Basic Rules of the Stock Market Every Trader Should Know

Updated: September 20, 2018

Here are 4 basic rules of stock market trading

The stock market is where most new students at Online Trading Academy are most comfortable when they arrive. They have traded stocks previously, either as individual shares or as components of a mutual fund purchased by their 401(k). They understand the concept of owning a piece of a company, and betting on how well that company is going to do in the near term. These stock market basics are very comfortable to them.

However, your familiarity with companies listed on the stock exchanges can actually be a disadvantage. It’s tempting and can even feel patriotic to buy a company’s stock because you like its products or its management, or because their headquarters are in your hometown. Stock market basics tell us that we should look for a strong company, with good management, in a growth industry—these are called “fundamentals”. The problem with the fundamental approach is that by the time a company flashes positive signals for all these qualities, its price has already increased to reflect a positive view from the market. Its further upside potential may be limited making it actually risky rather than a “blue chip” stock to invest in.

The Basics of Stock Types and Investment Strategy

The 4 Basic Rules of the Stock Market

Stock Market Basics Rule #1: Focus on Price

Educated traders follow a very different set of criteria. These traders focus on a single consideration: price. It may be a poorly run company but, if conditions call for a brief improvement in its price, it’s a good buy for the trader who knows when to get in and when to jump out for a quick profit. Conversely, a great company will sometimes climb out of its comfort zone to a price where suddenly there are more willing sellers than buyers. Price is about to plummet, and it’s the short seller who will reap the benefits.

Stock Market Basics Rule #2: Stay Liquid

If you’re interested in this much more pragmatic view of stock market basics, here are some guidelines to know about. First, the stock has to be actively traded — at least 100,000 shares in daily volume. Below that level you run the risk of being stuck in a position simply because there are no traders on the other side. Second, you should stick to tickers with a price below $50 simply because the liquidity requirements above that level become distracting for most traders.

Stock Market Basics Rule #3: Practice Before You Jump In

Finally and most important, rather than investing in the broad market you should consider following a few tickers and getting to know their trading range very well. This is a stock market basics approach focusing on price, remember. Once you know where it “should” trade then you’ll be well positioned to identify a departure from the norm and act quickly for a positive result. This is the opposite of “buy and hold” because you may load up on a stock in the morning, dump it in the afternoon or a day or two later, then buy it again when conditions change. It’s an agnostic approach to the markets in which the most important consideration is your own desire to be successful.

Stock Market Basics Rule #4: Don't Try to Out-Think The Markets

Here’s a scenario you’ve probably witnessed: a company in a sector has a bad quarter, or maybe a product recall, and all stocks in that sector decline even though the other companies have done nothing wrong. It’s illogical but that’s how the market works. Similarly, mediocre companies will go up in price when the market is hot because “a rising tide lifts all boats”.

When you’re focused solely on price — the basis of the patented trading strategy taught at Online Trading Academy — you don’t need the markets to be logical. You simply want to identify the zones where supply and demand are likely to be out of balance, then buy or sell when price enters these zones. Experience tells us there are large quantities of unfilled buy or sell orders at these price levels and, once the orders are filled, price will change direction regardless of what else is happening in the economy or the market.

We show a number of actual examples of completed trades that follow this strategy in our introductory Free Half-Day Class. If you haven’t attended already, check our schedule of upcoming classes in your area.

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