You've decided to get started as a trader or investor, but where do you start? The answer as always is very simple and the process I will take you through applies to virtually all markets (particularly shares, stocks and derivatives of these i.e. options and spread betting) Once you move into other markets (currency for example) you would have a different set of data and charts.
One important point to note, is that those of you who have full time employment and are just doing this for longer term investment, or to build up experience, all of the following can be done in the evenings or at the weekend. You may remember that I have said before, you do not need live data to start with - end of day data is fine. You also do not have to be sitting in front of your screen day after day, in fact it is better if you do not - you will only become stressed!
OK, I am going to assume that you are going to be trading shares/stocks/options or spread betting, depending on your experience. I suggest that you would follow the steps below, to arrive at a short list of prospects
In the evening or overnight, you would download all the daily data, and your charts would be updated to show the price action for that particular day. If you are trading the US markets then the data would probably have to be downloaded the following day as the markets only close at 9.00 pm UK time and update overnight. Now the general approach is called top down investing, because it is just that - we start with the big picture and work down!
You would start by analysing the major indices for the market you were considering. For the UK you would look at the FTSE100 index ( 250 and 350) , for the US the DJIA index etc. This will give you a view of the overall market, strength, weakness, support, resistance etc. Look at the daily volumes for unusual highs or lows. I would check the charts daily for volume anomalies.
All shares and stocks are divided and sub divided into various industry and market sectors. You need to analyse each industry sector chart, for strength and weakness, as well as support and resistance. After all, it makes sense - you do not want to be buying shares or stocks in a sector of the market which is particularly weak or selling short in a strong sector. (Most good charting packages will give you the facility to chart a share price with its performance against the market sector.) Naturally, there is no guarantee that any share you choose within a sector which is performing well will guarantee it will follow the trend, but it is a reasonable assumption to make as a start. Having identified what we feel are the stronger and weaker sectors, then we move on to look at the shares/stocks themselves. I would probably only check the sectors once a week.
Understanding and identifying industry and market sectors can be notoriously difficult. A good place to start is often the main exchange where details can usually be found - be aware that these do vary from country to country and exchange to exchange as there does not seem to be any standard in place at the moment.
Having downloaded the end of day data, I would then check all my charts. As always, you would look for trends, volume, support and resistance, breakouts from a channel, turning points and candle patterns. You would also consider price movements on the day - the package I use offers the facility to set a filter which identifies shares which have moved up or down 2% on the day. A move this size might indicate a share that is active. Once you have identified a list of possible prospects, you would then compare them with their sector, to see whether they were in a good sector or not, and how they were performing relative to the sector. If they looked OK, you would add them to your watch list. Remember that an important part of money management is to diversify your portfolio - so please do not build your portfolio in one sector - this is another reason sector analysis is so important. In addition, you may think you know which sector a share or stock is in, but sometimes they can surprise you!!
It is worth checking on any share or stock that you are considering as to details of any directors who have bought or sold shares recently. The software I use itemises recent deals which you can check. Please do not give any dealings too much weight as directors are notorious for getting things wrong!! - they often buy in a vain attempt to support their share price, and could well be selling as share options become available or they have a divorce settlement to pay! If you see several senior directors selling heavily then this may be a signal that they know something that you do not!
Check when a company is due to pay its dividends and the ex-dividend date. If you buy a share one day before this date then you will be entitled to the dividend, but if you buy on the day you will not be entitled. There is a three day window between the ex-dividend date and the date of record. On the date of record all eligible shareholders are noted and these will be the people who receive the dividend. If you are not sure, check on the web site of the company - they should have an 'investor' section which will detail all past dividends, payment dates, history etc
Again, check to see when the company is likely to be announcing its results. You do not want to buy the day before the company is due to announce its annual performance etc. ( you may consider this a good idea - that is fine - all I am saying is make the decision in the full knowledge of all the facts ). Trading through announcements can be difficult. In the US it is particularly difficult as results are announced quarterly and almost as soon as one ' earning season' is finished, another one starts. In the UK it is not quite so bad, with results generally announced half-yearly or annually.
On the broader front, keep an eye on the following : In the broad economy there are four clear periods to the economic cycle. It is important that you try to recognise where you feel the country is economically. The four are, full recession, early recovery, full recovery and early recession. As the economy moves through this cycle which is repeated, various market sectors become more important and others less. The markets tend to lead the economic cycle. In early recovery industrial, basic industry and energy sectors tend to lead, in full recovery staples and service sectors tend to lead, in early recession utilities and finance sector stocks tend to lead, and finally in full recession cyclical and technology stocks tend to lead the way. Naturally these are only broad guidelines, but it is worth trying to establish where the economy is, at any one point, whilst you are trading.
In trying to arrive at where you feel the economy may be, listen to the announcements on interest rates etc. You will almost certainly form your own view of the economy from your own experience of house prices, job opportunities, and retail knowledge. Try to use common sense rather than trying to acquire some deep knowledge of facts and figures that only economists understand. After all, if they know anything of value they would have retired long ago. Try to think in a common sense way.
Keep a check on oil prices. This is not normally good news for the markets, as increased raw commodities such as oil, can only increase company's costs and therefore reduce profitability. Despite this in the last 18 months with oil at record levels, shares have continued to move higher.
Keep an eye on the price of gold, because it can be an indicator of political uncertainty. It can also have a direct impact on mining stocks (look at oil prices recently)
And finally, remember, you are in this to make money - not for fun. If you are looking for fun or a thrill, try the on line poker or horse racing. Trading and investing is hard work and is about making money - not losing it!
One important point to note, is that those of you who have full time employment and are just doing this for longer term investment, or to build up experience, all of the following can be done in the evenings or at the weekend. You may remember that I have said before, you do not need live data to start with - end of day data is fine. You also do not have to be sitting in front of your screen day after day, in fact it is better if you do not - you will only become stressed!
OK, I am going to assume that you are going to be trading shares/stocks/options or spread betting, depending on your experience. I suggest that you would follow the steps below, to arrive at a short list of prospects
In the evening or overnight, you would download all the daily data, and your charts would be updated to show the price action for that particular day. If you are trading the US markets then the data would probably have to be downloaded the following day as the markets only close at 9.00 pm UK time and update overnight. Now the general approach is called top down investing, because it is just that - we start with the big picture and work down!
You would start by analysing the major indices for the market you were considering. For the UK you would look at the FTSE100 index ( 250 and 350) , for the US the DJIA index etc. This will give you a view of the overall market, strength, weakness, support, resistance etc. Look at the daily volumes for unusual highs or lows. I would check the charts daily for volume anomalies.
All shares and stocks are divided and sub divided into various industry and market sectors. You need to analyse each industry sector chart, for strength and weakness, as well as support and resistance. After all, it makes sense - you do not want to be buying shares or stocks in a sector of the market which is particularly weak or selling short in a strong sector. (Most good charting packages will give you the facility to chart a share price with its performance against the market sector.) Naturally, there is no guarantee that any share you choose within a sector which is performing well will guarantee it will follow the trend, but it is a reasonable assumption to make as a start. Having identified what we feel are the stronger and weaker sectors, then we move on to look at the shares/stocks themselves. I would probably only check the sectors once a week.
Understanding and identifying industry and market sectors can be notoriously difficult. A good place to start is often the main exchange where details can usually be found - be aware that these do vary from country to country and exchange to exchange as there does not seem to be any standard in place at the moment.
Having downloaded the end of day data, I would then check all my charts. As always, you would look for trends, volume, support and resistance, breakouts from a channel, turning points and candle patterns. You would also consider price movements on the day - the package I use offers the facility to set a filter which identifies shares which have moved up or down 2% on the day. A move this size might indicate a share that is active. Once you have identified a list of possible prospects, you would then compare them with their sector, to see whether they were in a good sector or not, and how they were performing relative to the sector. If they looked OK, you would add them to your watch list. Remember that an important part of money management is to diversify your portfolio - so please do not build your portfolio in one sector - this is another reason sector analysis is so important. In addition, you may think you know which sector a share or stock is in, but sometimes they can surprise you!!
It is worth checking on any share or stock that you are considering as to details of any directors who have bought or sold shares recently. The software I use itemises recent deals which you can check. Please do not give any dealings too much weight as directors are notorious for getting things wrong!! - they often buy in a vain attempt to support their share price, and could well be selling as share options become available or they have a divorce settlement to pay! If you see several senior directors selling heavily then this may be a signal that they know something that you do not!
Check when a company is due to pay its dividends and the ex-dividend date. If you buy a share one day before this date then you will be entitled to the dividend, but if you buy on the day you will not be entitled. There is a three day window between the ex-dividend date and the date of record. On the date of record all eligible shareholders are noted and these will be the people who receive the dividend. If you are not sure, check on the web site of the company - they should have an 'investor' section which will detail all past dividends, payment dates, history etc
Again, check to see when the company is likely to be announcing its results. You do not want to buy the day before the company is due to announce its annual performance etc. ( you may consider this a good idea - that is fine - all I am saying is make the decision in the full knowledge of all the facts ). Trading through announcements can be difficult. In the US it is particularly difficult as results are announced quarterly and almost as soon as one ' earning season' is finished, another one starts. In the UK it is not quite so bad, with results generally announced half-yearly or annually.
On the broader front, keep an eye on the following : In the broad economy there are four clear periods to the economic cycle. It is important that you try to recognise where you feel the country is economically. The four are, full recession, early recovery, full recovery and early recession. As the economy moves through this cycle which is repeated, various market sectors become more important and others less. The markets tend to lead the economic cycle. In early recovery industrial, basic industry and energy sectors tend to lead, in full recovery staples and service sectors tend to lead, in early recession utilities and finance sector stocks tend to lead, and finally in full recession cyclical and technology stocks tend to lead the way. Naturally these are only broad guidelines, but it is worth trying to establish where the economy is, at any one point, whilst you are trading.
In trying to arrive at where you feel the economy may be, listen to the announcements on interest rates etc. You will almost certainly form your own view of the economy from your own experience of house prices, job opportunities, and retail knowledge. Try to use common sense rather than trying to acquire some deep knowledge of facts and figures that only economists understand. After all, if they know anything of value they would have retired long ago. Try to think in a common sense way.
Keep a check on oil prices. This is not normally good news for the markets, as increased raw commodities such as oil, can only increase company's costs and therefore reduce profitability. Despite this in the last 18 months with oil at record levels, shares have continued to move higher.
Keep an eye on the price of gold, because it can be an indicator of political uncertainty. It can also have a direct impact on mining stocks (look at oil prices recently)
And finally, remember, you are in this to make money - not for fun. If you are looking for fun or a thrill, try the on line poker or horse racing. Trading and investing is hard work and is about making money - not losing it!
Last edited by a moderator:
