Equity Challenge Trading Articles

Date: September 8, 2006 Author: Mr. Jenkins - Daytrader

Now that you have assessed the stocks that affect your stock the most, you have to take into consideration the much larger picture, the overall market. Wall Street is often a large cesspool of herd mentality. When the market sells off, around 75% of stocks follow suit and also sell, the same is true about when the market goes up. Now there are exceptions, but you want to give yourself the best chance for success. So if the market is in a general uptrend you should be leaning more toward plays going that way.

You should now have the entire basis you need to pick a stock, now you need to determine your entry. I have found that the best way to do this is to break up a predetermined amount of money, and buy in pieces. I tend to buy on strength, not weakness. The reason is, if a stock is unusually weak, it normally tends to continue down, not trying catch the "falling knife" is a good way to save you money. If a stock is not strong, there is no reason for you to try to change the trend and hope your right later down the road. Sure you may miss the lowest entry possible, but it is my feeling that you will miss even more big losses.

The final tip and probably most important is to PROTECT YOUR MONEY. Wall Street doesn't care if you go broke; you have to take an active role in your own future. When you have a great gain, take some profits, when a stock is weak, SELL IT. Consider all gains your money. For example, say you buy a stock at ten dollars and now it's at twenty and beginning to pull back. You have to assess the situation like you just bought at twenty, because that is your money! Don't look at it and say "well ill just hold through this dip because I have a large gain", as a swing trader you have to realize that dips can become tops in a hurry. If it really is just a dip you can buy it back again when it is showing strength, if it is the top, who cares, you sold right?

This process requires a bit of time being spent, but considering the amount of money you stand to lose if you do not do it, it is well worth it. Trading isn't easy and it isn't for everyone, but once you equip yourself with the proper tools and knowledge, you have a better shot than most.

Date: September 6, 2006 Author: Mr. Jenkins - Daytrader

The ninth thing that you should do is to assess the value of the stock. This can be done in a few ways, it is important to keep in mind that certain industries are valued differently. For instance, an internet stock will almost always have richer valuations than homebuilders. Not that it is right, but it is just one of the things in the stock market that you have to deal with. The most common way that Wall Street values a stock is the price to earnings ratio or P/E. This is broken down to trailing P/E and forward P/E. Trailing simply means that it's based on already proven earnings going one year back, and forward P/E is simply and estimated number one year going forward. Price to sales is another metric that is often employed to calculate valuation. P/S is used less often by day traders and more by value investors. The third way stocks are valued is by growth. Rapidly growing stocks can often get away with lofty P/E and P/S ratios and still continue to go up. When you're swing trading these things doesn't have to be instrumental in your decision. You should, however be aware of them as richly valued stocks have a tendency to have nasty crash landings when anything goes wrong.

After you have determined the valuation of the stock, you need to go look at its industry peers. Stocks tend to move with their respective groups and if possible you don't want to fight the general trend. Events from same-industry stocks can also have a large effect on your stock. For instance if, Intel has a horrible quarterly report and your holding AMD, you can guess what happens the next day, your stock is going to fall because of INTC. Holding through these events is entirely dependant on your level of risk tolerance, and your confidence in the industry in general, but it pays to be aware of them ahead of time so you're not caught off guard with a large gap down in your stock position.