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?

EMC March 29
EMC March 29
HAL - Haliburton March 29
HAL – Haliburton March 29
XRX March 29
XRX March 29

Related posts:

  1. Part 2, Starting With Small Capital
  2. Paper Trading Portfolio No. 3 — An Explanation of the Stock Market Basics Approach to Short-term Trading
  3. About Stock Market Basics Paper Trading Portfolio 3
  4. September 01, 2011: Our New Paper-trading Portfolio is Up and Running
  5. Stock Market Basics Paper Trading Portfolio No. 3
  6. Still Waiting on the Sidelines to Start Paper-Trading Portfolio Number 3
  7. September 19th: Time to Review Our New Paper-Trading Portfolio and the Stock We Are Buying

Filed under: Stock Market Basics

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