Trading for Dummies

Introduction 1About This Book 2Foolish Assumptions 2Icons Used in This Book 3Beyond the Book 3Where to Go from Here 4Part 1: Getting Started with Trading 5Chapter 1: The Ups and Downs of Trading Stocks 7Distinguishing Trading from Investing 8Seeing Why Traders Do What They Do 8Successful Trading Characteristics 9Tools of the Trade 10Taking Time to Trade More Than Just Stocks 10Position trading 10Short-term swing trading 11Day trading 12Going Long or Short 12Managing Your Money 12Understanding Fundamental Analysis 13Getting a Grip on Technical Analysis 14Putting Trading Strategy into Practice 15Trading at Higher Risk 17Remembering to Have Fun! 17Chapter 2: Exploring Markets and Stock Exchanges 19Introducing the Broad Markets 19Stock markets 20Futures markets 20Bond markets 21Options markets 22Reviewing Stock Exchanges 22New York Stock Exchange (NYSE: ICE) 22NASDAQ 24Amex (now NYSE MKT LLC) 25Electronic communications networks (ECNs) 26Understanding Order Types 26Market order 27Limit order 27Stop order 28Stop-limit order 29Good-'til-canceled order 30Other order types 30Chapter 3: Going for Broke(r): Discovering Brokerage Options 31Why You Need a Broker 32Exploring Types of Brokers and Brokerage Services 32Full-service brokers 32Discount brokers 34Direct-access brokers 34Proprietary trading firms 36Futures brokers 36Services to Consider When Choosing a Broker 36Types of orders supported 36Data tools 37Charts 37ECN access 38Knowing the Types of Brokerage Accounts 38Cash accounts 38Margin accounts 38Options 39IRAs and other retirement accounts 39Choosing the Right Broker for You 41Considering more than price 41Doing a little research 42Understanding how you'll be paying 43Getting to Know the Rules 43Margin requirements 43Settling trades 45Free riding 45Chapter 4: Putting Your Key Business Tool to Work: The Computer 47Making Use of Your Computer 48Identifying trading candidates 48Managing your account 49Improving your trades 49Finding Price Charts 49Checking out Internet charts with delayed prices 51Considering Internet charts with real-time prices 51Looking into charting software 52Digging Up Fundamental Data 53Accessing Analyst Reports 54Selecting a Trading Platform 54Browser-based trading environments 55Integrated trading platforms 56Features to consider 57Determining Computer Requirements 58Weighing Windows versus Mac versus Linux 58Configuring your computer system 59Accessing the Internet 61Picking a browser 61Securing your computer 61Part 2: Reading the Fundamentals: Fundamental Analysis 63Chapter 5: Fundamentals 101: Observing Market Behavior 65The Basics of the Business Cycle 66Understanding how periods of economic growth and recession are determined 67Using economic indicators to determine the strength of the economy 68Relating bull markets and bear markets to the economy 70Employing a Sector Rotation Strategy 70Early recovery 71Full recovery 72Early recession 72Full recession 73Sector rotation 73Understanding Economic Indicators 74Interest rates 75Money supply 76Inflation rate 76Deflation 78Jobless claims 79Consumer confidence 80Business activity 80Using Data from Economic Indicators 82Chapter 6: Digging Into Fundamental Analysis 85Checking Out the Income Statement 86Revenues 87Cost of goods sold 87Gross margins 88Expenses 89Interest payments 90Tax payments 91Dividend payments 91Profitability 92Looking at Cash Flow 93Operating activities 94Financing activities 95Investment activities 96Scouring the Balance Sheet 97Analyzing assets 97Looking at debt 98Reviewing goodwill 99Determining Stock Valuations 99Earnings 100Earnings growth rate 100Figuring Your Ratios: Comparing One Company's Stock to Another 102Price/earnings ratio 102Price/book ratio 103Return on assets 103Return on equity 103Chapter 7: Listening to Analyst Calls 105Getting to Know Your Analysts 106Buy-side analysts: You won't see them 106Sell-side analysts: Watch for conflicts 106Independent analysts: Where are they? 109The Importance of Analysts 109Tracking how a company's doing 110Providing access to analyst calls 110Pointers for Listening to Analyst Calls 112Understanding the analysts' language 113Developing your listening skills 114Locating Company Calls 117Identifying Trends in the Stock-Analyst Community 117Part 3: Reading the Charts: Technical Analysis 119Chapter 8: Seeing Is Believing: An Introduction to Technical Analysis 121Understanding the Methodology 122Finding everything in the price 123Seeing that price movements are not always random 124Balancing supply and demand 125Understanding where you've been 125Understanding where you're headed 127Answering the Detractors 128Walking randomly 129Trading signals known to all 129Executing Your Trading Plan 130Using StockCharts.com 131Chapter 9: Reading Bar Charts Is Easy (Really) 135Creating a Price Chart 136Looking at a single price bar 137Measuring volume 138Coloring charts 140Identifying Simple Single-Day Patterns 140Single-bar patterns 140Reversal patterns 142Recognizing Trends and Trading Ranges 143Discerning a trading range 144Spotting a trend 145Paying attention to time frame 146Searching for Transitions 147Support and resistance: The keys to trend transitions 147Finding a breakout 149Sipping from a cup and handle 151Deciding what to do with a double bottom 152An alternative double-bottom strategy 153Looking at other patterns 154Chapter 10: Following Trends to Boost Your Probability of Success 155Identifying Trends 156Supporting and Resisting Trends 157Drawing trend lines to show support 158Using channels 159Trending and channeling strategies 160Seeing Gaps 161Common gap 162Breakout or breakaway gap 162Continuation gap 162Exhaustion gap 163Island gap 164Waving Flags and Pennants 164Withstanding Retracements 165Three-step and five-step retracements 166Subsequent trading ranges 167Dealing with Failed Signals 168Trapping bulls and bears 168Filling the gaps 169Deciding whether to reverse directions 169Chapter 11: Calculating Indicators and Oscillators 171The Ins and Outs of Moving Averages 173Simple moving average 173Exponential moving average 175Comparing SMAs and EMAs 178Interpreting and using moving averages 179Support and resistance factors 181Deciding the moving average time frame 182Understanding Buy and Sell Pressure through Stochastic Oscillators 183Calculating stochastic oscillators 183Interpreting stochastic oscillators 184Tracking Momentum with the MACD 185Calculating the MACD 186Using the MACD 187Revealing Relative Strength 190Calculating relative strength 190Putting relative strength to work 191Part 4: Developing Strategies for When to Buy and Sell Stocks 193Chapter 12: Money Management Techniques: Building a More Robust Portfolio 195Achieving Your Trading Goals with Smart Money Management 196Managing Your Portfolio 197Thinking of trading as a business 197Recognizing the trader's dilemma 198Finding a better plan 199Protecting Your Principal 201Recovering from a large loss: It ain't easy 202Setting a target price for handling losses 203Strategies for managing profitable trades 205Understanding Your Risks 209Market risks 209Investment risks 210Trading risks 210Chapter 13: Combining Fundamental and Technical Analyses for Optimum Strategy 213Seeing the Big Picture 214Knowing when the Fed is your friend 215Keeping an eye on industrial production 215Watching sector rotation 216Finding the dominant trend 220Selecting Your Trading Stock 225Trading Strategies 226Trading the bullish transition 226Trading in a bull market 227Trading the bullish pullback 227Trading the bearish transition 228Trading in a bear market 228Trading the bearish pullback 229A hypothetical trading example 229Chapter 14: Minimizing Trading Risks Using Exchange-Traded Funds 231What Is an ETF? 231Examining the advantages 232Avoiding the flaws 233Does Family Matter? 233Market-weighted ETFs 234Equal-weighted ETFs 235Fundamentally weighted ETFs 235Sector Rotation Strategies 236Early recovery 236Full recovery 236Early recession 237Full recession 237Analyzing ETFs 237Portfolio Construction 239International trading with ETFs 239Commodities and ETFs 239Currency trading and ETFs 239Leveraged ETFs 240Inverse ETFs 240Chapter 15: Executing Your Trades 241Entering and Exiting Your Trade 241Keeping straight the bid and the ask 243Understanding the spread 244Devising an effective order-entry strategy 244Timing your trades: Entering orders after the market closes 247Reviewing a week in the life of a trader 248Selling Stocks Short 253Avoiding Regulatory Pitfalls 254Understanding trade-settlement dates 254Avoiding free riding 255Avoiding margin calls and forced sales 256Avoiding pattern-day-trader restrictions 258The Tax Man Cometh 258Chapter 16: Developing Your Own Powerful Trading System 259Understanding Trading Systems 260Discretionary systems 261Mechanical systems 261Trend-following systems 262Countertrend systems 263Selecting System-Development Tools 264Choosing system-development hardware 264Deciding on system-development software 264Finding historical data for system testing 266Developing and Testing Trading Systems 267Working with trend-following systems 267Using breakout trading systems 270Accounting for slippage 275Keeping a Trading Journal 275Evaluating Trading Systems for Hire 276Part 5: Risk-Taker's Paradise 279Chapter 17: The Basics of Swing Trading 281Selecting Stocks Carefully 281Looking at Swing-Trading Strategies 283Trading trending stocks 283Trading range-bound stocks 287Trading volatility 289Money management issues 291Using Options for Swing Trading 291Getting a Grip on Swing-Trading Risks 293Taxes (of course) 293Pattern-day-trading rules apply 294Chapter 18: The Basics of Day Trading 295What Day Trading Is All About 296Institutional day traders (market makers) 296Retail day traders 296Understanding Account Restrictions 299The Fed's Regulation T: Margin requirements 299Settlement: No free rides 301Strategies for Successful Day Trading 301Technical needs 302Trading patterns 302Scalping 303Trend traders 303Recognizing That Risks Are High 303Liquidity 304Slippage 304Trading costs 305Taxes (of course) 306Avoiding the Most Common Mistakes 307Chapter 19: Doing It by Derivatives 311Types of Derivatives: Futures and Options 312Buy now, pay later: Futures 312Wait and see: Options 316Buying Options and Futures Contracts 321Opening an account 321Calculating the price and making a buy 322Options for Getting Out of Options 323Offsetting the option 323Holding the option 324Exercising the option 324The Risks of Trading Options and Futures 325Minimizing Risks 326Chapter 20: Going Foreign (Forex) 329Exploring the World of Forex 330Types of currency traders 330Why currency changes in value 331What traders do 332Understanding Money Jargon 333Spot transactions 334Forward transactions 334Options 335Looking at How Money Markets Work 336Different countries, different rules 337The almighty (U.S.) dollar 337Organized exchanges 337Taking Necessary Risks in the World Money Market 339Understanding the types of risks 339Seeking risk protection 342Getting Ready to Trade Money 343Part 6: The Part of Tens 345Chapter 21: More Than Ten Huge Trading Mistakes 347Fishing for Bottoms 347Timing the Top 348Trading against the Dominant Trend 349Winging It 349Taking Trading Personally 350Falling in Love 350Using After-Hours Market Orders 351Chasing a Runaway Trend 351Averaging Down 351Ignoring Your Stops 352Diversifying Badly 352Enduring Large Losses 353Chapter 22: Ten Trading Survival Techniques 355Build Your Trading Tool Chest 355Choose and Use Your Favorite Tools Wisely 356Use Both Technical and Fundamental Analyses 357Count on the Averages to Make Your Moves 357Develop and Manage Your Trading System 358Know Your Costs 358Have an Exit Strategy 359Watch for Signals, Don't Anticipate Them 359Buy on Strength, Sell on Weakness 360Keep a Trading Journal and Review It Often 360Index 361