How To Trade Stocks Like The Pros

Trading Tips and Tactics of the Wall Street Pros

Trading is a different game altogether than investing. When you're investing, it is best to look for companies with solid business fundamentals, possibly near their 52-week lows.

Your objective is to hold the stock for a minimum of one to five years, or even longer. An undervalued stock with a price unfairly beaten down is a beautiful thing to a patient investor.

By contrast, stocks that reach new 52-week highs are more appropriate for trading. This is because traders care more about the technical chart patterns of the stock than its actual business. As a trading pro, you're looking to hold a stock for a maximum of a month or two, but more likely for days, hours, or even just minutes.

Trading can be exciting, and it can be stressful. Not everyone is cut out for trading - it takes a person with an iron gut and nerves of steel. Most of all, however, trading requires discipline.

Is The Stock Trending Up or Down?

You might get a trading idea from a news story or even a hunch, but you should never actually execute a trade without analyzing the stock's chart.

A stock that is in an overall downtrend is rarely appropriate for trading.

You can determine the stock's trend by looking at its one-year chart, and connecting the spikes up over time (its peaks) and its spikes down over time (its troughs). Generally, trading pros only risk their capital on stocks that are trending up over time.

Is The Stock Facing Support or Resistance?

"Support" and "resistance" are popular jargon among Wall Street trading professionals.

"Support" generally applies to a stock that is headed down over the short-term, but may be in either a long-term uptrend or downtrend.

It refers to the price level at which the stock seems to bounce back up over time. You can think of support as a floor that the stock hasn't seemed to crash through in a long time.

Staying with the above example, "resistance" is like a ceiling. It's the price level at which the stock seems to bounce back down once it's hit.

The good news is that once a stock finally pierces through its resistance, it can go to the moon. Traders love a stock that breaks through the ceiling because there's nothing holding it back from going higher.

By the same token, once a stock falls through its floor, it is likely to go down and down until it finds new support. This might be a support level at which it previously bottomed out several times in years past.

Stocks that face resistance or support are unlikely to break through. Trading pros typically like to buy stocks that are in a long-term uptrend and are just bouncing up from support. Or, even better, they like to buy a stock as soon as it breaks through its resistance.

Stick To Your Plan

Before you buy a stock for trading purposes, decide at which price level you will sell it for a profit or loss. Trading pros typically let winners run for 20 percent or more, but always cut their losses at 7 percent with no exceptions.

Remember, you bought this stock for trading purposes, not as an investment. If your trading strategy doesn't work, don't compound the problem by failing to stick to your plan.

Trading takes serious discipline, and if you can't commit to your strategies, then you should probably stick to less volatile wealth building strategies.

But if you have the necessary discipline, and the thought of your net worth going on a rollercoaster of ups and downs doesn't make you nauseous, then active trading just might be right for you.

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