How To Trade Stocks Profitably

Most investors really have no idea when to buy and sell stocks. There are many factors that can go into the decision making process, and we are constantly bombarded by opinions from CNBC, the Wall Street Journal, Investor's Business Daily, and a variety of other media.

So how does the individual investor or trader determine when to buy and sell stocks? First of all, the individual must conduct an assessment of themselves to determine how to even approach answering this question. Here are some questions you should ask yourself…

How much time do you have to devote to analyze the stock market and individual stocks?

How much risk capital do you have?

What are your long term and short term financial goals?

How safe is your present job situation?

How much can you set aside and save each month for your investments?

What is your tolerance for risk?

What do you know about what drives stock prices?

How much time do you have to monitor your investments/trades?

These are just a few questions you need to ask yourself BEFORE you get started in trying to profitably trade stocks. In reality, however, trading stocks is not rocket science, but you need to get a handle on your own personal situation to determine how you can develop a strategy suitable to your needs and desires.

For instance, if you don't have the ability to monitor your trades throughout the day, then you have no business operating as a short term trader, or day trader. Also, if you don't have enough money saved to cover your expenses for at least a few months, then you should not be relying on your trading/investments to provide income for yourself.

Once you have assessed your situation and goals, it is time to educate yourself about the market. What exactly causes the price of a stock to move up or down? The very basic cause is supply and demand. You should realize that there are a finite number of shares available for any given company. Issuing common stock is one way a company raises money for its capital needs. If the demand for a stock outweighs the supply of the stock, the price will rise. If the supply exceeds demand, the price will fall.

Factors that drive the demand for a stock include its earnings, its return on equity, its dividend, or maybe it is producing a hot new product that will be valuable to consumers. This is what the analysts on CNBC are trying to do…determine the demand for a stock.

Most people should not even try to speculate about future demand for a stock. The price of the stock itself will tell you whether the company is currently in favor with investors, or out of favor. At any given time, there are always companies whose shares are rising in price, so it really makes no sense for the individual investor to buy stock in a company when the price of that stock is falling.

The fact of the matter is, the analysts hired by the big Wall Street companies do not have any better idea about whether a company's stock price will go up or down than the individual investor, unless they obtain some information illegally. With that in mind, the best course of action for individual investors is to ignore the analysts, and do their own homework.

So, back to the original question…when to buy and sell stocks. The individual needs to develop a plan and strategy for trading and investing in stocks. Since most people do not have the capital to wait out an investment that is falling in price, the first good idea is to focus on stocks that have been rising in price. If an investor wants to see profits fairly quickly, they should only focus on stocks that are rising in price. This fact alone tells the investor that there is underlying demand for that stock.

Next, the trader should determine how they can enter a position and keep their risk at a minimum. With that in mind, it is a good idea to wait for a stock that is rising in price to undergo a period where that price consolidates. By this we mean that the price stops rising, and essentially moves sideways, or up and down within a narrow price range. This allows the opportunity to define risk by identifying a point where buying the stock allows for instant profitability while at the same time identifying a price point where the trader will exit the position if for some reason the stock begins falling in price. What the trader wants to do is hop on board the stock when it regains its momentum to the upside, but at the same time limits his/her risk in the position.

There are many strategies that can achieve this goal, and it is beyond the scope of this article to identify even just a few of them. However, the trader or individual investor would be wise to do some research on the idea of trend following as it applies to the financial markets. Big money in the markets is made by capturing trends, and the traders who do this best, tend to be the most successful. If you can develop a strategy that will allow you to ride a stock for most of its uptrend, then you will have a great opportunity for long term profitability.

To summarize, successful investing or trading is really quite simple. You must buy stocks when they are rising in price, and sell stocks when they are falling in price. Unfortunately, this is counterintuitive, because most people want to buy things when they are cheap. However, if you view a stock as you would any quality product, then you will soon realize that you must pay for quality. A stock that is cheap is cheap for a reason…because it is not a good product. Therefore, if you simply focus on stocks that are rising in price, you will have a leg up on most other investors.


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For more great information on trading stocks, visit When to Buy and Sell Stocks