This is an excerpt from the Liberated Stock Trader Book & Trading Academy Pro Stock Market Training Course. Chapter 12, Section 2. This Chapter is Dedicated to Trading Strategy
Before you start to buy and sell stocks it is important to look at who you are and what you want to achieve. To begin with we need to understand some basic terms.
The term investor has many different meanings, the Collins English dictionary defines it as “An investor is a person or organization that buys stocks or shares or pays money into a bank in order to receive a profit”. But this is a little generic to be used clearly for us to reference.
In the world of finance, investments and speculation the way in which you seek to gain your profit dictates what you are.
A speculator seeks to exploit short term trends, loopholes, momentum or news to seek a gain on money invested. For example, if I see that there is incredible Volume on a stock and I want to trade into that stock to get a quick gain without having any in depth understanding of the company, industry or management team I am essentially speculating that this event will make the stock rise.
Alternatively, someone who enters into an Options Contract shorting a stock, in order to make a profit is also speculating that the stock price will drop during a given time frame. This certainly is not investing. None of the Cash invested in the Options Contract will ever be seen by the company in question; therefore you are not investing in that company.
George Soros could be considered one of the ultimate Speculators, and indeed the most successful with a net worth of circa $7 Billion. Soros, known as the “man who broke the Bank of England” took out a $10 Billion Short Position betting that Pound Sterling would fall. Although the Bank of England did everything it could to prop up the currency it failed dramatically and Soros bagged $2 Billion profit from the bet. Soros was betting on a future event happening. Was this risky? George Soros does not take undue risk, his knowledge of the Global Finance and Capital markets enabled him to take a calculated risk which paid off handsomely. What he did is classic speculation.
Those who speculate in stocks usually use Charts and News events to trade with.
The investor is usually someone whose money is used to capitalize a company and the money is invested accordingly by the company to achieve better business results. An investor will seek a reward for his belief in an investment and seek a profit thereof.
An investor, will have evaluated the worth of an investment, and seek a steady return from it. Someone who buys their own house is an investor. An investor will often seek to minimize risk and maximize reward. A smart investor will look to buy an investment at a time where it is good value and this value will help to minimize downside risks. An investor looks at the business fundamentals of a deal and weighs facts not emotion to enable a thorough judgment to be made.
Buying Bonds with fixed rates of returns are an investment for someone looking to beat their Bank Saving/Checking account interest but also unwilling to take the perceived risks of purchasing stocks.
A trader is someone who buys and sells a security or commodity to make a profit. However someone who is an investor could trade stocks and also people who speculate usually trade contracts, stock, or use other more exotic tools.
The Liberated Stock Trader:
A liberated stock trader will seek to base stock purchases on solid Fundamental facts that make business sense in the cold light of day. You will select fundamentally winning companies with great futures and use technical analysis to measure the market action to decide if the time is right to buy this stock……………
This section goes on to discuss Investing Goals, How to Quantify your Goals & How to become a millionaire in the stock market, yes REALLY.
Other Chapters of the Liberated Stock Trader Book are listed below
This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and micro economics
This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles and how to spot them.
What are stock market cycles and the cycles of business and economies. Important information that you need to appreciate as part of your core analysis.
Next we move into fundamental analysis and the financial fitness of a company. All the major indicators and measures are covered.
Stock screening means using criteria to short list the kind of stock that you want to purchase. A vital part of any stock market training
Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy. The next thing to do is the technical analysis. Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out. This is called catching a falling knife. This is what chart patterns and technical analysis helps with.
Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend and estimate how long the trend will last. Vital for you to establish buy and sell signals.
Which indicators should you use, there are literally hundreds of stock chart indicators. Each have a specific use case and application, which should you use?
Volume is a vital indicator along with price. Both of these you need to understand in granular detail, you will learn everything you need to know.
Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.
How are the market participants feeling? Positive, Negative or indifferent. Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator. Lean how to use them to your advantage.
Understanding how you want to invest, how much time you have and your time horizon. These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you. Then we move on to building your stock investing system, a critical element to your plan.