The concept of trading in the stock market is fairly simple; buy stocks low and sell them high. But the dilemma most people face is knowing how low is low, and how high is high. Buying and selling stocks is fairly easy, but picking which stocks to buy, and knowing the right time to sell it is very challenging.
Traders and investors use several tools to identify where a particular stock is going. There is no particular tool or technique that is 100 percent correct because if there is, then everybody would already be rich right now. Making profit in buying and selling stocks entails knowledge and discipline, hence you must do your homework and research about the different techniques in analyzing stocks, discipline, and controlling your emotions. Emotions can cloud your logic, hence you must be able to keep yourself from following your emotions if they’re not backed by logic.
Here are some things that you must consider before buying a stock.
1.) Basics of technical analysis. Technical analysis deals with charts and their indicators. You must first practice your eyes in reading charts and analyzing it. In buying stocks, buy stocks that are at “support” or that have bounced from their support. Supports are areas or prices wherein the price action stops going down and reverses back up. Supports are easy to spot; simply draw a straight line across price bottoms, and if they hit the line and bounce their is support at that price. The more bounces from the support, the stronger the support. Aside from support, buy stocks that are oversold. Check the RSI of stocks, and if they fall below 20, such stock is bound to bounce back.
2.) Basics of fundamental analysis. If technical analysis is dealing with charts, fundamental analysis deals with the financial statements, company developments, earnings reports, or anything that shows a stock or company’s health. By using fundamental analysis, find and buy companies or stocks with increasing earnings and relatively low price to earnings or P/E ratios. Earnings are the bottom line of everything, hence if you see a company that is earning well, there’s a great chance for its value to go higher. P/E ratios tell whether a stock is overvalued or undervalued. If stocks are undervalued, there is a good chance for it to go higher hence you can earn more.
Many investors prefer fundamentals over technicals because fundamentals show the real score of a stock. It is believed that stocks always reach their real values in time, hence if stocks are trading below their values, theya re considered undervalued, and the chances of going up are believed good. Fundamentals are used in choosing what stocks to buy, and technicals on what price to buy.
3.) Volume and sentiment. Aside from the company’s overall health and its chart patterns; checking who’s buying and selling the stock is also very important. If you notice several brokers buying in to a single stock, then you might be assured that such stock will go up. Normally, huge brokers accumulate first; this creates the impression that there is inactivity in a stock until they begin accumulating, then they push the stock up for profit.
If a stock has a certain sentiment, then its chances of going up is good.