Trading for Dummies

387 Pages·4.675 MB·English

by  Lita Epstein, Michael Griffis, MBA Lita Epstein, Griffis, Dummies Press Staff

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Investing
Making Everything Easier!™ 2nd Edition
Now updated — your guide to
trading success regardless of the 2nd Edition
market!
Open the book and find:
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d i
a
Tr
Want to make smarter trading decisions? This strategy- (cid:127) T he ins and outs of trading stocks
packed, no-nonsense guide presents a proven system for
(cid:127) Fresh ways to analyze trends and
analyzing stocks, trends, and indicators and setting a buy- indicators T
and-sell range beforehand to decrease your risk in both up
(cid:127) Updated stock charts and Web sites r
and down markets. You’ll discover the benefits of position
a
trading, conduct technical analysis, and research your entry (cid:127) Position trading tips and
techniques
and exit points before you even purchase your stock.
d
(cid:127) Step-by-step instructions for
(cid:127) Build your trading toolbox — know the markets and exchanges,
building and reading charts i
find a broker, set up your brokerage account, and determine
n
your computer/Internet needs (cid:127) Key money management
techniques
(cid:127) Explore position trading — discover the benefit of executing g
trades in and out of positions and holding positions for various
(cid:127) W arnings about frauds and scams
lengths of time, depending on trends
(cid:127) Top ten trading survival
(cid:127) Find value in fundamental analysis — observe market behavior,
techniques
understand economic indicators, find critical information in
financial statements, and make the most of analysts (cid:127) Huge trading mistakes to avoid at
all costs
(cid:127) Take on technical analysis — build and read charts, identify
trends, recognize bull and bear patterns, and differentiate
between stocks that are range bound and ones that are trending
Learn to:
(cid:127) Develop strategies for buying and selling — know your risks,
gather key info through analysis to build your optimum trading Go to dummies.com® (cid:127) Trade stocks in any type of market
strategy, and develop your own powerful trading system for more!
(cid:127) Analyze trends and indicators
(cid:127) Jump into the deep end — from swing and day trading to
derivatives and foreign currency, get the basics of these riskier
forms of trading (cid:127) Minimize risk and maximize return
(cid:127) Conduct technical analysis
$24.99 US / $29.99 CN / £16.99 UK
Michael Griffis, MBA, is an active stock broker. He writes extensively ISBN 978-0-470-43840-4
about investing and marketing, benefiting clients in the banking, and Michael Griffis, MBA
brokerage industries. Lita Epstein, MBA, has written more than 25 books
Stock trader
to help readers understand the complex worlds of money and finance,
Lita Epstein, MBA
including Bookkeeping For Dummies and Reading Financial Reports For Griffis
Dummies. Epstein Financial writer

Trading
FOR
DUMmIES
‰
2
ND EDITION
by Michael Griffi s and Lita Epstein
Trading For Dummies®, 2nd Edition
Published by
Wiley Publishing, Inc.
111 River St.
Hoboken, NJ 07030-5774
www.wiley.com
Copyright © 2009 by Wiley Publishing, Inc., Indianapolis, Indiana
Published by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
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Library of Congress Control Number: 2009925743
ISBN: 978-0-470-43840-4
Manufactured in the United States of America
10 9 8 7 6 5 4 3 2 1
About the Authors
Michael Griffi s became an active trader in the mid 1980s. He fi rst traded
commodities and precious-metals after taking a commodities trading class as
part of his MBA program at Rollins College. He turned his interest in trading
into a profession and became a stock broker in 1992, where he helped busi-
ness and individuals manage investments in stocks, bonds, mutual funds,
retirement plans, 401(k) employee-savings plans, and asset management pro-
grams. Today, he mostly trades for his own account.
In addition, Michael is an author and business owner and has written about
stock trading for online audiences. Outside of the business and investment
world, he is active in his community and volunteers his time and talents as a
fundraiser for civic and nonprofi t organizations.
Lita Epstein, who earned her MBA from Emory University’s Goizueta
Business School, enjoys helping people develop good fi nancial, investing, and
tax planning skills. She designs and teaches online courses on topics such as
accounting, reading fi nancial reports, investing for retirement, getting ready
for tax time, and fi nance and investing for women. She has written more than
20 books, including Bookkeeping for Dummies and Reading Financial Reports
For Dummies, both published by Wiley.
Lita was the content director for a fi nancial services Web site, MostChoice.
com and managed the Investing for Women Web site. As a Congressional
press secretary, Lita gained fi rst-hand knowledge about how to work within
and around the federal bureaucracy, which gives her great insight into how
government programs work. In the past Lita has been a daily newspaper
reporter, magazine editor, and fundraiser for The Carter Presidential Center.
For fun, Lita enjoys scuba diving and is an underwater photographer. She
hikes, canoes, and surfs the Web for hidden treasures.
Acknowledgments
We would like to thank all the people who have been instrumental in making
this new edition a reality. In particular, we’d like to thank Jessica Faust at
BookEnds for getting us connected with Wiley. We’d also like to thank all
of the wonderful For Dummies folks at Wiley, especially Michael Lewis and
Corbin Collins for shepherding this project to completion and for advice and
suggestions, and Russell Rhoads for keeping us accurate. Also, we appreciate
the extraordinary efforts of Chip Anderson, owner of StockCharts.com, for
his help providing the example charts used throughout this book.
Publisher’s Acknowledgments
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tion form located at http://dummies.custhelp.com. For other comments, please contact our
Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax
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Development
Project Coordinator: Lynsey Stanford
Project Editor: Corbin Collins
Layout and Graphics: Samantha W. Allen,
(Previous Edition: Tim Gallan) Christin Swinford
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Cover Photos: © Image Source/Corbis
Cartoons: Rich Tennant
(www.the5thwave.com)
Publishing and Editorial for Consumer Dummies
Diane Graves Steele, Vice President and Publisher, Consumer Dummies
Kristin Ferguson-Wagstaffe, Product Development Director, Consumer Dummies
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Kelly Regan, Editorial Director, Travel
Publishing for Technology Dummies
Andy Cummings, Vice President and Publisher, Dummies Technology/General User
Composition Services
Debbie Stailey, Director of Composition Services
Contents at a Glance
Introduction ................................................................ 1
Part I: So You Want to Be a Trader:
Gathering Your Tools .................................................... 7
Chapter 1: The Ups and Downs of Trading Stocks ........................................................9
Chapter 2: Exploring the Markets and the Stock Exchanges .....................................21
Chapter 3: Going for Broke(r): Discovering Your Brokerage Options ......................33
Chapter 4: Putting Your Computer to Work: Your Key Business Tool .....................49
Part II: Reading the Fundamentals:
Fundamental Analysis ................................................ 65
Chapter 5: Fundamentals 101: Observing Market Behavior .......................................67
Chapter 6: Digging Into the Critical Parts of Fundamental Analysis .........................83
Chapter 7: Listening to Analyst Calls ..........................................................................103
Part III: Reading the Charts: Technical Analysis ........ 117
Chapter 8: Reading the Tea Leaves: Does Technical Analysis Work? .....................119
Chapter 9: Reading Bar Charts Is Easy (Really) .........................................................129
Chapter 10: Following Trends for Fun and Profi t.......................................................149
Chapter 11: Calculating Indicators and Oscillators ...................................................165
Part IV: Developing Strategies for
When to Buy and Sell Stocks .................................... 185
Chapter 12: Money Management Techniques:
When to Hold ’em, When to Fold ’em .......................................................................187
Chapter 13: Using Fundamental and Technical Analyses
for Optimum Strategy .................................................................................................203
Chapter 14: Executing Your Trades.............................................................................221
Chapter 15: Developing Your Own Powerful Trading System .................................239
Part V: Risk-Taker’s Paradise ................................... 257
Chapter 16: The Basics of Swing Trading ...................................................................259
Chapter 17: The Basics of Day Trading .......................................................................273
Chapter 18: Doing It by Derivatives .............................................................................287
Chapter 19: Going Foreign (Forex) ..............................................................................303
Chapter 20: Trading for Others: Obtaining Trading Licenses
and Certifi cations ........................................................................................................319
Part VI: The Part of Tens .......................................... 335
Chapter 21: Ten (Or More) Huge Trading Mistakes ..................................................337
Chapter 22: Top Ten Trading Survival Techniques...................................................343
Index ...................................................................... 349
Table of Contents
Introduction ................................................................. 1
About This Book ..............................................................................................1
Foolish Assumptions .......................................................................................2
How the Book Is Organized ............................................................................2
Part I: So You Want to Be a Trader: Gathering Your Tools ..............3
Part II: Reading the Fundamentals: Fundamental Analysis ..............3
Part III: Reading the Charts: Technical Analysis ................................3
Part IV: Developing Strategies for When to Buy and Sell Stocks .....4
Part V: Risk-Taker’s Paradise ...............................................................4
Part VI: The Part of Tens .......................................................................4
Icons Used in This Book .................................................................................5
Where to Go from Here ...................................................................................5
Part I: So You Want to Be a Trader:
Gathering Your Tools ..................................................... 7
Chapter 1: The Ups and Downs of Trading Stocks. . . . . . . . . . . . . . . . . .9
Trading versus Investing ..............................................................................10
Why Trade? ....................................................................................................10
Successful Trading Characteristics .............................................................11
Tools of the Trade .........................................................................................12
Taking Time to Trade More than Just Stocks ............................................12
Position trading ....................................................................................12
Short-term swing trading ....................................................................13
Day trading ...........................................................................................13
Going Long or Short ......................................................................................14
Managing Your Money ..................................................................................14
Understanding Fundamental Analysis ........................................................15
Getting a Grip on Technical Analysis ..........................................................16
Putting Trading Strategy into Practice .......................................................17
Trading at Higher Risk ..................................................................................19
Remember: Have Fun! ...................................................................................19
Chapter 2: Exploring the Markets and the Stock Exchanges. . . . . . . .21
Introducing the Broad Markets ....................................................................21
Stock markets .......................................................................................22
Futures markets ...................................................................................22
Bond markets .......................................................................................23
Options markets ...................................................................................24
viii
Trading For Dummies, 2nd Edition
Reviewing Stock Exchanges .........................................................................24
New York Stock Exchange (NYSE) .....................................................24
NASDAQ ................................................................................................26
Amex ......................................................................................................27
Electronic communications networks (ECNs) .................................28
Understanding Order Types ........................................................................29
Market order .........................................................................................29
Limit order ............................................................................................30
Stop order .............................................................................................30
Stop-limit order ....................................................................................31
Good ’til canceled orders....................................................................32
Other order types ................................................................................32
Chapter 3: Going for Broke(r): Discovering
Your Brokerage Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Why You Need a Broker ................................................................................33
Exploring Types of Brokers and Brokerage Services ................................34
Full-service brokers .............................................................................34
Discount brokers .................................................................................36
Direct-access brokers ..........................................................................36
Proprietary trading fi rms ....................................................................38
Futures brokers ....................................................................................38
Services You Should Consider When Choosing Your Broker ..................38
Types of orders supported .................................................................38
Data feed ...............................................................................................39
Charts ....................................................................................................39
ECN access ............................................................................................40
Understanding the Types of Brokerage Accounts ....................................40
Cash accounts ......................................................................................40
Margin accounts...................................................................................40
Options ..................................................................................................41
IRAs and other retirement accounts .................................................41
Choosing the Right Broker for You .............................................................43
Considering more than price..............................................................43
Doing a little research .........................................................................43
Understanding how you’ll be paying .................................................44
Getting to Know the Rules ............................................................................45
Margin requirements ...........................................................................45
Settling trades ......................................................................................47
Free riding .............................................................................................47
Chapter 4: Putting Your Computer to Work:
Your Key Business Tool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Making Use of Your Computer .....................................................................50
Identifying trading candidates ...........................................................50
Managing your account .......................................................................51
Improving your trades ........................................................................51