It is not essential to build a watch list for the purposes of following the articles on the new Stock Market Basics “Limited Capital” paper trading portfolio. Although for actual trading I believe it is beneficial to have one — it saves time, making it unnecessary to repeatedly enter the same stock symbols when monitoring an established list of stocks that might be likely candidates to trade later on, when it comes time for buying stocks, perhaps when additional funds become available when other of the portfolio’s stocks are sold.

Anyone who wishes to build a watch list of the stocks listed on the Stock Market Basics website for our current paper trading portfolio (Number 3) can do so at a number of reliable financial web sites, my own preference is to use the one available at no cost, like most others, at Finance.Yahoo.com.

Establishing an account
It requires an internet account and if you don’t already have one, it is a simple process to open an account a Yahoo account and establish a unique password. Once logged in, the computer usually remembers the password and does not require it on future visits to the site.

But when setting up a portfolio for the first time, after calling up the home page at Finance.Yahoo.com, go to the tab marked “My Portfolios” at centre-top of the page. When hovered over, it directs you to “sign in to access my portfolios”, a click on this will take you to the sign in page where an account can be registered in the usual manner, or if already opened, the username and password will be entered.

After that, go again to the My Portfolios tab at center-top, click on “Create New Portfolio”, on the page that appears, click on “Track a symbol watch list”, that will then take you to the page where you enter for the following steps:

Step 1: the name you wish to use for the portfolio (e.g.: “Practice Portfolio, or Paper Trade Portfolio, or whatever)

Step 2: the names of the stocks we are watching, separated by commas, which are: [you can highlight and copy them here]

AUY,CVI,EMC,HAL,HBAN,MO,SCHW,QQQ,QLD,STX,XRX,

Step 3: Tick “Sort symbols alphabetically”

Then click “Finished” and the complete current watch list should now be added to your account — as given in yesterday’s stock market basics post, listed below.

The first stock choice
The initial contemplated stock purchase for this portfolio is given at the end of this article together with its stock chart. [Updated Monday a.m. April 11, 2011]

Starting with little working capital, $1,000; $5,000; $10,000
The purpose of building a speculative stock portfolio and paper-trading in real time in the way that a beginner, new to trading, might try to do, is to illustrate a possible series of actions for buying stocks when starting out with very limited working capital — a few thousand dollars instead of a more usual minimum amount of tens to hundreds of thousands.

The limited capital available places restrictions and requires discipline but let us examine what might happen when following the guidelines suggested in our stock market basics articles. One of the biggest challenges is avoid quickly depleting the working capital by losing money.

The figures and values used will be the actual values as if the trades were real-time trades instead of an exercise in paper trading. The stock prices used for final calculations will be mainly the official stock exchange closing prices.

On a personal note, there could be dangers to the credibility of this site if the suggestions made here do not prove to be successful, nevertheless, I believe the risk to the website and its credibility is warranted in order to be able to define some simple guidelines that might help the beginning trader get off to a successful start – most beginning self-directed traders lose money, especially when working capital is short. Let us together see what can happen and what lessons can be learned.

PS: Our 2 previous real-time paper trading events, detailed and carried out in real-time on this website, for AGCO (No. 1 – September 2010) and ASYS (No. 2 – October 2010) — now closed out, were very successful, meaning profitable, and they followed the same principles and guidelines as outlined in the articles on this site.

The watch List
As a beginning, our new watch list will include the following stocks — by symbol in alphabetical order:

AUY, CVI, EMC, HAL, HBAN, HL, KFN, MO, SCHW, QQQ, QLD, STX, XRX.

The stock charts for these stocks can be found by entering their symbol at either top center, or in the box at top left, of the reference site we usually use: StockCharts. The charts for EMC, HAL, and XRX were shown at the end of the earlier post that introduced the intentions of starting this portfolio.

In keeping with the suggestions of previous posts on this site –  which have identified the various steps to be taken before making a first commitment in buying stocks, the watch list has been assembled for ongoing reference that can be periodically checked to see whether entry signals, such as breakouts from resistance or support, new highs, or earnings announcements, etc., occur — and when they do, to initiate the commitment in buying the stocks indicated.

The stocks on our watch list have been chosen from a variety of typical but mainly random sources that will be referred to later in a separate post to this website when we discuss “How to Find Stocks”. This will be done so that others can independently compile, if they wish, their own separate watch lists in the same way and perhaps select their own trading candidates in order to guage their own abilities. The Stock Market Basics watch list is comprised of approximately 10 stocks that we will place in a Yahoo Finance Portfolio, with closing prices for Friday April 8, 2011. I will supply a password for the watch list so that anyone who wishes can independently track the progress of those stocks as their prices fluctuate each day from this point on. I check them at least once each day, usually after the close.

Discussing the watch list of stocks
The next post on this site will discuss briefly the listed stocks and why they were chosen as possible stocks to buy.

The path to success in trading
Is to follow well established guidelines that over the years, have been show to be effective in managing risk, minimizing losses, and maximizing profits. They are the same guidelines developed and followed by the greatest traders of the past and the present and are the result of fortunes gained, and sometimes lost. It sounds grandiose but it works. The person who is still learning the stock market basics can follow those same rules.

This post continues the paper trading process for following the basic routines to identify and qualify suitable stock candidates, a necessary step before actually making a commitment to buying stocks.

After identifying suitable stocks to trade, the paper trading process that we will follow here at Stock Market Basics, is meant to provide a simple guide to the steps to take as we monitor their progress to success or failure. Failures are part of the learning process too. for there will be losses.

Losing trades and the number one rule
Every trader experiences losing trades, it is how the losing stock positions are managed that is important. The number one rule of trading is to exit losing trades quickly, usually summed up as “Cut the losses quickly!”

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Our first stock to trade — but only after confirmation signal appears on the chart
The first stock choice is HL, Hecla Mining, a company engaged in silver mining. Silver, together with gold, has seen a significant rise in price over the last year and looks to continue in that trend.The HL Chart is shown below.

ETF as Secondary choice: QQQ
The secondary or alternate choice will be to take a position in one of the index funds (ETFs), DIA, SPY, QQQ — the least expensive of the index funds being the QQQ. We believe the market should shortly confirm a new upward trend and the Q’s will provide a measure of diversification.
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Check the news, there is more than just the technical aspects to consider
While, as speculative traders, we mostly depend on so called “technical” indicators to choose stocks and initiate trades, that does not mean we should ignore the fundamental aspects and it may help to know more about the company, associated companies in the same market sector, the industry, and relevant world events that might impact the company or its activities.

For instance, this is just one of many relevant articles to be found on internet financial sites Silver.
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HL Chart April 08

When Starting as an independent self-directed stock market participant:

If money is available, it is not difficult to open a brokerage account and start buying stocks. But for the inexperience person who is still in the process of learning the stock market basics, we offer the following suggestions on how to learn by following a sequence of steps. We will outline what’s needed to be done, from step one in selecting a stock to trade and then through the several steps until exiting a position, win or lose.

First things
We will outline our approach first, and then follow up with some specific examples. The example will be used in our next series of paper trades to illustrate the stock market basics.

Follow a plan
Whether trading or investing, and there is a difference, it is advisable for the beginning trader or investor to formulate a plan that can establish what to do in order to anticipate and deal with various situations and events that occur or may occur while being involved in stock market activity. Especially in the early days. That’s just a long way of saying “Have a Plan at the start”.

Of course, not everything goes exactly according to plan anyway, so as much as possible, a plan should allow for “contingencies” — things that happen unexpectedly.

Experienced traders may not follow an explicit plan since their previous experience has taught them what works and what doesn’t –  and successful traders generally know what to expect and know how to deal with the unexpected — and they probably follow their own set of guidelines to control the risks inherent in trading.

Our Trading Approach — The sequence of steps

Some people follow the advice of others, buying stocks without question that someone else has chosen. That can be profitable or maybe not. This website is for the person wishing to learn the stock market basics for themselves together with some simple rules that can guide their own self-directed trading activities.

Most of our own decisions to watch or trade a particular stock, as a simulated paper trade or as a real-time trade, are based on indications that are revealed on its stock chart. So it is extremely valuable to know about stock charts, at least at a basic level, it takes time and it’s an acquired skill that some cannot master, but it is worth the effort required and many successful traders will not buy stocks without first checking the charts. There are several posts on this website that discuss stock charts, and stock charts are often used in the posts for illustration purposes. Articles on this topic can be accessed by selecting the titles at List of Topics. The various chart articles can be found quickly by using a search routine for “Chart”.

There are other successful ways to trade without reference to stock charts, especially ways that take into account the fundamental attributes of a company, in some cases, doing so may require deeper research and more time but is an essential element in investing and “bigtime” trading. But the information on this site is meant to inform the small trader, with less start-up capital and who is willing to take a more simple technical approach to stock picking and buying stocks.

How much to allocate for buying stocks?
Before initiating our first trade, we need to decide how much of our working capital to commit to an individual stock position, and how many positions we wish to hold. We have to consider what is  ideal and what is practical. We need to have enough for more than a single stock purchase. In our forthcoming paper trading series, we will be precise on that as we allocate a proportion from different amounts of start up capital, namely for a $1,000, a $5,000, and a $10,000 portfolio.

Establish a plan
Once we select a stock for trading, in accordance with our method discussed below, we must establish a simple plan that identifies the following:

• Entry price and the chart signal we need to initiate a trade
• Exit strategy defining the exit price when profitable or the exit price when a loss is occurring.
• Earnings announcement date — as a precaution, we may want to exit prior to the next earnings date
• Target gain and, where possible, the date of exit.

We must determine how much of our working capital to use to buy a selected stock, how many positions we wish to hold, the ideal and the practical.

Sequence of [ 4 ] steps to finding stocks and making a trade

• Search for stocks to possibly trade — How do we find Stocks ?
• Add suitable stocks to a Watch List — stocks that qualify by meeting simple criteria, either being now ready to trade, subject to prevailing circumstances or showing chart indications that they are approaching breakouts from resistance
• Entry — How to time the entry — based mainly on the signals to watch for
• Setting our price targets and duration for holding — that may depend on stock price performance and earnings announcements.

The foregoing is to provide a basic explanation of what should be taken into account at the beginning in the early days when learning to trade.

What’s next?
The next posts to this website will outline first trades based on the above approach and should be available in a day or two — we need to be ready to maker our commitments when the main earnings announcements will be made in about one week’s time.

In a  recent post on this Stock Market Basics website , I made reference to Resistance and Support, concepts in technical analysis and stock chart interpretation that traders accept as having merit in establishing specific price levels at which stocks seem unable, in many cases, to rise above or fall below, hence the designation of Resistance and Support. They are neither scientific or mathematical but are the result of observations of what really does happen and can be readily seen on stock charts. Because of this, levels of resistance and support, resulting from several different indicators, have gained importance as reference points to watch for because eventually, stocks break through the apparent levels of confinement and in doing so, the breakouts at which they occur are regarded as signals of entry or exit points for buying stocks or selling stocks or exiting a losing position. It is normal to await confirmation, by further market action, that the stock price will stay at or above the new levels as trading continues through the following period.

S&P 500 now at established resistance level
For example at this time, April 4, 2011, the chart of the S&P 500 Index shows that the S&P is “bumping up” against an established overhead resistance level, a level based on a previous price high reached by the index on about February 19 of this year at 1344. Similarly the same applies to the other most watched indexes, the DOW ($INDU) is trading at resistance and the Nasdaq ($NDX) is nearing but requiring an additional upward push to get there.  In the post referred to above, there is a stock chart example with lines added at levels of support and resistance to illustrate the concept.

Just for a little added interest, the chart of one stock’s trading for today, a real example, shows a rather unusual but precise and readily apparent level of resistance that almost suggests the the price level was being controlled and not permitted to rise above that particular level, in other words it seems a little “unnatural” – what do you think? This chart shows that the price repeatedly reached no higher than $25.95 for the 2 hour period 2 pm to 4 pm. What will happen tomorrow at the opening? Stay tuned! (I’m looking for a break out). But it is the closing price that is most important for factoring into the trader’s decision making process.

About stock charts
I believe that for anyone who is seriously trying to learn stock market basics, and there is a lot to learn, stock market knowledge is more easily acquired gradually, by becoming familiar with the trading basics discussed in many posts on this website. Chart reading is especially important even though the trading patterns of many stocks are very erratic and their charts cannot convey much of use — but some charts are extremely informative and time should be spent in examining some of them to elicit what they portray, they can reveal many things that may not necessarily prompt a trader into buying stocks, or selling them, but it’s good practice and helps build a useful skill.

Click on the chart for a slight enlargement and a sharper view.

MO Daily Chart April 4, 2011

Rising in price all day
One more daily chart to illustrate what traders would like to see when they are holding a long position in a stock like this. And note, the volume towards the close is rising, often a good sign — meaning money is flowing in that can support a continued up move.

HLIT Daily chart April 4, 2011

We’ve been printing a chart of the Friday close of the S&P 500 with a brief explanation in recent weeks, but there’s no real need this week to print a copy for the Friday April 01, 2011 close, it’s much the same as the chart pattern for the previous Friday after a rather quiet week of trading that did move the market up to around 1332 on the S&P, challenging the previous high at about 1345. A break through at that level may lead to a nice upward move with no resistance ahead. The free chart can be found as usual at here at StockCharts.com.

For an update on the market action, there are many media reports available, you may find this one of interest, as a summary of what might be to come for this new week: What to Look For Next Week.

Let’s talk about losing
It is important for the beginning trader, learning the stock market basics, to know that there will be trading losses, even when taking positions in quality stocks that, on examination and after doing the “due diligence” as they say, meet all the criteria to warrant their purchase. Unforeseen events frequently occur to impact the market and interrupt the normal patterns of price fluctuation, sometimes to a significant extent.

Be prepared to exit promptly
When something unexpected occurs that affects a stock or the market, it is necessary to monitor what is happening and continues to happen and if a stock position in the trading portfolio is adversely affected, be prepared to exit the position promptly. Many people have lost big money by just watching their holdings decline in value day by day, being indecisive, not knowing what to do. It happens too often and can be avoided, losing trades are inevitable but it is essential to preserve trading capital by cutting losses at an early stage when it does occur.

Cut losses and let the profits run — a common axiom of the Street
You will hear it cited often. At the beginning of a trade, a trader must establish an exit strategy by fixing an amount of loss that can be tolerated and if the stock concerned should fall in price to that amount, then quickly “pull the trigger” , get out and take the loss. A typical amount, suggested by several well known speculators is to cut losses when a stock falls by 8% — or something at about that percentage. As for the gains, as suggested, when they occur, let them continue to add up, do not exit too soon while there are gains being added, but be ready to exit at an established percentage just as in the case of taking a loss.

Letting the profits run
As a company’s stock climbs in price it usually experiences a series of minor corrections, price fluctuations, but eventually it will reach a final peak and start to fall more drastically in price, due to any number of possible reasons, often after announcing lower earnings than forecast or perhaps an external geo-political event for instance.  But there comes a time when buyers cease buying stocks of that company, — even though it may, at a later date, surpass that peak. It is impossible to know at what price the stock will begin to fall back but the trader must always be watching and ready to exit when they are convinced the run-up has ended. Again, a common method is to allow an 8% loss from the highest price achieved.

Or sell when the price target is reached
It requires an appraisal skill to forecast, but if a target price is established when the trade is placed, another exit strategy is to promptly exit when that target  price is reached.

Our exit strategy
In our paper trades, we will try to establish an exit policy that depends on reaching a stock price target or reaching a specific date or passage of time from the purchase date.

Winning and losing examples
For reference, real-time examples of a two trades now in progress, one showing a loss and one showing a gain, will be discussed in the next post tomorrow with the objective of making a decision on what to do. Is it time to sell? The question is the same but each case is different.

Continuing from where we left off in the first post in this series — a quick look at each of the charts shown on that post, for EMC, HAL, and XRX shows that they are all “breaking out”, meaning that their closing price is above a theoretical resistance level. When that occurs it is often regarded as a signal to initiate a trader’s stock purchase or sale, in this case, a purchase signal for buying stocks.

Resistance and Support  (see chart below for reference)

There are several ways of identifying resistance and its counterpart, support, on a stock chart, which is one of the advantages of using charts as a visual aide to quickly identify when stock prices are nearing, breaking out, or being rebuffed at levels of resistance.

The concept
The concept of price and support and resistance is not based on a scientific approach but is based on observations of previous price movements and the identification of the various levels at which stocks or the market in general have respectively ceased moving in a given primary direction — primary meaning that minor fluctuations are ignored.

Support, once penetrated on a downtrend, can later become a resistance level on a subsequent upward reversal of trend. And the same with Resistance, it can become a level of support later after having been breached.
Support and resistance are sometimes referred to by other equally descriptive names such as floor and ceiling.

The principal is best illustrated by a stock chart, a standard tool of the trader.

NOK-Support-and-resistance.jpg

On the above chart for Nokia, the yellow line at the top is obviously a consistent resistance level at which the upward trend of the stock’s price could not continue on several occasions during the year. The lower yellow line indicates a support below which the price did not fall until its eventual penetration around May of 2010   — and when it did, it plummeted! — often what happens, both ways, down and up. The green lines all represent support levels and the upward slanting green line on the right also indicates the up trend that failed in late February, probably on an earnings announcement or the recent geopolitical troubles in the middle east and the natural disasters in Japan. It again plummeted.

To return to our watch list candidates
To get back to the three stocks in question, they coud be added to the Watch List, but after examining them and considering a few things, I will for now, confirm only EMC as a “prime” candidate and add it to a watch list that can be followed on Finance.Yahoo.com by anyone on this site who may wish to check it out — after I have given it a suitable name and entered the details — which I will do in the next few hours and advise in the next post.

Meanwhile for your perusal, I a suggesting a few more candidates for the watch list and, eventually perhaps, as trading prospects for our new stock market basics paper trading portfolio. Here they are, why not take a look at them and draw your own conclusions, I think you will recognize what to look for. One of them exhibits a different and very important pattern.

The stocks are: HL, SUM, SOL, AMAT, XOM. After I have had a chance to review them myself I will report back.

I will also be readyy to make the first paper trade for one, or more, of the new portfolios designed for buying stocks when only a small amount of working capital is available.

An opportunity to learn by observing real time “as it happens” simulated trades as they evolve in day-to-day trading

We start our venture into trading by examining below, the charts of 3 stocks — EMC, HAL, and XRX, with more to follow.

This is an exercise and an opportunity to learn some stock market basics, to introduce a beginning trader with a small amount of working capital to some simple routines to guide stock buying activities and to avoid some of the inevitable pitfalls that a newcomer must deal with — and at a time of inexperience when losses frequently occur. We believe that stock charts have a useful role in helping to understand how the price of stocks change in keeping with a variety of influences, not only supply and demand but external events as well. We will endevor to find stock charts that can illustrate and support a logical decision making process on entry and exit levels to buy and sell the issues under consideration.

I propose a careful trading approach covered by basic and simple guidelines that will be explained and then be illustrated by follow-up paper trading actions, simulated trades in real-time that obey “rules”, we will call the House Rules, for trades which we cannot, at the beginning, know whether they will prove to be successful. This will enable the follower of this series to determine the validity and effectiveness of the methods being used in the series of paper trades. In this way, the learning experience, if followed seriously, should impart some basic stock market trading know-how to the participant — it is hoped.

The primary goal is to:

1. Learn and apply the House Rules
2. Learn to use Stock Charts, to recognize specific stock price patterns and identify Buy or Sell signals that may be indicated. But not limited to just providing buy and sell signals, the charts are used daily to monitor the progress of the stocks or the market indexes (I know, that should be indices), they a useful visual aid in understanding what is taking places regarding  the issues under consideration
3. Learn about buying options as well as, or as an alternative to, buying stocks

First reference, usually the S&P 500 chart
Using the S&P 500 index chart for reference (go to StockCharts.com symbol $SPX), the 12-month chart shows that the market continues in its upward trend and apart from a possible temporary pause hereabouts, it appears that it will soon challenge the resistance level 1340 on the chart. If successful, a breakthrough would provide us a signal to enter or re-enter the market and tell us that it time to start buying stocks again. That should coincide nicely with the beginning of the next round of corporate earnings that many believe will give a boost to the up-trending market.

The next Stock Market Basics paper trading series
To be ready to start our next Stock Market Basics stock paper trading series by the time earnings season starts in earnest in a couple of weeks, we need to compile a list of stocks for our Watch List. About 10 or 15 should be enough to begin with. The stocks we choose must be affordable for the trader with a small amount of working capital — so that would eliminate such stocks as Apple ($348) and Google ($586) — although there are ways for the smaller trader to participate in the stock market with those stocks (see this Link and its recent Update.)

There are also several other attributes that define a suitable stock to be considered appropriate for the small trader, whose interests we try to mainly focus on here, although similar guidelines can be applied for any stock buying category.

For now, the unofficial categories will be for buying stocks when starting to trade with start up capital of about $1,000, or $5,000, or $10,000.

Guidelines for buying stocks

1. Generally trade only with the trend – meaning only go long (buy stocks) when the stock is an upward trend, don’t buy stocks, or add to a stock position, when the stock itself is on the way down, falling in price. Similarly, don’t go short (sell stocks) when the stock’s price is moving up.
2. Trade volume for our purpose in this series, should be 1 million shares or more daily, although in a less cautious approach that figure would be much lower, typically at around 250,000 to 300,000, the point is to provide the liquidity that allows the stock to be sold at prevailing prices at short notice if desired. Problems can be encountered when trading low volume stocks. When deciding on an entry price-point, it helps if the stock is moving up on heavier than normal volume. That can be seen by looking at the Quote Summary on Yahoo or by examining a stock chart. Check out UTEK as an example for instance and see how the stock rose today (March 31, 2011) on much heavier volume — but it is not a stock that would normally qualify under our guidelines anyway.
3. Price between $5 and about $35. Higher priced stocks are often safer, but with small start-up capital we can acquire more positions if we concentrate on the lower priced stocks, around $10 is fine. But if it qualifies, we may include a higher priced stock, such as HAL @ 47.50 for instance, but will be limited to a small number of shares — but anyway this is to be a learning and testing experience to see whether the simple approach that I am suggesting is profitable, at least in our paper trading method to demonstrate stock buying.
4. Preference is to not enter positions when a stocks earnings announcement date is near. For easy reference, an Earnings Calendar is available at Finance.Yahoo.com.
5. As time permits, I will add other guidelines shortly, but for now I would like to start posting some charts for the Watch List.

Simple patterns to become familiar with and to watch for, especially “beak-out” patterns
I will try to post 3 stock selections each day or two for your examination to help to become gradually accustomed to the simple things to watch for on charts and to get to recognize some of the favorite simple pattern characteristics. There are not a large number and I will point out and discuss briefly as the days pass, and the same patterns may occur on many of the stocks we examine for the watch list. Among the most common are a break-out from a resistance level or some geometric confining shape that can be mentally constructed on a chart — it’s something like outlining star constellations by joining imaginary lines between stars. There are many such imaginary shapes, triangles and pennants and flagpole shapes, that can be interpreted as confirmation signals for the trader wanting to buy stocks  — not all stocks necessarily will have such patterns — many of the best may not, but there are identifiable patterns that have in the past, provided a sufficient number of winners. Let us start with EMC, HAL, and XRX — our first watch list candidates that we will watch to see if they qualify.

We must also be aware stocks that could be possible candidates for trading even though they do not exhibit any tell-tale patterns on a stock chart. It will take time to deal with those many aspects but we will try.

To slightly enlarge these charts for better clarity, pleas click on the chart.

Can you see why these are possible trading candidates? And how that could be confirmed?