Let me start by asking you this question. What is the present value of a stock? It is what someone is willing to pay for it. In doubt what causes the price to change? What the buyers and sellers THINK about a stock (People’s Sentiment). click here to read more on how people sentiment move stock price.
The sentiment is from people like you and I and they are called buyers & sellers. People are extremely predictable and are driven by emotions. Let me narrow down our emotions to Fear and Optimism. Fear is the main force;
- the fear of loss of opportunity
- the fear of loss of capital
The emotion from the buyers and sellers causes market zone which we previously discussed and it is called the Support – The price point where a stock finds more buying pressure than selling pressure, and the buying pressure drive drives the price higher (Bullish). And
Resistance – The price point where a stock finds more selling pressure than buying pressure, and the selling pressure drive drives the price lower (Bearish)
Winning more Trades – Buy and Sell Stocks
I have always wanted to win my trades, at least more than lose. This is why you are reading this post. You want to know how to win and become a profitable trader. Overcome your fear of missing opportunities and losing your capital. Stock price move in 3 directions, there is no fourth direction.
A stock price will move upwards, downwards or sideways. You have to get ride the market just like a surf boarder. Never surf boarded but I intend to have a go one day. Imagine you riding the wave in the right direction as a trader; you win and put more money in the bank.
The goal of every trader is to win and make profit. It is easier to arrive at profit by
- Pick your stock direction
- Apply an appropriate strategy to your trade.
“Support & Resistance help us determine the framework, which allows us to pick a direction. Now we must pick a winning strategy!”
Enough of the theory do you want to practise some skills to buy and sell stocks? Let us take practical steps to enhance your skills and knowledge to prepare you for real success.
Baby Steps – Practise brings Expertise
When do we buy and sell stocks? I buy when a stock is moving higher (Bullish) and sell when a stock is moving lower (bearish). So simple.
It means I can give orders to buy or sell stocks. Buy order is an order to buy a stock while Sell order is an order to sell a stock. This is what happens when you buy a stock – your cash goes out and your purchased shares come in. When you sell shares – Shares go out and cash comes in.
|Buy and Sell Stocks Order|
|Buy 100 shares of ABC @ £50||-£5,000||+ £5,000|
|Sell 100 shares of ABC @ £55||+£5,500||0|
Remember, what the goal of profitable trade you need to pick a direction and a strategy. There are two stock strategies
- Long strategy – Use when you want to make a profit while the stock rises in price
- Short strategy – Use when you want to make a profit while the stock falls in price
Example: Green Line is the buy or Long position while you have 2 exits for profits.
|Buying Long – Buy to open and sell to close|
|Buy 100 shares of ABC @ £18.00||£1,800||100@ £18.00||£1,800||£20,000|
|Balance||£18,200||100 @ £18||£1,800||£20,000|
|Balance||£18,200||100 @ £30||£3,000||£21,200|
|Sell 100 shares of ABC @ £30.00||£3,000||-100||0||£21,200|
Buying long has two types of orders;
- A buy order: This initiates a new long trade
- A sell order: This closes a long trade
The second strategy is called Selling Short. This is the opposite of a long trade strategy; it simply means to sell a stock. This is a case where you do not own the stock but you borrow a stock & sell it, logically you must eventually buy it. Unlike the long strategy where you get dividends you do not receive dividends and to make profit in this case you will need the stock to go down in price.
Example: The red line is the place to Short or Sell
|Selling Short – Sell to open and buy to close|
|Sell / Short 100 shares of ABC @ £245.00||£24,500||-100 @ £245.00||£24,500||£41,200|
|Balance||£65,700||-100 @ £245||£24,500||£41,200|
|Balance||£65,700||-100 @ £205||£20,500||£45,200|
|buy 100 shares of ABC @ £205.00||-£20,500||+100 @ £205||£20,500||£45,200|
This is called a short because you do not own the stock (you owe it!), so how can we sell something we don’t own? Simple answer is Borrow it!
This is a legal trade because it is the rules of the game and by doing this a liquid market is created thereby insuring the free market. It is also moral because it is called a market so someone sell and someone buys.
Similar to buy long, selling short have two types of orders
- A sell (short) order: This initiates a new short trade
- A buy (to cover) order: This closes a short trade
|Buying Long vs. Selling Short|
|Long Trades||Short Trades|
|Own Stock||Borrow Stock|
|Receive Dividends||Owe Dividends|
|Price of stock to go up for profit||Price of stock must go down to profit|
|Hold stock as long as required or forever||Must return the borrowed stock|
Setting up a Trade – Buy and Sell Stocks
Setting up a trade with the explanations now funnels to initially picking a stock and as previously discussed analyse the chart. Following the chart analysis to understand the market sentiments you pick the direction of trade and apply the right strategy as discussed in this post.
This is easy and simple. I almost forgot, remember to apply a stop loss to all your trade this is the popular key to your risk reward ratio.
What is a Stop Loss?
A Stop loss is an order that “protects” your capital if a trade goes bad, if our the trade moves in the wrong direction, the stop is triggered and your position is liquidate, meaning you do not lose more than you are ready to lose in another term, you do not risk more than you have capacity to risk.
Stop loss order for a bullish or in a long trade, the stop goes BELOW the trade
Stop loss order for a bearish or a short trade the stop goes ABOVE the trade
This is what I recommend you do to understand all we discussed. Initially open a virtual account and start practicing buying a stock long, selling a stock short, setting a stop for each and remember do it all on a by initially reading my post on charting and help you open virtual free account.