The good part about do it yourself Stock trading is that you don’t need to suffer the mistakes of others. The down side to do it yourself stock trading is that it is work. Traders determine stock value and predict stock price direction using two approaches. For longer term swing traders the key is learning to calculate intrinsic stock value and for day traders the key is technical analysis.
Fundamental Stock Value
Over time the value of a stock is determined by the cash flow of the company. Investors and swing traders learn to calculate intrinsic stock value which is discussed by Profitable Investing Tips.
The dictionary definition of intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value.
Predicted earnings per share, long term growth assessment and the current yield of AAA corporate bonds are used to calculate intrinsic value. That value is then compared to the current stock price. If the intrinsic value exceeds the current stock price the stock is a buy and if the contrary is true the stock should be sold or ignored. The trick to making this work is learning to accurately assess forward looking earnings.
On the way from a stock’s current value to its eventual price market participants drive a stock price up and down. The ebb and flow of market sentiment can be analyzed and profited from using technical analysis.
Technical analysis says that the future direction of stock prices can be predicted solely by studying past market data for price and volume indicators. Technical analysis says that all relevant market data is reflected by prices so that fundamental analysis is unnecessary. Technical analysis data is built into trading programs allowing the day trader to predict pending market moves with a fair degree of accuracy.
Purely technical traders assume that the market immediately takes into account all available information. Thus a technical purist will say that fundamentals don’t matter. The idea is that market price patterns repeat themselves time and time again. Learn to read the first part of a pattern and then profit from predicting the last part. This approach today used statistically based signals on a computerized trade station. But the idea goes back to the 16th century when the Dutch traded tulip bulbs and to Japanese rice traders in the days of the Samurai. The Japanese method endures and is called Japanese Candlesticks.
A Bit of Each
The best approach to do it yourself stock trading is to trade stocks about which you have some knowledge. This will provide insight into the fundamentals that eventually set the price. Then apply technical analysis to profit optimally from swings in price. What is essential is that if you are going to do strictly day trading you need to learn the system and should simulation trade until your skill set is sufficient to read and act upon signals in a timely manner.