Stock Market Basics Guidelines And The S&P 500 Index Today
It pays to learn the stock market basics before entering the fray
The objective of this stock market basics website is to provide information to the would-be stock market trader in order to provide an introductory level of basic information to help guide future stock trading activities.
The motivation to start trading in the stock market is to make money. However, the stock market is frequently where people lose money fast, especially those with little knowledge and who are unprepared for the unexpected reversals the stock market so often exhibits – as it has been doing in recent weeks.
There is a saying “If you think education is expensive, consider the cost of ignorance”. I think that trading in the stock market validates that aphorism. Stock market trading can often be a challenging pursuit for even the experienced and best informed participants.
Basic rules to trade by:
Trading rules cannot guarantee a profit but it can really help to know them, understand them, and follow them. Many well-known and proven unofficial trading rules, which we refer to here as the stock market basics guidelines, are followed almost automatically by experienced traders. Among the most fundamental are the following five:
- Trade with the trend. Be sure you know the current trend, whether it be up or down or sideways. A stock chart will inform you at a glance whether a trend is rising or falling or sideways. A sideways trend is often referred to as being “rangebound”.
- Cut losses quickly but let profits run. Risk management at it’s best.
- Bulls make money, bears make money, but pigs get slaughtered! A modification of # 2 is: Be ready to take a profit. While not wishing to exit too soon from a winning position, reversals can often occur quite suddenly. If you are not alert to that possibility a nice apparent profit evaporates quickly, keep in mind, a profit only becomes a reality when a winning position is sold.
- Do not add to a losing position. When already holding a long position, do not average down, meaning do not buy more stock when the stock’s price declines substantially as indicated by it’s falling trend line.
- Buy Strength, Sell Weakness. Stocks that trade up to their 52-week highs frequently continue to trade even higher. Stocks that trade at their 52-week lows are more likely to continue to go lower.
A look at the broad market as depicted by the S&P 500
A quick look at the weekly chart for the S&P 500 stock index indicates we are mostly range bound at this time, 21 December, 2011. Perhaps the first thing that many traders are looking for is a breakout above the trading range and to a continuation above the 50 week moving average, shown as the blue line in the chart below. Another possibility, of course, is a breakout on the downside to below the 200 week moving average, the red line on the chart, but that is less likely I believe.
Much of the recent activity has been governed by the uncertainty regarding what will happen in the euro zone and whether the several financial crises there will be overcome. The stock market dislikes uncertainty.
Chart of S&P 500 21 December 2.17 pm
What’s in the near future?
I was just reading that, except for 2008, most recent election years have provided positive upside gains, so that would be a good starting bias going into 2012. Also, most corporate earnings projections are strongly positive, giving additional reasons for optimism that we can end the year in strong fashion with an equally positive following quarter through to the end of March.
While it may be best to stay on the sidelines at this time we should be ready with some potential stock candidates to trade if and when we break through the above-mentioned blue 200 moving average resistance line, which could be very soon.