PAPER TRADING
Paper Trading is the art of trading stocks on paper without using any real money. After you become comfortable with your style of trading then start buying stocks for real.
Why Paper Trade? If you don't you will wish you had! Most people lose money when they first invest in the stock market. That's because the way stocks and the stock market act are usually not the same as what you think they will do. You buy a stock you think will go up; it goes down! You buy a stock on news, which says that the stock will go up; it goes up just a little and then tanks! You trust a broker's recommendation that a stock will go up; it goes down but the broker gets his commission!
What Causes Stocks To Go UP? Expected Profits! Examples of expected profits are increased sales, decreased expenses, new money line of credit, increased growth, and decreasing interest rates.
- Increased Sales. If a company increases its sales significantly then within 6 months, depending on manufacturing, the product ships and the payments for the products comes in. Hopefully the company is properly managed and the sales are greater than the expense, which produces profits, which in turn translate into increase stock worth.
- Decreased Expenses. Another way to increase profits is to hold sales at the same level and to decrease expenses. Ways to decrease expenses are to payoff loans, cut labor force, and decrease operating expenses.
- New Money Line of Credit. If a company receives a substantial money line of credit, it usually means that they will implement an expansion project to increase their profits.
- Increased Growth. Growth is a measure of profits. But you don't know if these profits are coming from increased sales or from cost cutting. The best kind of growth is from increased sales. A company can only cut cost so far. And if they do not increase sales what do they do next quarter to produce growth? So when checking a company's growth always check their sales growth also. Hint-if a company's growth is flat or decreasing for more than 12 months and then you see growth increasing you probable have a stock, which is going to increase.
- Decreasing Interest Rates. When interest rates go up it increases operating expenses leaving less money to run the business. When interest rates go down, the existing loans can be refinanced at a lower interest rate, which leaves more money to operate the business. Don't miss this part! This is big! When a company's sales are flat and the stock is going sideways and the interest rates go up then most likely the stock price will go down all though nothing has changed in the company. When interest rates go down and nothing else changes then the company has more money to spend and the stock price increases. This is the biggest thing, which beginners often do not understand is that there are external forces, which have nothing to do with the company, which will move the stock price of the company up and down. This accounts for the fact that bad companies stock prices will rise when interest rates decline and good companies stock prices decline when interest rates increase. In summary get to know not only the company but what the overall market is doing also.
How much money do I need to start? There are as many ways to pick stocks as there are people picking stocks. Let me explain one of the basic ways to pick stocks. First, you want to buy stocks in quantities of about 500 to 1,000 shares per stock. Otherwise your commissions will eat up your profits. The second rule is to buy between 7 and 10 stocks. Now figure out how much money you have in your portfolio. Divide by 10 stocks and then divide by the minimum quantity of 500. Or let's go the other way. Use a minimum quantity of 500 shares times $1.50 per share = $750 per stock times 7 stocks = $5,250. As you can see this is the absolute lowest amount you need to start investing. And if you have a 30% drop in your portfolio you could be in real trouble right away! You will also be limited to the price of stocks to buy of not being over $1.50 per share. You should also not buy stocks under $0.75 per share as these stocks can be very unstable and can go up and down for no reason. As you can see the better amount to start a portfolio is about $15,000. Here is how this portfolio breaks down. $15,000 divided by 7 stocks = $2,143 per stock divided by 1,000 shares = $2.14 each. This gives a much wider range of stocks to pick from.
How to Pick Stocks! For you first set of stocks I recommend the following:
- Find out what the Federal Reserve is doing with interest rates. Wait until the interest rates are not climbing any more. The best is to wait until the interest rates are just starting to go down. This may take a long time but believe me when I tell you, if you don't know what you are doing you might as well throw your money in the toilet and flush it!
- Next look for a stock in your price range, which has been decreasing in price for 12 months or more and then has had 4 consecutive weeks where the price on the close of Fridays has increased each week over the preceding week.
- Next make sure that the average trading volume is 10,000 shares or greater. If the average volume is less than 10,000 shares, you will have a hard time selling the stock when it's time to sell.
- Check what sector this stock belongs in. Make sure that the sector price is increasing for the last two weeks.
- Divide your portfolio into 7 to 10 stocks and purchase all 7 to 10 stocks within one week.
How to Sell Your Stocks!
- Keep track of the highest price of each stock since you bought it.
- If the stocks decrease more than 12% sell the stock.
- Use a price 40-day moving average. If the price falls below the 40 day price moving average then sell the stock.
Now that you have the basics of stock trading, start trading stocks on paper. And as you trade follow me as I trade!
- Follow My Trades as they Happen[2007 Current Trades]
- See what my trading style has done in the past![History]