First on the list of recommended preparatory tasks is to obtain a book which covers the Dow theory. This isn’t lightweight reading, but will surely serve to make you a smarter investor. Just as history repeats itself, stock market trends do too. Being able to ascertain what part of which type of cycle the market is currently experiencing is of great help in understanding the stock market and anticipating favorable conditions for your money.
Using the rolling stock strategy requires that you be well versed in stochastics. Stochastics is at the crux of this strategy. The so-called penny stocks often have a short term and repeating cycle of rising and falling prices which stay in an overall, consistent price range. The best candidates are those with an upward trend, where the price gradually rises, while sustaining a predictable rolling cycle. You buy just at the point where the stock has bottomed and is now on the rise. The safest strategy is to sell before the cycle peaks. You can make money this way, but you must have familiarity with the Dow theory, as well as stochastics. In any case, understanding the stock market as thoroughly as possible, is essential to your success.
Day-trading is one strategy that requires courage, expertise and a ‘type A’ personality. The day trader follows several stocks at once, looking for that ‘perfect moment’ to plunk down his money, selling sometimes within minutes. With the purchase of a large number of shares, the difference of even an eighth of a point rise in the stock value can result in a large profit. Then again, the day trader can just as easily suffer a tremendous loss. Some brokerages do not execute the sell order quickly enough, particularly on days of heavy activity. Understanding the stock market well may not be enough in this case, as the situation is out of your control. Day-trading is a risky and highly stressful strategy.
No matter what your strategy, if you’re a small investor, you must know that understanding the stock market means that you are aware of some very obscure influences which can make your ‘perfect pick’ imperfect. A well-known consultant, who gives seminars on stock investments, brought this element into sharp relief for a group of students.
The assignment involved one particular stock which each student was to investigate and give their opinion of this investment, citing reasons why they would or would not. The stock was a ‘good pick’, according to all the participants. The consultant then explained the factor which no one had uncovered in the investigation phase which actually made this good-looking stock a disaster as an investment. As it turned out, every 20 years, a ‘red tide’ appeared off the coast of Peru, ruining the product and thus, the stock value for the entire season.
Along with your self educating in all things stock market, you should begin to test your understanding of the stock market. There are many websites which give a daily list of stocks for you to peruse and make a prediction of whether they go up or down in a certain time period. Others ask you to predict which will have the largest percentage rise, also in a certain time frame. It may take a considerable while before your predictions are, for the most part, accurate. This strategy of testing your understanding of the stock market will save you a bundle of money. You may decide the stock market is not your niche! Understanding the stock market is a difficult and time consuming effort.