But how do you decide on a stock market direction?

When questions of predicting the stock markets arise, it is inevitable to warn readers of the dangers of prediction.  It is very, very simple to track the stock price movement after the price action has played itself out.  It is a matter of extensive training and study to do so without the benefit of the ensuing data.

In my years and years of trading, technical analysis, advising and offering consultancy, in all my interactions, the first two questions, which I have encoutered, are

– what is the price target? and

– in what time?

This is like The Inevitable.  And the best part of it is, people are not willing to accept if you give them a realistic price or a time target for any financial instrument.

And no one asks, what if the projection is wrong?  After all, we breed of technical analysts are human, and are wrong quite a few times.  The saving grace is that we have learnt to keep a tight stop loss, so as not to erode our capital, and be prepared to ride a trend to its maximum.

After all, no one can accurately predict what is going to come tomorrow.

This discussion is centered around stocks, but holds true for any tradable financial instrument, be it stocks, commodities, futures, bonds, mutual funds, LIBOR, the Baltic Freight Index, in fact anything which has a price, and can be traded.

There is definitely a wealth of information about spread betting and it’s so much to take in – if starting out I would recommend you to start with our technical analysis trading course.

Many spread traders use a mix of fundamental as well as technical analysis to foresee price movements. Fundamental analysis assesses the economy and individual corporate data to determine the value of a share, whereas technical analysis is all about price movements and volumes of trades. If you’re considering a company ask yourself questions like: Do you understand the business? Does the business have an edge or intrinsic value over competitors that is hard to replicate? Is management competent? Is the company reasonably priced?

Naturally, buying is easier. Before entering a trade it is prudent to take your time and do your homepage; check the website, the graphs and financial facts; try to collate as much expert opinion and knowledge as possible, add a tinge of gut instinct and make your decision.

The information for your best trades is likely to come unexpectedly and from the most unlikely sources. Keep your eyes open all the time. What you are seeking are insider bit and pieces that have not reached the mass market and thus have not yet moved stock prices. For instance in the Swan pub I heard about an enterprise that was in such great difficulties that it was going to be making a lot of redundancies and another company where demand from overseas permitted expansion. I’ve also learned to listen to the young ones and I honestly admin that on many things they know more than me!

One of the most popular ways of spotting short-term opportunities is by looking at price-charts. Charts give you a real-time snapshot of what’s really going on in a market. They illustrate the ongoing tug-of-war between buyers and sellers. Once you learn how to interpret them, you will start seeing tradable situations everywhere

If you trade shares make sure that you are aware of any scheduled announcements that are coming up such as trading updates as these can have a serious impact on a stock price. This allows you to be ready to react to the announcement or even take a trade in advance of the news release, in anticipation of what you believe might happen.

You also need a trading system with rules that are clearly defined, specific and easy to understand. In this respect technical analysis works well. This would include trading breakouts and using trend and/or pattern analysis, backed up by moving averages and momentum indicators. In any case what I have found over the years is that it is best to start with something simple and add to it. For example, look for price patterns or an indicator pattern which you believe tells you something about the price. Then look for some other indicator pattern which confirms this belief. Then you can look for others to further confirm this. The more times you can confirm the belief the better as it gives you more evidence to confirm what you believe the price is going to do.

I tend to hold trades over a few months so I look at trends over the past few months. I think its also fair to say that even for an long term hold, if the stock trades for the past three months with negative relative strength then all momentum is lost regardless of previous higher highs and higher lows. And if that is good enough for a stock it should be good enough for the index. Would we really want to hold anything that has been falling for three months or more?

The information for your best plays may come from the most unlikely sources so it pays to keep your eyes and ears open. It can also be quite unexpected… What you are looking for are tiny bits of tangible information (insider facts) that have yet to reach the wider market and have thus not had the time to impact stock prices. In a pub for instance I heard about one company that was shedding jobs after finding itself in rouble while another was expanding following overseas expansion. Young people shouldn’t be ignored; more often than they may know more things than you!

When to sell? Taking Jim Slater’s mantra: Don’t be ruled by greed. In practice this is easy to say but its harder to do. A friend of mine sticks to a simple rule. When he buys a stock he makes a note of what he consider would be a good profit and puts a pre-determined time limit on it. For instance, if within 3 months the share rises 15% from the buy price, he sells. But whatever you decide, don’t look back.

Note: The best way to introduce yourself to shares trading is practice. Now if you wish to do this with your own money then obviously its risky, but you can follow shares as if you bought them, wait a few months and then see how they perform. Did you make money? Did you loose money? Test yourself. Research, research and keep researching the company as if you owned and were running it yourself… If you believe that it is an honest company that is likely to give good shareholder returns then take the plunge but remember this is investing (not trading).