisive when faced with a loss and they hold on with the result that the loss sometimes becomes even greater — and sometimes quickly.

Will the loss be limited to the pre-establish percentage?
Unfortunately not, sometimeds the trading moves too fast to obtain the specified price, or if you only act after seeing end of the day closing prices as many traders do, the stock may have moved lower than the preferred 8 or 9% and the sell order would be placed after you see the action at the next day’s opening of trading. The following JDSU example describes that scenario.

A current example: JDS Uniphase (JDSU)

JDSU stock had traded up to around $27.50 on Friday of last week but on Wednesday it took a 20% drop to down around $22 at the close — that exceeded the 8 or 9% loss for the target exit price but that’s what can happen. As it worked out, it meant that even with the pre-established acceptable loss pegged at 8% or 9%, the best price that could be received the following morning was around $22.37 price, about $3 lower than planned.

Now, the price may quickly go back up but that does not matter, the guidelines must be followed, in this case taking a loss. The guidelines have been proven to work and help preserve working capital, the name of the game — many people have lost their proverbial shirt by not following the basic guidelines, in this case the shirt really being the trading stake, the working capital to stay in the game and be ready to fight another day in the unforgiving trading arena.

Here is a chart that shows the big one-day drop in JDSU — but note the previous gap on February 4, 2011 that took the stock suddenly higher, so it can be seen how big stock price changes occur to the upsise as well as to the downside.

JDSU Re March 9 gap down