Trading For Dummies, Second Edition (For Dummies (Business & Personal Finance))

387 Pages·2009·4.91 MB·English

by  Michael Griffis

Trading
FOR
DUMmIES
‰
2
ND EDITION
by Michael Griffi s and Lita Epstein
Trading For Dummies®, 2nd Edition
Published by
Wiley Publishing, Inc.
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Hoboken, NJ 07030-5774
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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
We’re proud of this book; please send us your comments through our Dummies online registra-
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
317-572-4002.
Some of the people who helped bring this book to market include the following:
Acquisitions, Editorial, and Media Composition Services
Development
Project Coordinator: Lynsey Stanford
Project Editor: Corbin Collins
Layout and Graphics: Samantha W. Allen,
(Previous Edition: Tim Gallan) Christin Swinford
Acquisitions Editor: Michael Lewis Proofreaders: Lauren L. Bowman,
Jessica Kramer
Copy Editor: Corbin Collins
Indexer: BIM Indexing & Proofreading Services
Assistant Editor: Erin Calligan Mooney
Editorial Program Coordinator: Joe Niesen
Technical Editor: Russell Rhoads
Editorial Supervisor & Reprint Manager:
Carmen Krikorian
Senior Editorial Manager: Jennifer Ehrlich
Editorial Assistant: David Lutton
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
Ensley Eikenburg, Associate Publisher, Travel
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