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STOCKS
A BEGINNER'S GUIDE TO TRADING &
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START
TRADING
STOCKS
A BEGINNER'S GUIDE TO TRADING &
INVESTING ON THE STOCK MARKET

SASHA EVDAKOV
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Copyright © 2014 Sasha Evdakov

All rights reserved.

 INTRODUCTION
“Trade stocks: make fast money and make a fortune.” This is what most
people think when it comes to trading stocks on the stock market. Over
the years I have seen more traders become broke than a swarm of
wasps dropping dead after being sprayed with pesticide.

Too many people want the quick riches and that’s what they hope to
find in the stock market. This is not how things work in the markets
and you need to understand that the odds are stacked against you due
to high frequency traders and market professionals. Although you can
make a great fortune in the stock market you must be determined,
patient, persistent, and you have to be willing to do some difficult
things internally. However, most cannot stick with it long enough to
see their results come to fruition or aren’t willing to do the necessary
things to achieve their dreams.

A tennis player isn’t created overnight. It takes years for them to

become great! After practicing ten plus years on the tennis court then
they may become a professional and win their million dollar
tournaments. This is similar to the stock market. Little victories and
tournaments do come. If you are looking for the big wins right from the
beginning your thinking process is incorrect and you should adjust it
quickly or else you will be disappointed.

As for my early years in trading I first got into the stock market when
I was about 14 years old. Although I heard about stocks before, it was
because of my mom that I became interested in them.

At the time she worked as a private health care nurse to older patients
in Florida and they were always watching their stocks and checking
their investments. Slowly after about five years of watching the
markets with her patients my mom decided to try trading some stocks.

I helped her open the account since she was not very technical savvy
and then I would execute the trades, but she would tell me the stock
picks of what and when to buy or sell.

Our first year was very profitable! We traded one stock in particular —
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

where we made a few hundred dollars profit weekly. It was a good

feeling making an extra $1000 a month!

After some time I took the reins into my own hands. I got the
investment capital to trade from working on my digital design
business. After about six months of isolated gains I hit a critical part
in my trading. I lost over $16,000 in about 16 minutes!!! It was a
biotech company and really proved to me that I had no clue what the
heck I was doing.

I decided to take a moment to step back and try to figure out what
happened. From then on I took the next 7+ years to just study
everything I could get my hands on and slowly made my way back to
the market. I think it takes a major experience to realize how fast you
can lose money in the markets.

Since that time I put many disciplines in place and created my own
trading system. I decided to help other people out from the knowledge
that I learned when I started my educational business. Stock market
education was just so expensive and I wanted to give everyone the
opportunity to learn what I learned over the last 10+ years.

So that’s my goal for you. Learn what you can and then make it in your
own. Make your money work for you! Think of each dollar as a little
worker that is out there working for you.

In this book I wanted to share with you the quick tips and mindsets
that you can use to transform your trading style, get insight, learn
more, and get a different perspective so that you can stay profitable.

This book is not about giving you the Bible to trading. It’s about giving
you a great foundation to getting started in trading stocks. You will
probably need to read many more books, study a few more courses, and
play with other concepts. However, this book should give you a good
foundation to getting started in the world of stocks.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

TRADING DISCLAIMER
Sasha Evdakov or Rise2Learn, LLC are NOT licensed financial
advisers (here will be referred to as Rise2Learn). Nothing contained in
our material (hereinafter referred to as media) is intended to be or
construed to be as financial advice. All information on any media is not
intended as investment, tax, accounting, or legal advice. Nor is it an
offer or endorsement or recommendation of any company, security, or
fund.

TRADING INVOLVES RISK AND IS NOT

SUITABLE FOR ALL INVESTORS
Online trading has inherent risk due to system response and access
times that may vary due to market conditions, system performance,
and other factors. An investor should understand these and additional
risks before trading. While implied volatility represents the consensus
of the marketplace as to the future level of stock price volatility or
probability of researching a specific price point there is no guarantee
that this forecast will be correct.

Content, research, tools, and stock or option symbols are for

entertainment, educational, and illustrative purposes only and do not
imply a recommendation or solicitation to buy or sell a particular
security or to engage in any particular investment strategy. The
projections or other information regarding the likelihood of various
investment outcomes are hypothetical in nature, and are not
guarantees of future results.

You agree that all content including all media under Rise2Learn, LLC
along with its materials are proprietary rights and that their use is
restricted by the terms of this agreement. Use of the content, media, or
material, for any purpose without written permission from
Rise2Learn, LLC is strictly prohibited. You further agree that you will
not create derivate works of this media, material or products offered
by Rise2Learn, LLC.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Rise2Learn does not guarantee or promise any income or particular

result from your use of the information contained herein. Rise2Learn,
LLC assumes no responsibility or liability for issues, errors, or
omissions in the information in our media.

DAMAGES AND LIABILITIES

Rise2Learn will not be liable for any incidental, indirect, direct,
punitive, consequential, special, exemplary, or other damages
including, but not limited to, loss of revenue or income, pain and
suffering, emotional distress, or similar damages even if Rise2Learn
has been advised of the possibility of such damages.

In no event will the collective liability to any party (regardless of the

form of action, whether in contract, tort, or otherwise) exceed the
greater of $100 or the amount you have paid to Rise2Learn for the
information product, service, seminar, or media out of which liability
arose. Under no circumstances will Rise2Learn be liable for any loss or
damage caused by your reliance on the information contained herein.

It is your responsibility to evaluate the accuracy, completeness, or

usefulness of any information, advice, opinion, or other content
contained in any media presented by Rise2Learn. Please seek the
advice of professionals, as appropriate, regarding the evaluation of any
specific information, advice, opinion, or content, or media.
 Start Tracing Stocks: Beginners Guide to Trading on the Stock Market

COPYRIGHT NOTICE
This book is copyright. I love spreading knowledge in the world,
educating other people, and helping others achieve their potential. You
are welcome to cite things from this book; however, please give credit
back to me or my _ website http://tradersfly.com or
http://sashaevdakov.com.

If you have any questions regarding the copyright or would like to use
parts of it on your website, presentation, just contact me from my stock
trading website http://tradersflycom or my personal website
http://sashaevdakov.com

COPYRIGHT FROM THE LAWYERS

Please do not distribute, copy, or create derivate works of this book as
this book as it contains material protected under International and
Federal Copyright Laws and Treaties. Any unauthorized reprint or use
of this material is prohibited. No part of this book may be reproduced
or transmitted in any form or by any means, electronic or mechanical,
including photocopying, recording, or by any information storage and
retrieval system without express written permission from the author /
publisher.

Okay, enough with that. Let’s get into some stock market tips!

Vil
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

QUICK RESOURCES
Before you get too far I just want to give you a few handful resources
that I use. All of these resources can be easily found on my website at:

http://www.tradersfly.com : Free Stock Trading Lessons

http://www.sashaevdakov.com : My personal / business website

If you visit www.tradersfly.com there are a plethora of articles, videos,

and resources to learn from. Most of them are free! If you decide to take
your trading to the next level and want to accelerate your education, I
have created in depth video training material that are unlike any
others on the market.

With that being said... let’s get rolling!

Vili
 TABLE OF CONTENTS
CHAPTER 1: STARTING YOUR STOCK MARKET JOURNEY.......cscccccssessesceesecseees 12

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RISKVABUSIMESS —AIIADOUERISK tee scenecetinerscece cractiessceresesacheccetesesa hestemmrcanens 70
POPUL OJICE eer LOIMEES
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CHAPTER 3: GETTING SETUP TO TRADE ........ccccesccssscccscccscecccccnscccssccsscceeccencce 80

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WOE VOUVECG CO SOE TAG Wave teres erties sev tesatecesteeteesstsensvctenncortecranes 81
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tits stitrces saa trnaenesevaantamaetentartins 92
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How Much Investment Capital To Start WIth? ......cccesesseccesessseeceseeennseeees 99
Stock Movement — Not Straight Up —SWiINg POINTS......::cccccccecsessenssnneees 101
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cent<deraPranpaeins 108

CHAPTER 4. THE TRADER IN YOU.........sscccssccnsccccscccsccnscccsccccccsnrssscesccenseeecece 111

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CPU I ONa EDL Sot ee anaes oe va lege nes cyaioteavon sans scien ems venustnto syn ovecai 123
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Having the Right Tax MeNtality.....cscsccesccecersescssserseeteenersserescsssnaseneseneens 126

Journaling To S€€ YOUPSEIf.......ssesessccsscsseseecessessessecsessensseveceseesesasensees 128

CHAPTER 5: STAYING CAREFUL. .........cccssscscsssccsccsccesccccessonsesssscccccssescesccsccscans 131

What AreStopseiir trite, merccer sci estteiter secs: sateeareieaytance scones anes tedenarars 135
What IS HEDGING? .1sceccssteceee+ cxnaesedgnseniigetea us Saadapnel aiep aptnangets waantans 138
irasuadt
Short SQUCOZC sind teas aitsseeiy sivoh eeevexcnaneDedyeop 1 aeetvacetadt urate ipod iRaatadebamarands cane’ 140
What iS TOM cueetszoossaakanenagen
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nsterere dgeisisdec 140
THACING WITRIMQIGUIN, <6vsussssvutons nino vnseora ote Mhasabrnsttds «tet tetipapeass nants aanetiigeh: 142

CHAPTER 6: FUNDAMENTAL ANALYSIS .........ccsssscccssccsnssccnsccccesscesccecessecsscenes 144

Basics‘Of FUNGOMENTGI-ANGIYSIS oio<.tco.sarsecsnesseo tace:str

Meerckesesvexsosnturs cextuesars 144
Simplified Investment Descisions Based ON th COMPANY ......-..1secesseereeee 145
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deltas apuigesed tt«148
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CHAPTER 7: TECHNICAL ANALYSIS .........csscssscsccscccccccccsccssceccncccccnsesssecceccscnes 155

WRGCIS PECHICOLANGIY
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T OCINGICCUMINOIGE LOPS cece. aes wn cacosdtuiina consuccs ckencit Cer eee eeltieee cdcama tee wane 190
Wrap Up on Technical ANGIVS!S «a: cc: cumepecete immed Semuesctes cs rat nels 195

CHAPTER 8: PUTTING ON A TRADE... :ccchaccesosesccsnsettbansssssesthanvoccsttverucesctatences 196

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

CHAPTER 9: MONEY MANAGEMENT.......ccccccsssssssssscescecesersccsssssseseeseceeeeseneees 211

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SEGUE ARO tity, LAGE. Mele: Meek. MBE AOA. Ban 215
Taking WVoney Outor Putting MOneyn Wesiisiesslecesssvceterseret coscdeenenssvadl vue 220

CHAPTER 10: IDEAS FOR VARIOUS ACCOUNT SIZES ........cccsssesessessseceeseeseseees 224

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Xi
 Chapter 1:
STARTING YOUR STOCK
MARKET JOURNEY

WHY TRADE OR INVEST IN THE MARKETS?

It's all about the money. That's why people trade on the stock market!
Well at least that's what I thought when I first got into the stock
market years ago. There are hundreds of personal reasons why you
may be interested in trading on the stock market. However, the most
basic reason is to make money from the cash you have available.

There are very few things in this world that you can just put your
money into, let it sit, and take out more money than what you put in.
So the premise behind making money is the primary reason people are
attracted to the stock market and it doesn't take much to change your
life.

All you need is one or two good plays and it can drastically change your
life. Take for example the rise in Apple over the last decade. If you
invested $5,000 in Apple in 1997 and then sold it in 2013 you would
have made about $500,000. Take that next investment and do
something half as good and you would have an extra $1 million in your
bank account. That is a huge life change for most people in the world.
As a side note, if you invested in Apple like Forrest Gump in the 1980’s
you would have over $7 billion dollars.

Now I understand that not everyone can pick the best stock out there,
but the fact that it allows you to have this opportunity without doing
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

much work besides having great patience is a huge attraction to many

people. Even just doing one investment that's just “okay” still puts you
ahead and can change your life.

If you look at the stock charts over the years you get a fairly good
reading of the performance. Not every year will be a perfect home run,
but the average return ranges from 7% to 12%. Most people say 10%
for simplicity sake. Corporate bonds return on average about 4%. U.S.
Treasuries are about 3% and inflation grows between 2% and 3%.
Treasuries and inflation are usually on par and when you take into
account the taxes you have to pay, when you invest in treasuries you
are actually losing money!

Note: Inflation is what happens when a general good that you purchase
increases in price. For example, every dollar you have can buy you so
many oranges. In our case let’s say we can buy three oranges for $1.
Over time that dollar is worth less as inflation increases. So it might
be that in five years you may only be able to buy one orange for $1.00.

Treasuries is the Certificate of Deposit (CD) or Certificate of

Depreciation as I like to call it, is the money you give to your bank that
sits there in the accounts making some interest. However, they are the
lowest risk since the government guarantees your money because you
put it into a bank.

Corporate Bonds are investments that you give to companies such as

Microsoft or IBM. The company sells these debt securities (think of it
like a coupon) and you as the investor buys it from them. That coupon
is a promise from the company that they will pay you back in a certain
amount of time based on the coupon you bought. These investments
are more risky than a CD since it is backed by the company and not
the government.

Although with corporate bonds you do make money slightly over the
inflation rate it's still quite miniscule in my opinion for the amount of
work and headaches that you have to go through. The effort and setup
time will give you that extra 1% percent over inflation.

Is it worth it? Well, depending on your situation and circumstance, the

answer is yes. Corporate bonds are great investments to do when you

13
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

are 50 years old or older because there is more stability in them than
there are in stocks.

Stocks are even more risky than corporate bonds, however the financial
return is far superior. In fact, it is nearly double the average corporate
bond return. For that additional amount of work even if you just invest
in a lifecycle fund that buys you a bundle stocks for the next 10 years,
it is worth it (at least in my opinion). The amount of work to get a
lifecycle fund or a corporate bond is not much different.

Now of course as I mentioned earlier you will not have perfect returns
and home runs; every year you need to look at the long-term picture
and make sure that the gains keep moving forward.

You Can Work From Anywhere

One of the things that attracted me to the stock market is that you can
work from anywhere. By anywhere I’m talking about anywhere with
Internet access. I really enjoy traveling certain times of the year. It's
more of when the mood strikes me rather than planning months ahead.
When you have a corporate job working for a large company, there's
only so much vacation time that you can have.

Planning far ahead of time usually doesn't work for me. If you become
a full-time stock trader it allows you to work from anywhere in the
world given that you have Internet access. If you are trading overseas
you may need to carry five tablet devices depending on how active ofa
trader you are, and you might have to work late in the evening
depending on the time zone differences, but nevertheless it could be a
great alternative to seeing a part of the world and enjoying your life
while still making some money on the side.

Personally, I hate being tied to one location. That's one of the reasons
that I love online businesses. You can work from anywhere you want
to. If you want to move to Costa Rica one day and you can do so. If you
need to leave for three months to another state to be with a loved one
— then you can just go. You don't need to take a leave of absence from
your job. The flexibility is simply amazing and you have to start
thinking about your life not just about the dollars that you earn, but
the value of your free time.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Your Time Freedom

How much is your free time worth? Free time that you can spend with
your children an extra hour or an extra day? Most people when they
calculate their earnings they always talk about the direct relationship
to money such as “I make $50,000 a year.” Okay that's fantastic, but
you are working 80 hours a week!!!

Then you got some 20 year old kid that says “I work 5 hours a week
and make $30,000.” Who makes more? If you value free time and doing
things in your life rather than collecting dollar bills than the 20 year
old kid makes a fortune! Especially if he values his free time at $500
an hour. Imagine an extra hour to go to the beach, spend the time with
your family, or listening to music on your final days. What’s your free
time worth?

I’ve seen this happen with doctors that I’ve known who work 90 hours
a week making $200,000 a year, but their family is destroyed. They
don’t spend time with their kids and they are stressed out with gray
hair by the time they are 32. It all comes down to what you value. If
you want free time and flexibility the stock market gives you that
ability.

Fluidity of Stocks and Your Money Working For You

There are many things you can invest in in this world. Your money can
go anywhere and it can work for you. You have the option of investing
in real estate, starting a business, collecting rare coins, stamps,
antique cars, and so many other things.

Often times you will hear real estate people boasting about real estate
investments and people who invest in rare coins will pump up the rare
coins investment area. The fact is I don't care where you invest — the
important part is to invest somewhere.

Learn about stamps and start investing in them if that’s your passion
or learn about antique cars if you love cars. It is up to you. Find
something that interests you and then stick with it over your lifetime.
All an investment is — is something that goes up in value over time.
Buying regular cars doesn’t work since they lose value over time.
However stick to the 1930’s classics and you got yourself potential.

15
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

My two favorite things to invest in: building businesses and buying

stocks. More specifically, virtual or online automated businesses.

Before I get into these advantages and why I like them, let me give you
a basic overview of real estate investing which my mom loves to do. It
is a very different mentality. Real estate can be a great investment for
people with a certain mentality. It takes more physical work and time
in my opinion whereas stocks take more mental work. They are both
great investment vehicles, but which one do you want to do is the more
important question.

For example if you purchase an investment property you do get to rent

it and build equity over time. If you have five houses then from each
one you could be earning $1,000 a month (for the sake of easy math)
and at the same time build equity in the property. When you sell the
home you will collect the profits. This is a good retirement strategy in
my opinion. However, you must time it properly as if you buy the homes
when you are 20 years old — typically they won’t withstand the test of
time for the next 40 years.

After seeing my mom invest in real estate over the last 20 years and
owning on average five homes at a time I learned a few things. First
off, most renters don’t care about your house property. You need to find
renters that are of high quality and those are hard to find. Even if you
do, there will still be things to fix once they move out for the next
renter. That’s just part of living in the home.

For a $1,000 a month you collect on your property you have to

remember that one or two of those months that property may be vacant
for repairs or to find someone to move in unless you have tenants that
live in one place for years (which is rare).

That drops your $12,000 a year to $10,000. Then every year you have
to deal with property taxes, repairs, and not to mention the biggest
annoyance of random things breaking like a water pipe and then you
will be the one that has to jump up and down to coordinate the repairs.
This puts you at $7,000 profit for the year.

When it’s time to sell you usually can’t just sell your house in a month.
It may take three to six months! This can involve many hours of
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

cleaning, preparing, and showing your home to other people as well as

a large amount of paperwork during the sale.

Think of all this time that you have to put in — finding the renters,
selling the home, dealing with agents, and running over there for every
little issue, calling people for not paying, and the annoyance of time
and money when you have to evict them. I like to keep my life simple.
I value my time immensely and I don’t want all those headaches.

Investing in stocks is much easier because of the liquidity and

simplicity. If you want to sell your stock this week — you can with the
simple click of a button. If you want to sell half of it, than you can sell
part of your position. You can’t just sell half of your house. There will
almost always be a buyer of your stock if you invest in very liquid
companies that trade millions of shares daily. Not to mention you don’t
have to deal with dead beat tenants. When you sell your stock it’s sold!
The money will be in your account.

Leverages Income On Your Choices

One of the things that I find interesting about investing or making
money in the stock market versus anywhere else is that you get to
leverage your income based on your choices.

For example, if you make a real estate investment and you believe that
House A is going to make you 30% on your money whereas the other
properties you have (Houses B and C) you only predict a 15% gain. The
downside behind this is approach is that you cannot buy three House
A’s because they are not the same house! It's possible you won't even
find a comparable house in the same location.

If you believe that a certain stock investment in a company will make

you more money (whether they sell raincoats or computer technology),
you can put more money in that specific investment so long as you have
the capital.

That's the beauty behind leveraged income on your choices. You can
put in as much risk as you would like based on your confidence level,
risk tolerance, investment strategy, and outlook. There are no other
investments that make it easier to do this than the stock market.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Even if you were investing in stamps or gold coins it's difficult to find
certain stamps or gold coins. There may only be a handful of these
items available. Then again you will have the trouble of selling them
in the future because they are not as liquid of an asset.

There is power in your choices. If you are successful, you get the
benefit, period. If we compare this to working in the corporate world,
it’s like saying you choose to be the CEO of Google today. Someone
hands you the job, you get paid millions of dollars, but the catch is you
have to be able to handle the requirements. Most people won't be ready
to handle the job because they may not understand how the company
works. However, what if you did? Then you just jumped a bunch of
levels in the company.

With stocks it’s that easy. If you are earning $500 extra a month
trading stocks, next year you can say I will start trading or investing
more. Then you start making $1,000 or $2,000 a month. The year after
you do the same thing and now you are making an extra $3,000 or
$4,000 per month.

Of course I wouldn't take this approach and go too quickly. Instead

take things slowly and build up your skills to the point where you are
confident and have a proven track record of consistency. Once you have
those things, you can promote yourself at any time.

Almost a Level Playing Field

When you first start job hunting after you graduate college, you may
find you’re on an uneven playing field because other candidates have
the upper hand. For example, if you have a Bachelor’s degree and
someone else has a Master's, they might be the more likely candidate
for the job.

In every situation or industry there are advantages that would be

fantastic if you were the one to possess them. The one great thing about
the stock market is that traditional education has very little effect on
your success in the market.

What I mean by this is you don't have to have a degree to trade on the
stock market. If you want to become a doctor, you have to go to school
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

for years! With the stock market you can start trading almost
immediately after you set up your account.

Now of course I don't recommend that because you likely won't be

successful and you'll probably lose all your money. I highly recommend
you do your due diligence and study as much as possible because you
will be trading with professionals. However, you don’t have to have a
fancy degree from a University to trade on the stock market. In fact,
from what I've read, seen, and heard many people who have degrees in
finance or some other related area think very linearly and this is not
helpful to trading or investing in the stocking market.

I tend to think that the market gives everyone an equal opportunity to

invest or trade within reason. There are some caveats such as people
who have more money in the stock market can move the stock if they
are trading a low dollar stock. In addition there is a lot of computer
algorithmic trades that happen during the day (this is called intraday
trading — when you buy and sell a stock the same day). Some people
know this as high-frequency trading.

Nevertheless, if you stick to a longer-term outlook rather than just

trading in and out in one day you are much safer and you are an equal
in the market. Of course you can also attend the stockholders meetings
if you choose to and even vote on what the company should or should
not do. Unfortunately if you do not own a large piece of the company
your vote will be minimal based on the amount of shares you have.

THE LEARNING PROCESS

Before we get into learning about the market and how to make money
from it I think it's important to understand the learning stages and
what your mental state will go through to digest all the information.
These are also known as the stages of competency. When you
understand the learning process you will know this stage that you are
in as a stock trader or investor.

These stages of competencies can be applied to anything that you do.

Whether you are learning a new sport, building a business, or picking

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

up a new hobby.

So here's is the breakdown of the four stages of competencies.

Unconscious Incompetence
Conscious Incompetence
Conscious Competence
gi Unconscious Competence
edie

In simple terms you can substitute the word “unaware” for

“unconscious” and “wisdom” for “competent.” So as we break down
what these mean, let me give you a brief overview and then I will give
you a simple example.

Lb Unconscious Incompetent — You are unaware that you are a

dummy. You do things without thinking about it, but think
you're smart and savvy. (Most beginner traders)
Conscious Incompetence — You are aware that you are a
dummy, but you still cannot do what you'd like to accomplish
because you do not have the skills. (Traders after failing will
know they are not as smart as they think.)
Conscious Competence — You are aware and have the skills to
do what you need to do. However you still have to think about
it very carefully, but you can do it. (Traders that are
successful, but they have to think about things because they
are slow to process.)
Unconscious Competence — You can do something without
thinking about it. You are wise without thinking which brings
a natural flow. This is the “I can do this in my sleep” phase.
(Professional traders)

Let’s take these four stages and compare them to learning how to drive
a Car.

Stage 1: Unconscious Incompetent: Before you first start driving as a

teenager you believe that driving is easy and simple. You are unaware
that it is actually difficult and takes some practice. You don't have the
necessary skills and you are foolhardy about it. This is why teenagers

20
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

will typically get behind the wheel their first time with full confidence.

Stage 2: Conscious Incompetent: Once you start driving you become

aware that driving is a little more difficult than you thought because
you do not have the skills. It becomes important for you to practice with
a parent or teacher telling you what to do properly. In this stage you
are aware that is more difficult, but you still don't have the skills so
you are incompetent.

Stage 3: Conscious Competence: After you get your driver’s license and
you get behind the wheel all by yourself, you now have the skills that
are required to drive a vehicle properly. You now know what it takes,
but you still may have to concentrate on certain procedures until you
get more comfortable. Since you have to think about the driving process
it means that you are still conscious, but you do possess the skills.

Stage 4: Unconscious Competence: Later in your life after you've been

driving for quite some time, it becomes natural to you. You just get in
your car and go. Some people even eat a sandwich, listen to the radio,
and talk on the phone all at the same time as they're driving.
Multitasking becomes natural when you don't have to think about
driving. At this stage you possess the skills while you unconsciously
complete the driving process.

When it comes to stock trading, most people are closest to the

professional level when they first start trading as they are most
relaxed. This is the stage of unconscious incompetent.

In the other stages, until you hit the unconscious competence stage,
you have to think about trading more and this can be dangerous for
trading as analysis paralysis will kick in.

Once you’ve been trading for quite some time, the system and your
strategy you develop becomes so ingrained within you that you don't
have to think about it anymore. Everything becomes natural and you
can do it in your sleep. This is where you become a professional trader.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

HOW YOU MAKE MONEY IN THE MARKET

Why Companies Sell Stock

In order to make money in the stock market you have to understand
how things work before you can capitalize on it. A stock is just a share
of acompany. Think of it like a little piece of a company similar to parts
of an orange that gets broken up into multiple pieces and then the
owner sells parts of the pieces.

But why would the owner of a company sell equity of their company to
investors? When you look at “business” as a whole you have to realize
that it's very expensive to create a company and requires a lot of equity.
This is in fact why stocks at times are called equities. Smaller
companies can be built on a dime and/or get lucky. Larger companies
may require thousands or millions of dollars to just get started.

In order to acquire this funding to build the company you need to get
the money from someplace. Companies can borrow money from a bank
— this is typically how most regular people think of starting a new
business. Or they can sell part of the company, which is selling their
equity, but at least they get to earn money with a different strategy
that has different benefits.

The upside with the bank is that you can find a bank on any street
corner. As long as they approve you, you are good to go. When you are
selling parts of your company then that becomes a little more difficult
because you have to find the investors willing to give you the money
for part of your company or your vision.

With a bank, as the company owner you have to pay interest along with
a regular payment along the way. This can be very expensive since you
have to start paying back the loan almost immediately.

If you are selling stock or a part of your company, you don't have to
start paying anyone back immediately. All that happens is someone
else sells their share of your company to another person.
Unfortunately, when you sell stock you are giving up a-part of your
profits in the future.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

As your company grows, typically the value of it grows so long as you

are adding assets and value to your company. This means that future
investors that purchase part of your company will have to pay more for
it than the early investors. This allows the early investors to cash out
at some future date and time.

For someone to cash out early, it is a little more difficult if the company
is not that big. However, once the company goes public which is the
Initial Public Offering (also known as the IPO) it becomes easier for a
company to sell more stock as well as for other investors to sell their
original shares.

Not every company will sell stock or a piece of their company. For
example, a local cleaning service in your town will probably not be
trading on the stock market anytime soon. The reason is the cleaning
service usually does not require additional funding or capital to get
started. All the fees such as the cleaning products, vehicles, and
business materials can be funded by the owner themselves.

However, if you are starting a massive oil refining business you

probably can't build that just from your pocket money. It takes a lot of
capital to get something large off the ground and of course if you can
avoid the interest payments on loans then you will be better off. That's
why selling company stock can be a better route since it will give you
ample of time to get your business off the ground.

What Types of Stock Can You Purchase?

Not all company stock is created equal. There are different types of
stock that you can purchase. It’s important to understand that when
you purchase stock you're buying a piece of the company. When you
own a piece of the company it allows you to have certain rights and
privileges.

This means when a company has a meeting, also known as a

shareholder meeting, it allows you to vote on issues and things for the
future growth of the company. The more shares or percentage of the
company that you own, the more important your vote.

In simple terms, let's say you have 1,000 shares of company XYZ and

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

the owner has 50,000 shares. Other investors accumulate for 15,000
shares. When you go to vote on an issue regarding future marketing
tactics for company XYZ, your vote is only counted 1,000 times. The
owner’s vote will always win out since he is the major shareholder with
50,000 shares.

As a company becomes larger, it will have more shareholders and this

is where the voting rights can really be interesting because it can skew
the decision of the major holder or the owner! However, many people
that trade or invest in stocks do not attend the shareholder meetings.
Instead, they might watch them on recaps or not even care about it
because they strictly trade off the charts.

The people that do care about these types of things are usually people
that own a large stake in a huge company such as owning 5% of
McDonald's. The single individual that owns that many shares usually
has millions of dollars with just one company and when voting takes
place they want to make sure that it is in the best interest of the
company because they are holding their shares for the long-term. Not
to mention they have millions of dollars on the line.

As you get deeper into stocks, you will realize that there's more than
one type of stock. You can have common stock, preferred stock, and
even unlisted stock. In general you will be trading the common stock
since it's the easiest to trade and invest in.

Common Stock: Common stock are the basic shares that can be
purchased by an investor as long as the company is publicly held. This
is most of the popular companies that you hear about on the stock
market. As you trade and invest you will be dealing with common stock
most the time unless you get into some special conditions.

Preferred Stock: Preferred stock is still stock. The difference here is

there are different rights behind owning the shares. If the company
closes or goes bankrupt the preferred shareholders get paid before the
common stockholders. For example, if dividends have to be paid out,
but the company does not have enough money, the preferred
shareholders will get the dividends before the common stockholders.
This includes any asset liquidation if it comes to that.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Unlisted Stock: Unlisted stock or unlisted securities are usually traded

in the secondary market. This can be like the cleaning ladies at Google
that got rich because they were first in the company helping out. Or it
could be when the stock is being sold before the company goes public to
raise money ahead of time. Sometimes the unlisted area could be a
little dangerous so you have to be careful and trade accordingly.
Usually you have to have an “in” of some kind in order to get unlisted
shares. This area is not for the common investor or stock trader.

Owning Great Companies is What Makes You Rich

If you've dabbled a bit in stocks enough to pick up this book, you
understand that the stock market is a very prosperous area — it
attracts money and wealth, but why-is that? Let me see if I can bring
an “Ahhhaaa!” moment to you.

It isn’t the stocks that are lucrative. It is owning a successful company.

Think of the greatest and richest people alive, people who sold their
companies for huge dollars or made a fortune with their companies
over the years.

People like Bill Gates who started Microsoft. He didn’t become rich
because he had stock. He became rich because he owned a successful
company — a company and business that grew to astronomical value
over the years.

Take a look at Jeff Bezos who thought up the concept to start

Amazon.com driving cross country. He made his wealth through his
business. A business that adds and produces value to other people. I
could name hundreds of other people like Steve Jobs who started
Apple. Larry Page and Sergey Brin who started Google — a company
that gets billions of page views per day which generated each guy over
$30 billion dollars!

You see you could go out and sell things to people making a few dollars
on each item you sell. That’s the hard work. Or you could buy a piece
of Amazon and then promote products that are listed on Amazon. As
the company grows over time the value of your shares increase in
value!
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

This is the beauty and the power of the stock market. You don’t have
to create your own company. You don’t have to be savvy and have
business concepts. You have to understand what people want and
recognize the great companies. You can do that by listening to people.
What’s the latest handheld device in the kids’ hands? What
restaurants are people going to?

I hope by now you realize that it isn’t just “investing” that makes you
money. It isn’t just “stock trading” that will make you wealthy. It is
putting your money to work in companies that will grow and appreciate
over time! That’s where the big bucks are!

How Stocks Trade

When a stock's price is changing, it is being bought and sold. That’s the
act of trading. This is the one thing that beginning traders struggle
with because they feel that they need to trade all the time.

Now you're ready to buy Starbucks stock, how do you do it? First off
you need to know the ticker symbol. Every stock must have a ticker
symbol which is an abbreviation for the company name. In our case the
ticker symbol for Starbucks is SBUX.

It is through the ticker symbol that you execute trades for that specific
company this is why every ticker symbol is unique for that company.
Ticker symbols also make order execution much faster (rather than
typing out the whole company name). Here is a list of some other
companies and their ticker symbols.

e Google (GOOG) e Netflix (NFLX)

¢ Facebook (FB) e Priceline (PCLN)
e Tesla (TSLA) e Starbucks (SBUX)
e Amazon (AMZN) e Electronic Arts (EA)
e Apple (AAPL) e AT&T (T)

When you are ready to purchase shares of Starbucks, you check the
price and hit the buy order. Congratulations you purchased 100 shares
of Starbucks at $70. That cost you $7,000 to purchase all those shares.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

The next day you wake up and Starbucks is up $2. What does that do
to your investment? Well you made $2.00 on every share you owned.
That’s $2.00 x 100 shares which means you gained $200!

Typically the movement up or down in a stock’s price is not referenced

as “dollars” —but points. So if someone tells you that my stock is up 10
points it usually means $10 dollars. In the trading world the term
points is used because there are markets all over the world and to be
congruent and not confuse when you trade currencies we’ve adapted
points.

For example, if you were talking about the rise of the US Dollar and
you said the Dollar is up $2 dollars it would sounds a bit weird. Instead
we say the US Dollar is up 2 points. However some people still say “my
stock is up $2 dollars” and that's perfectly okay so long as the person
you are communicating to understands you.

The 100 shares that we purchased of Starbucks is called a round Jot.

This round lot is in increments of 100. Most people don't talk about
round lots often when they discussed their trades. They still will say
5,000 shares which is 50 round lots. Trading in round lots makes it
easier for you to calculate the math on your profit and loss.

Rather than figuring out a 7 point gain on 2,831 shares it is much

easier to get a more accurate reading on 3,000 shares or 2,800 shares.
Not to mention many other traders are trading in round lots. Due to
this group mentality it makes it easier to get in and out of positions
when you trade in round lots since most people trade in a batch of 100
shares to keep things simple for calculations.

Earning Through Share Appreciation

By the earlier example you can see that one of the best ways to make
money on the stock market, and probably the most popular because it’s
easy-to-understand, is through share appreciation.

As the value of your company investment for your stock value goes up
then so does the value of your investment. This is where the power
behind leveraged income on your choices comes into play.

You could trade 100 shares of Starbucks and for a 3 point move you

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

make $300. Or you decide that you want to invest more because you
believe SBUX has a huge potential. In this case you can buy 10,000
shares. Now a 3 point move in the stock would give you $30,000 in
profit! That’s the power behind the markets. There is no other industry
out there that I know of where you can capitalize on something in that
way.

Take a look at some of the following examples of some stocks and their
runs. I’ve given you an example of what your profit would be if you
invested 100 shares during each run.

rice
Teer tnt pce
pig RetTne peaShare_
oper ‘Gain_100 t
NFLX $60 2010 - 2014 $395 335 $33,500

cae ae sada an ie | Ee

renee err ern

pra $27 ened ns | on 28 ey

As you can see that by simply owning 100 shares of a great company
over a few years can give you a great amount of additional income for
your lifestyle or for your retirement. All of these investments would
have cost you less than $6,000 and often times you would have doubled
or even tripled your money. That's very tough to do in any other area
for just simply sitting and waiting patiently.

There is a famous phrase by Jesse Livermore who says he “made more

money by sitting on his hands than actually trading.” This is because
when you buy the right stocks at the right time and just let them run
without getting too panicky, it will give you great gains in the long run.

Of course with appreciation you do have the negative effect that can
happen. For example if you purchase 100 shares of a stock and it goes
down 8 points — you are at an $800 loss. If you purchased 500 shares
and it’s down 8 points then you would be down $4,000!

yt
AS
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

You have to remember that not every investment you make will be a
great investment. Rather than ending up with appreciation on your
investment for your stocks you might end up with depreciation. This is
just part of investing so you have to learn how to deal with the bad
stock investments or trades as well as the good ones.

The better and faster you can learn to deal with the losses, the quicker
you will become successful in the markets. From my experience, people
who can’t deal with their losses rarely make it in this business in the
long run.

Dividends
Dividends are another way for you to make money from your stocks
and investments. You can get paid a dividend whether the stock goes
up or down. Dividends in simple terms are little payouts that the
company decides to do for their investors.

A dividend is typically given out every quarter from the company's

earnings. Earnings are held every quarter which means every three
months. Sometimes it happens that the company's earnings are not
that great or the company loses money and therefore the company can
choose not to pay out a dividend. This decision happens on the dividend
declaration date. This is when the company decides if they are paying
out a dividend as well as how much.

Typically most companies that have been paying out dividends for
years do not all of a sudden stop paying dividends. Usually if you find
a company that has been paying dividends for quite some time
consistently then you are fairly safe.

The question then is how do you receive a dividend payout? Well, you
must meet a few criteria to receive a dividend payout. First off, you
must own the stock by the ex-dividend date. If you do not own the stock
by the ex-dividend date than you won't be paid a dividend. This is
because the company looks at the list of shareholders and records
within the next week to see who should receive the dividend. If you are
not on that record sheet, you are out of luck and will not be paid a
dividend.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Now if you do own the stock for the ex-dividend date and you are on
the record sheet then you will get a dividend check which you can use
to reinvest and buy more stock or put it in your bank account and enjoy
the money.

The dividend that is paid to you will be determined based on the

amount of shares that you own. If you have 1,000 shares and the
dividend is $0.28 then you will be paid $0.28 for every share you have.
That means you would get $280 every 3 months from the company or
in other words $1,120 every year. If you owned 7,000 shares then of
course you would be making much more!

7,000 x 0.28 = $1,960 every quarter or $7,840 every year in interest

payments to you! That’s pretty good!

Not every company pays out a dividend so it's important to do your

research to see which companies do pay out a dividend. Some people
make their living just through dividend payments alone. If you are
looking for this long term perspective thing you need to choose
companies that have stable dividend payouts over the years. Stable
companies like GE, McDonalds, Verizon, Colgate, and Palmolive have
all had stable dividends throughout the recent years.

Remember the bigger picture: just because you receive the dividend
does not mean that your stock cannot go down. If the stock is not
moving in an upward direction you could be losing more from
depreciation of your investment than on the dividends. However,
dividends help you offset the risk if your stock does go down and you
are looking at the longer term perspective.

Options
Options are more complicated than the scope of this book. I could write
another three books just on options alone. Never the less, I do want to
mention what's possible behind options just so you can see the bigger
picture. Keep in mind I am giving you the simplistic overview behind
options in this section. Don’t kill yourself over it because they can get
very complex. However, it is an area to explore further as your
education and knowledge grows.

30)
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

If we think of options in terms of coupons that we can buy or sell, such

as on Groupon, there are people who buy contracts named cail/ options
which allows them to purchase a stock at a pre-determined price in the
future.

Think of this as them saying they want to rent or control a piece of land
to search for gold over the next month. They don’t own the land, but
what they find is all theirs. If you purchase a discounted coupon that
allows you to get sushi from a restaurant at a discount then you have
the right to get food from a certain restaurant, for a certain price, by a
certain date. Options are similar in that you have the right to buy a
certain stock, for a certain price, before an expiration date.

If we apply this concept to a call contract with Nike (NKE) and it is

currently trading at $70 per share someone may say I want to buy a
call contract at $80. So if the stock gets to $80 they can choose to buy
the shares.

Why would they do this? Well 100 shares of Nike may cost you $70,000,
but the right to purchase it in the future may only cost you $1,700. It
is about saving your capital. If the stock appreciates to $100 per share
you can buy the stock at $80 since you had the call contract. If the stock
went to $200 per share you could still buy it at $80 because you own
this coupon (call option) that allows you to get the stock at a discount
so long as your option contract has not expired!

If we are talking about the stock moving to $100 per share and you had
a call contract you would pay $80 on the strike price x 100 shares =
$80,000.

Then turn it right around and sell it for $100 x 100 shares = $100,000
making you a net of $20,000 profit!

Normally the value of your option contract increases as the price of the
stock rises. This is why most people just sell the option contract for
more money rather than buying their stock by using their option
contract and then reselling the stock after the purchase.

So the question is then how do you capitalize on this if you are a stock
owner?

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 Start Trading Stocks: Beginners Guide toe Trading on the Stock Market

You can be on the other side of the trade! You can be the SELLER of
the option contract. This means that if you bought 100 shares of Nike
at $60 and a few months later you decide to sell the $80 call option —
you collect that $1,700 someone else had to pay to take that bet. If Nike
gets to $76, their option contract expires, you collect the profit, and you
get to keep your stock!

However, if the stock gets to $81 then you still get your $1,700. The
downside is your stock will be removed from your account at $80 since
you sold the option contract. This also means you made $20 per share
from your original $60 investment.

The reason the stock will get removed is because when you sell a call
option contract you are giving the purchaser the right or ability to
purchase stock at $80. If they choose to, then you will be forced to give
them stock. Now of course if this happens you can just repurchase the
stock at $81 or whatever price it currently is at the next day.

This is why it is safer to have stock while selling option calls otherwise
it could be very costly! Imagine you sold an option contract at $80, but
you didn’t have the stock and the stock went to $200 per share. This
means you would have to buy the stock at $200 per share and give it to
that person at $80! Yikes! That would result in a huge loss!

This is the danger behind doing things in the market that you don’t
understand. However, the power behind options allow you to collect
money in addition to the dividend. Each month you could be selling the
higher strike price and collecting your premiums.

At this rate if the stock went to $78 you collected your $1,700 and still
had the stock. Next month you would sell the $90 call contract. If the
stock got to $85 you collect your money, but you still keep the stock.
This process can go on forever in theory. Here is a simple table to help
you out.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Call Option Strike Stock Bectl

Price Sold Price cour
SSS a a eer

$80 $75 Collect premium and keep stock

$85 $83 Collect premium and keep stock

$90 $89 Collect premium and keep stock

ee ae ee aan sic pre ant e

uae ois $100 per share.

Again, options are bit more complex than the scope of this book, but I
wanted to introduce them to you to make you aware of what is available
in the future. Think about them later as your education evolves.

WHAT THE HECK IS “THE MARKET”?

As you start to pay attention more to the markets, whether that's
watching television or reading articles, on the web you'll often hear the
term “the market.” You might hear bloggers or economists saying the
market is going down or the market is going up. What do they mean
when they say “the market?”

Normally they are referring to an index like the Dow Jones Industrial
Average (which is a group of stocks). It is sometimes known as the
DJIA, Dow 30, or simply the Dow. The Dow Jones is not all of the stocks
averaged together, but as the name implies it is an industrial average
of 30 very well-known companies.

Over the years the average has changed. Certain companies will be
removed from the Dow and other companies will replace them instead.
The people that make these decisions behind which stocks are in or out
are trying to find stable and well-known companies so that the regular
investor can look at this Dow index and see if it's going up or down.

If the Dow is going upward then the majority of the stocks in the
market usually go to the upside as well. Remember that the Dow Jones

BS
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Industrial Average is just an average as the name implies and it is also

an index. Averages and indexes are just there to give you a 40,000 foot
fly-by perspective on the market as a whole. There are many averages
and indexes that you can follow depending on the stocks that interest
you or the focus of your investments.

Here is a list of the stocks in the Dow Jones Industrial Average as of

November 2014.

3M C
Co MMM 156.76
American Express Co 92.45
MO WERT aa LN ee eee ee!
Boeing Co 124.06
Caterpillar Inc te BF is i as = een
Chevron (Corp CVX ticbcde:
:Cisco Systems Inc :eH) - Ke _csco a
E I duPont de Nemours and Co ad Qeoret Ve 3 _ 70.03
_Exxon Mobil
} Corp > ___XOM_ 96.37
General E
Electric Co. - lees es2 akan
GS.
. Home |
Depot Inc amtkxeia
LBD op 97.02
_ Intel Corp ARE AS33.2321 | :.
“161.2
International. Bisse: Machines on nLBM "iedens
Johnson & Johnson 108.96
JPMorgan Chase and Co : JPM 61.53
McDonald’ s Corp _ MCD 94.23.
Merck & Co Inc MRK 59.22
Microsoft Corp MSFT 48.28
Nike Inc 93.44
Pfizer Inc : PFE 29.04
Procter & Gamble Co PG 89.61
_The Coca-Cola Co KO 42.31
Travelers Companies Inc TRV Vee
_United Technologies Corp cua agg 108.92
UnitedHealth Group Inc UNH ora
Verizon Communications Inc 50.81
Visa IInc
“Mart Stores
_Wal-}
Inc: nanan
patna tain patient ees
18.72
Walt Disney Co DIS 89.74

34
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

S&P 500, Russell 3000, and Other Indexes

The S&P500 is probably more famous among professional investors.
That is because it covers about 75% of the stock market. As the name
implies it covers 500 large publicly traded companies. Companies like
Amazon, American Express, CVS, Delta, eBay, FedEx, and Google are
in the S&P500.

Notice that American Express is listed in the S&P 500 as well as the
Dow Jones. If you are serious about investing in stock trading, watch
the S&P 500 more closely rather than the Dow Jones. It gives a more
realistic outlook to the movement in the market than the Dow Jones
and it's for this reason that more professional investors follow the S&P
500.

Russell 3000 Index

The Russell 3000 index looks at over 3,000 publicly held US companies
based on market capitalization. This index represents almost 98% of
the investable US equities on the stock market. Since this index covers
98% of the market, you will find pretty much any stock that you are
looking for in this index.

If it's not in this index, chances are the company that you are looking
for doesn't have the appropriate capital to make it into this index. If
you are looking to trade a company that is not in the Russell 3000 then
you are probably looking to invest in a company that is unstable. It
could be a penny stock (stocks trading Jess than $5) or a fly-by night
company — so be extra careful.

There are many other indexes out there. Some are great and some to
avoid. Here are some to pay attention to.

500 large companies having common stock

S&P 500
listed on the NYSE or NASDAQ

S&P MidCap 400 Tracks 400 mid-size companies

S&P SmallCap 600 Tracks 600 small companies

35
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Dow Jones Industrial Covers 30 popular companies that are supposed

Average torepresent the market asa whole.

Gavee about 98% of ie ees Ree on

Russell 3000 market cap.

Covers 3000 ermhorients ofmostly nies‘ach

NASDAQ Composite growth companies

NASDAQ 100 Top 100 stocks on he NASDAQ ually path

companies

There are sub segments and specific areas within each of these indexes.
For example, the Russell has the Russell 3000 Growth, Russell 3000
Value, Russell 1000, Russell 200, Russell MidCap Growth, etc.

It is not important to know and memorize them. All you have to do is

take two or three major indexes and learn how it moves and how the
move affects your stock’s price movement. If you just watch the S&P
500, the Dow Jones, and the NASDAQ you will be perfectly fine.

If you want a list of all the indexes you can take a look at the resources
section on my website at www.tradersfly.com/resources

What Creates a Market?

You've heard me explain to you that when people are referring to “the
market” they are normally talking about the Dow Jones or the S&P
500. In reality, you don't know what they are referencing. They're just
referring to the general scope of the trades happening on a day-to-day
basis.

As I started trading more and began interacting with other traders, I

started to think of the market as a place where people exchange
ownership. Many economists will tell you that the market is supply
and demand. They will tell you that supply and demand is what makes
the market go up and down. In my opinion, that couldn’t be further
from the truth.

It is the imbalance between human wants and desires that creates a

market. If everyone was happy with what they had, the amount of
shares that they had of a company, or the price of something, then
nothing would be traded or exchange.

36
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Imagine yourself in elementary school eating lunch and you had an

orange and someone else offered you their orange for your orange.
There would be no need to make the exchange since there is no purpose
or reason to trade. You gain nothing. On the contrary, if you had an
orange and a cookie and you wanted a slice of pizza then an exchange
could happen because you are not balanced, or happy, in your current
state.

Since most people are not happy with where they are, they’re always
trying to improve their life. There is an imbalance in the markets and
this is why they are always moving up or down. Everyone is always
trying to gain or earn more money, reduce their risk, or invest more.
With all the traders out there — there will never be a time where the
markets are perfectly balanced. It isin our human nature for change
to happen in the future.

There are times when the market moves sideways, meaning that it
doesn't move up or down much, then it is a more balanced market.
These periods are typically known as consolidation periods. Sometimes
these consolidation periods can last for a few days and other times for
a few months. There are even periods in history where the market
moved sideways for years!

TYPICAL OBSTACLES FOR BEGINNERS

When you first start out in the wonderful world of stocks and investing,
you'll run into some hurdles and obstacles that you didn't foresee
before. This happens with anything we start that we do not know or
understand. It coincides with the phrase “you don't know what you
don't know.”

If you're building a new business from the ground up doing wedding

photography, you might not know which camera to start with. You may
not understand how to create contracts that actually protect you. Not
to mention you may not know what to expect during the wedding day
or how to interact with the guests if they request something out of the
ordinary.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

This is why many times when you are first starting out it is helpful to
have a mentor. You'll often hear about mentorship when a medical
student is looking to become a doctor. Having someone to shadow and
then slowly taking the reigns as your skills and experience progress
will accelerate your learning process and it will save you from making
costly mistakes.

It is a lot easier to find a mentor in photography, swimming, sports, or

cooking. These industries are more community-centric and it allows
you to build connections and relationships easier.

Unfortunately, in the finance world and in stock trading it’s very

difficult to find a mentor. First off, the people that are successful at
trading stocks do not usually have the time or luxury to educate people
as they are busy managing their money. They could be managing
millions of dollars and the $500, $5,000, or $50,000 that you pay them
may not be worth their time. It will be difficult to find a mentor unless
of course they are passionate for helping other people or they are self-
motivated to contribute to others.

I'm not saying that it's impossible — I'm just saying that you will have
to do a lot of extra work to get on their radar. For example, rather than
sending them an e-mail you may need to send them a gift package
through the mail since we get thousands of e-mails a week, but only a
handful of regular mail packages. You will have to get creative.
Remember, one of the greatest things a mentor wants is for you to
succeed and for their time not to go to waste. So you will have to prove
to them how much work and effort you have already done in their area
of expertise.

However, if you can't find a mentor I want to share with you some
obstacles that I normally hear about from people just getting into the
stock market. Some of these obstacles and hurdles I have personally
experienced myself.

The Learning Curve

The time and energy to learn how to properly trade stocks is a huge
obstacle that many beginner traders do not see. Most of the time if you
remember the stages of competencies we think that things are easy. In

38
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

fact, so easy that anybody can do it.

We do not anticipate that certain fields and industries are going to be

difficult. Stock trading and investing is one of those things because
typically you have to do the counterintuitive thing to be successful.

It requires an immense amount of time and energy to learn this

business. I think this industry is on par if not even more difficult than
becoming a doctor who studies for over 10+ years to become proficient
at what he does. Let’s not undermine the countless hours that he
spends doing his clinical trials.

I say this because most traders that start out want things quick and
easy. We all want the microwave solution, but unfortunately this is a
crockpot world. You need to put the time and energy into this business
and industry if you want to become great.

Many do not have the patience, financial resources, or the dedication

to pursue it long enough to stick with it. If you need money immediately
or within the next few months and are planning to get that income
through stock trading, then you might as well stop reading right now.

It takes years to really “get” this business. You may have to spend
nights and weekends studying chart patterns, looking at how stocks
move on the computer screens, and understanding the behavior of how
everything works together to finally grasp everything.

Basically, you have to do your own homework. You are the one that
needs to put the time and effort into it. Once you start understanding
how the market works, people quit right there, right before the finish
line. What I mean by this is that even after traders understand how
things work, they then look for a feed based website to give them when
to enter and exit their trades. They don't want to do their homework.

This is a horrible strategy because what happens if that website goes

down? What happens if something doesn't go according to plan? If you
don't understand how to properly trade on your own you will never be
truly independently successful. You will be relying on someone else.
This can be okay temporarily, but in the long term this is not
sustainable because the stock website to get your picks from will not
cater towards your risk and reward strategy over the lifetime of your

oo
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

investment goals.

With that being said, you need to make sure that you put your own
time, effort, energy, and money into learning this business if you are
serious about trading or investing. If you are not, then like I mentioned
at the beginning just put your money into a lifecycle fund and forget
about it.

This business will be the most expensive education you will ever have.
I’m not just talking about the books, video courses, and study material
you will have to get. It will be costly in your time and energy along with
taking a lot of losses over the years to really understand things.

If you have an opportunity to purchase some great quality courses or

attend some fantastic seminars — then do so because it will save youa
great deal of money, headaches, and frustration in the long run.

However, you can do this business if you stick with it. Dedication and
patience are key since success won't happen overnight. It will take
hours upon hours of daily studying to really put the puzzle pieces
together. But when you do, it will be incredibly rewarding and you will
have a big grin on your face smiling at the world around you.

Pattern Day Trader Rule

If you are planning to be an active trader and trade frequently on a
daily basis, then one of the first hurdles that you will run into is the
pattern day trader rule.

First of all, a day trader is someone who executes a buy and a sell order
in the same day. This means that if you buy a stock in the morning and
sell it in the evening that is one day trade. This means you can classify
yourself as an active trader or in other words you did a day trade. The
more day trades that you do, the more active of a day trader you are.

The labels or the classifications is like saying you are a jock or a nerd.
The label that you get does not matter except with the fact that if you
get labeled as a pattern day trader it can affect your trading abilities
because there was a law that was put in place by the SEC which is the
U.S. Securities and Exchange Commission. Think of the SEC as the
rule makers of the stock market — they regulate everything

40
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

The pattern day trader rule was created to describe a stock market
trader who executes four or more day trades within five business days
in a standard margin account.

If you are classified as a pattern day trader it does not matter unless
you have less than $25,000 in your trading account. If you have less
than $25,000 you can only execute less than four trades in a given week
until your funds clear.

Think of this like a check having to clear a bank. If you don't have the
funds in your bank account, then you won't be able to withdraw the
money. The same thing is true in the stock market. If you executed
three trades already this week then you only have one more remaining
until the first one clears. -

This can be a huge problem for beginning investors if they never heard
about this rule. The reason being if you purchased 100 shares of stock
A in the morning on Monday and sold it in the evening this marks as
one trade. Do this twice on Tuesday and now you are up to three.

Here is where the problem lies. If you are near the point of executing
four trades in a given five day period and you are looking to trade a
stock you may be able to BUY the stock, but if you want to sell the stock
because it starts heading lower you may be stuck in your position! This
can be a huge disaster.

The broker that you use will not be able to help you out even if you call
them because it's a law and regulation that they have to follow. So what
you need to do is be a disciplined trader and understand the rules of
the game.

If you plan to be an active trader and have less than $25,000 then you
need to pay careful attention to the amount of trades that you are
executing.

If you have more than $25,000 and you execute more than four trades
in a given week then you will just be flagged as a pattern day trader.
There's nothing wrong with being flagged as a pattern day trader; it's
just a classification that your broker will see if they look into your
account.

4}
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

If you have more than $25,000 in your account, and you drop below
that $25,000 you will be held accountable to the pattern day trader
rule.

The rule was created to protect traders from over trading. I think it can
actually be more damaging than helpful to people who understand
what's going on. I think it's just something that was put in place so
people don't lose their money too quickly. In either case, that's the
current rule that we have to abide by if you plan to be an active trader.

Knowing And Control Your Inner-Self

Something that most novice traders don't even know exists is the
concept of the inner game and the outer game. In order for you to be
successful you must master both parts of the puzzle. In summary, the
outer game are the external things and the inner game are things that
are internal (usually mental).

To break this concept down further let's talk about a professional

tennis player. A successful tennis player who has the outer game
mastered knows and understands how the game is played. He has a
great forehand swing, a great backhand swing, runs quickly, knows
what to do in various situations, and great endurance.

The inner game on the other hand is how he deals with himself on the
tennis court. This is about keeping your mental state together when
you are down a few points. It's about staying positive in difficult
moments. It's about controlling your emotional state, having the
patience, and the discipline to beat your opponent.

As you can see from this comparison if you had a professional sports
player that had a great outer game, but a horrible inner game — then
they might play well for some time, but if they got mentally upset or
missed a point they would just break down and the rest of the game
would fall apart.

Imagine if Michael Jordan got upset when he missed a shot and didn’t
have a good inner game, then the rest of the game he would be
destroyed and not even be able to play — that's what having a weak
inner game would cause.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

In the world of stock trading you need to have both components to be

successful. The outer game is all about knowing the trading world. It's
about understanding how the market works, knowing the chart
patterns, understanding how to fill orders, knowing your software, and
understanding the rules of the game.

The outer game is typically what most people focus on and anytime a
trader struggles with their trades or has a losing position they try to
fix it by focusing on the outer game problem. They may do this by trying
to find a new trading indicator or a great stock picking website when
in fact the problem lies within the inner game.

The inner game in stock trading is about knowing yourself. It's about
knowing how you deal with losses, keeping your emotions calm under
pressure, being patient for the next trade, and focusing on the right
things.

The inner game is a huge topic for stock trading and one that doesn't
get enough attention. It's for this reason I have developed a whole
course on the inner game that has over 9+ hours of video training called
Trader Transformation.

You need to make sure that you master both the inner game and the
outer game if you want to be a profitable trader. Lacking in any one of
these areas will make it difficult for you to achieve your trading goals.

Risk and Money Management

A trader that just opened up their account or has only been trading a
few months, risk and money management is usually the last thing on
their mind. Often times when we open up our trading account and get
into the act of trading we tend to focus on the potential profits. This is
where our mind shifts and becomes our kryptonite.

This is often caused by being wrapped up in the dream world when we

start something new. We start to think of what can we buy with our
future profits. We think about the Lamborghinis, the new house, a fun
jet-ski, and how many trades it will take to get there. We start to dream
about the potential of possibilities. That becomes our focus rather than
the risk or the task we have to do at hand.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Although dreaming is not a bad thing. Dreams help us create future

goals. They define the direction that we want to go and motivate us to
move forward. Regardless, there is a time and a place to dream and it
is not right before or after you enter a trade.

When you are in the process of trading you should be focusing on risk
and money management. Stock trading is all about risk management.
If you never heard this before embrace it and study it as much as you
can. Knowing and understanding your risk or anticipating the
possibilities of what will happen next is the key behind stock trading.

In a weird way you need to foresee the future with the crystal ball even
though you do not have one. My crystal ball has been broken for many
years. I just can't seem to find parts from 1657. Even though it's not
easy that's not an excuse for not watching my risk and my money while
I'm trading.

Think of it like a chess game. If you have some basic knowledge and
understanding of professional chess players you know that some of the
greatest players look not just two or three moves ahead, but 20 or 30
moves ahead and the possibilities and probabilities of the outcomes
from them.

You don’t have to get that complicated when it comes to stock trading.
However you do need to come up with a plan of what you're going to do
if the stock goes up or down. What will you do if a stock goes down
when you expect it to go up? What would you do if the stock starts to
go up when you expect it to go down (when you are short)?

You might create a strategy in place different for every single trade.
What is really important is that you create a strategy or system that
works for you. For example for every $2.00 a stock goes up you might
sell 10% of your holdings.

This would allow you to capture a $2.00 profit for every share you own.
By selling or taking profits you are reducing your risk and allowing the
rest of your shares run. As you do this five times with one trade
towards the end, you have less and less riding on the table. In other
words you're basically playing with your profits (or the houses money
if you care to look at it that way).

44
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Beyond just looking at the profits to the upside you need to have a plan
in place for the downside. If one of the positions that you entered just
a day ago is heading lower you may decide to sell all of it. On the other
hand, if it moved up a few dollars in a couple of days, and then starts
pulling back you may have a different plan in place.

What I'm getting to is not the specifics behind creating a plan. ’'m
helping you see and understand the need to start focusing on risk and
money management rather than the profits when you are trading. In
other words you need to have a plan in place because most people have
stars in their eyes when they first start trading and it's not the way to
go.

Your plan can be your trading strategy to the upside, the downside,
and even the specific of when you would draw more money from your
trading. When you make for yourself and be wrong so long as they have
a plan. You may choose to adjust your plan in the future, but having
some kind of plan to start with is better than no plan at all.

HOW MUCH RETURN CAN YOU EXPECT?

An all too common question that's fair to know before you spend too
much time or commit to this industry is how much money you can
expect to make in this industry?

This can best be answered depending on the type of trader or investor

that you're going to be. There are a few different types of traders. We
will break this down more in a future section, but in simple terms you
have a day trader who holds positions for just a single day. A swing
trader who can hold it for a few days to a few months. Then you have
a long-term investor who can hold it for years.

Depending on your future outlook, strategies, risk tolerance, and

current capital will determine your income level or your return each
day, month, or year.

If you are interested in making money every single month in order to

transform your life then you will need to have a different strategy in
place than someone who is looking to build up their retirement fund. If

45
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

you are even more micro-focused such as you need money every week
or day rather than on a monthly basis then you will need to trade more
frequently or at least be making consistent monthly trades to cover
your living expenses.

I can give you the numbers right now, but remember you are trading
for a lifestyle, not because of the money. You are trading because that
money will give you a certain lifestyle or outcome that you desire. I will
give you a few different breakdowns and then you can see which one
best applies to you. Feel free to create your own little spreadsheet and
do some calculations on your own to give you an idea of the potential
possibilities.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Starting Capital and the Potential of Growth Each Year

Year 10% /Year 10%/Year 15%/Year 15%/Year

Tea $10,000 $50,000 $10,000 $50,000
en Od soso Sil sod S57 S00
Poe ee cee 00 Sis ee ooo 12
4 $13,310 ~—s- $66,550 «$15,209 ~—s- $76,044
sadn $14,641 $73,205 $17,490 $87,450
6 $16,105 $80,526 += $20,114 $100,568
7 $17,716 $88,578 S23A3dso0 w5145,6535-
8 $19,487 $97,436 $26,600 $133,001
9 $21,436 $107,179 $30,590 —- $152,951
AG eco aayo
sbudonsl.g.vtieek S117 ROP une
SCL SsS Yee
yom eT : bi
Sv wien Ky ROUEN SMART OL
Ents C16 epemh $C ICHT QRS TOTO
oe ee
a aa es ee
ee ae ae ee
Pa. ee
Sima GMCS PERE MGT OSHERTS
oC) EEL ete TERTE Ca GT a
PR NSS CRAMER ES METT PETA LTO
soe 51 NEE AESEN SCENE OTF
22 ~: $74,002 ~—-$370,012 «$188,215 $941,076 ©
23 $81,403 $407,014 $216,447 $1,082,237
2d $89,543 $447,715 $248,915 $1,244,573
25 $98,497 $492,487 $286,252 $1,431,259

Getting Stuck in Positions - Staying Liquid

One of the great things about the stock market is that there is a huge
amount of liquidity. Unlike real estate which can be very difficult to
sell and sometimes takes months to get an interested buyer, the stock
market is completely the opposite. In real estate, you can’t just sell just
part of your property easily. Even if you are to sell part of your
property, it will take a lot of paperwork, surveyors, and just a lot of
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

additional time to get those things completed.

In the stock market if you want to sell the stock, usually you can sell it
within a few seconds. It doesn't take long to get rid of your shares
whether you want to sell all of it or part of it. That's one of the beautiful
things in this industry.

Of course where there is an upside, there is always a downside. For a

novice trader who just got started in the stock market they may not
understand that not every stock is liquid. Remember, you do need
someone to buy your shares in order to get out of the position.

Liquidity is all about the amount of shares that are being traded
throughout the day and how easy it is to get in and out of those shares.
The more liquid a stock, the easier it is to get in and out of it. If a stock
is not liquid that means a lot of shares are not being traded. This means
you may need to wait for a buyer or a seller to get in or out of the trade.

This becomes a problem when you start owning a large stake in the
company. I know that you're probably not going to own 15% or 20% of
any major corporation at this time, but if you're trading stocks that do
not have many shareholders or are not that popular then not
understanding liquidity could get you in serious trouble!

First of all, let's zoom out and look at an example of what happens to a
stock if you want to buy all the shares available and take over a
company. When you start buying shares the stock price goes up
because not everyone wants to sell it at that first initial price. Some
people will want more money for their shares so you would have to pay
them the higher price if you are trying to buy everything.

As the price goes higher on those shares, other people will see that the
stock is heading higher so they will won’t sell until they get an even
higher price for their shares. So you have to pay even more for the next
group of people. This will continue indefinitely until you acquire all the
available shares.

The reverse is true on the downside. If you are trying to sell a bunch of
shares (such as an owner of a company) what happens to the stock?
Think of it this way: if everybody is trying to sell what happens to a
stock? The stock starts heading lower, people start seeing that it's

48
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

getting weaker and they want a better deal or bargain so they keep
waiting. Even though they are bargain shoppers they don't want to
catch it early and then the stock goes down further.

So what's the point of understanding this? The more you own of a stock
the more vulnerable you are if you need to get in or out of your position.
If you are a small retail trader this is not usually a problem, but you
have to be careful on the stocks that you trade. The key here is you
want to be undetectable. You want to be a trading ninja that is not on
anyone's radar.

It's for this reason why certain shareholders or company owners are
forced to disclose when they sell their company shares so that way their
company does not tank and of course for transparency reasons.

Let’s take this concept and apply it to an actual situation. Let's say a
company trades on average 300,000 shares per day. The current stock
price is $60 dollars per share, then it is moving over $18,000,000 of
money every single day in that one specific stock! If you are trading
just 1,000 shares or $60,000 this is pretty much unnoticeable compared
to the bigger picture. However if you are trading 100,000 shares ($6
million) that's over 30% of the days transaction which becomes much
more noticeable.

If you are a beginning trader you probably don't have $6 million to put
into one stock. However, what happens is novice traders like to trade
low dollar stocks. So let’s take a different approach and say a $1 stock
is trading 30,000 shares per day. Now what happens if you purchase
5,000 shares? That's only $5,000 and already you might be on the radar
moving the stock. You may not have problems getting in, but you might
have problems getting out.

This is where things can get dangerous and it is for this reason the
huge institutions or the big money players like the hedge funds and
mutual funds and do not trade low dollar stocks. They need the
liquidity because they're trading millions and billions of dollars every
single day.

Don't get stuck in to these low dollar stocks that don't have liquidity.
Even some expensive stocks are not that liquid so you need to check

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the volume, which is the amount of shares traded for that time period.
If there is not enough volume, you should avoid the stock because
otherwise you might be forced to pay a premium to purchase it or it
will be difficult to get out of it when you are ready to sell.

Always watch the liquidity and how your trade or account will impact
it. If you stay below the radar then it will make it much easier for you
to get in and out of the shares.

Getting Trading Experience - The Cheap Way

As we already discussed, it takes inner game and the outer game to
make a successful trader. With that in mind, you need the subsets of
these components. Acquiring knowledge will help you get better at the
outer game. This is part of studying, reading books, and watching video
courses about stock trading. The thing that will help you get better at
the inner game is experience. Experience is not something that can be
taught — it is something that you personally have to go through to
attain.

It is often said that it's better to have great experience than only the
knowledge because as you go through the appropriate experiences you
will gain the knowledge. That's the great thing about experiences; you
get this little added bonus. Sadly, the downside is that sometimes
gaining experience can be expensive. In some industries experience is
not that expensive; however, in the stock market it can be
exponentially costly.

Imagine that you do not understand what's going on in the stock

market, yet you feel pretty confident with your money. Imagine that
you are at the initial stage of competency and you decide to put in
$250,000 in one stock. As the stock heads lower you continue to buy
more shares in anticipation of it bouncing higher.

Regrettably, a month goes by and the stock still doesn't bounce. In fact
it continues to head even lower so you continue to purchase more
shares thinking that a pop in the price will come soon. After a year
nothing happens and your stock is almost worthless. Then 5 years goes
by and you are still at a huge loss. Then 10 years goes by and nothing
happened with the stock.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

This is not uncommon for a stock to sit at low levels for a long time.
These disastrous investment decisions could be avoided if your
experience was up to par. Unfortunately, most people do not get that
experience in the market quick enough since we only have so many
years to live on this planet. By the time you get your 15 or 20 years of
horrible experience to where you understand what to do, you might be
broke.

So what's the better solution to gaining this experience quickly without

it costing you too much?

The way I always tell people to approach the stock market if they're
looking to gain experience is to start trading extremely light, but do it
in a way that you can mimic your system. So if your trading system in
the future was to buy 1,000 shares then sell 200 shares for every $5
the stock goes up — then to gain experience in your practice trades you
will need to execute multiple trades.

In order to practice this trading system you would start out trading
just five shares. I'm not talking about a simulated paper money
account. I'm talking about trading actual shares. Take these five
shares and do a real trade on a stock that you beén watching. Then as
it moves up you can sell one share according to your trading plan or
your strategy. As it continues to run higher then again sell one more
share.

As you continue this process, calculate whether you had profit or loss
without taking commissions into account. Then all you have to do is
multiply by 1,000 shares or 10,000 shares and see how you would have
done.

The trading example above is just an example of a system or strategy.

You can create your own trading plan based on your risk tolerance or
your trading goals. What I really want you to get from this is to
understand that you need to gain the experience behind trading stocks
and you want it as cost effective as possible.

Yes, I understand that you will lose money because of the commissions.
You probably won't gain anything in terms of monetary value when
doing these types of practice sessions. However, remember to look at

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the bigger picture. You are doing this in order to gain the experience.
Experience is not something you can buy, but something you attain
over time.

When trading like this and doing real simulated trades with real
money you will start to notice how you feel regarding your inner game.
You will start to realize how your emotions come into play as you buy
or sell your stock. It takes time to start seeing and being aware of these
things inside of you. It's something that can only be attained from
experience. So make it as cheap as possible.

Do it as long as it takes for you to build up the confidence that your

strategy or system works. As you do experiments you will see the areas
that you lack.

The best thing you can do is to notice them and recognize them and
then improve from there. It may only cost you less than $100 in
commissions per trade, but think about it if you lose $2,000 on a trade
that could have been easily avoid with the proper experience.

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Chapter 2.
THE GAME OF WALL STREET

PLAYERS OF THE GAME

If you have ever played any board games you know that with every
game there are certain rules, types of players that like to play, and
specific strategies to win. When it comes to the game of trading stocks
or the game of Wall Street you need to know how it functions, who the
players are, and how to succeed.

Dreamers
We first start off with the dreamers. The dreamers are the people who
get into the stock market and think about the possible riches that they
can attain in the stock market. Some of them rarely step out of their
comfort zone to make a trade or invest in their own education. Others
trade lightly, but dream about the possibilities of good fortunes.

The dreamers are usually independent traders that have very little
potential and motivation to succeed. In fact their success is already
predetermined in the stock market. They will fail because they only
dream about their future. Rarely do they take action, admit to their
faults, evaluate themselves and continue to improve.

They feed off of hope rather than a planned investment or trading

strategies and say phrases such as “one day I will make it.”

Retail Traders
Retail traders are the standard independent investors who actually
actively trade. Although most of their trades do not impact the stock
market heavily, they are an important piece of the trading
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

environment. It is because of the retail traders that liquidity is brought

into the markets.

If you are a person who trades at home actively on a week to week or

month to month basis, you probably are a retail trader. Typically a
retail trading account is less than $500,000. Some retail traders are
just getting started with less than $20,000 and others have been
trading for some time and may trade with over $1 million dollar
portfolio.

Think of every day trader that is in the markets as retail traders. They
are not the ones that do one trade and hold it for one or two years.
They're the ones that are more active in the markets.

Retail Investor (Long Term Investor)

The retail or long-term investor are the people who get in the markets
at various times when they believe it is a good buy. Typically these are
the individuals who do not have millions of dollars in their account, but
they do want to invest money in the stock market to accumulate from
future gains.

They usually hold their position for a year or longer. Often times they
will purchase ETF's, mutual funds, or bonds, and are looking for a more
stable ride in the stock market.

This could be a person with less than $20,000 in their account or again
over a $1 million portfolio. The long-term investor does not bring
liquidity to the markets. They are ones that get in and get out slowly.
They pick their timing carefully prior to making any decision.

They are still an important component to the game of Wall Street

because their positions are more stable since they are looking for the
long term gains. They will not be quick to exit if a slight pullback
happens in the markets. It is important to recognize these traders and
where they are holding positions because this is where the stock has
some extra stability.

Institutional Investors
The institutional investors are the huge players in the stock market.

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They are the ones that move the markets from a day-to-day basis. The
institutional investors may include banks, hedge funds, and huge
individual investors.

Often times they are trading millions to billions of dollars on a single

trade! It takes them months to build up a position because they have
so much buying power. They don't want to move the stock early.

It is the institutional investors who you want to watch when you are
trading since they are the ones that move the markets. If you know
their game plan and know what they are doing in a specific stock then
you can anticipate the future price run.

These big boys cannot hide their position forever since volume will
show you the buildup over time. However they do try and disguise what
they are doing, building up their position for a solid pop in a company
they are interested in. You need to learn to read the signs carefully.

When you learn to watch what the institutional investors then you will
gain a huge trading edge.

Market Makers
A market maker could be a company or a single individual that quotes
a buy and sell price in a stock. Typically they have inventory in that
specific stock or equity and they make a profit on the difference
between the bid-ask spread.

Market makers are not people to worry about if you are a retail trader
since you can't do too much about your trading atmosphere or
environment. What you can do is set limits to your orders and make
sure you get filled at your designated price rather than the market
price.

If you set a market price and decide to get in at whatever price they
give you, this is where the market makers can take advantage of you
and make a few extra pennies on your shares.

In these digital markets if a bid matches the ask, everything is handled

electronically; however, in certain markets there are still people who
specialize in certain stocks and have a certain quota or shares

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outstanding that they're looking to buy or dump. Their responsibility

is to maintain both sides of the exchange and sometimes they have left
over inventory.

All you have to remember is that they are the middlemen that handle
your order. In certain cases this market maker could be a digital
computer. If that’s the case, then you may just need to be a little more
patient when you execute your orders and let your limit order sit in the
queue so you can get a good fill price.

Summary
Understanding where you are in the game will help you understand
how Wall Street works. I assume that most people reading this book
will be a retail investor or a long-term independent investor. If you fall
into the dreamer category then that's okay, but just understand that
you won't have great results in the near future.

Remember that it's the huge money makers like the institutions and
hedge funds that move the markets — not the retail traders since it
takes millions and billions of dollars to move certain stocks every day!

STOCK MARKET INFLUENCERS

When it comes to the game influencers these are people that can
change the game for the players. You’ve heard of the game Spin the
Bottle — you know that all the teenagers are sitting around in a big
circle and these are all the players. All of a sudden we have mom walk
in who is a game influencer who breaks up the party and they are out
of luck from kissing that cutie.

We have a few different game influencers in the stock market as a

whole. Of course your spouse or significant other could be a game
influencer for you personally, but in terms of Wall Street these game
influencers impact a lot of traders based on their reports or what they
say.

What you need to understand from these game influencers is that they
really do not know any better of where the market will go then you do.

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Each one is going to have their own opinion and they can influence your
trading decisions.

This can become a problem if you start relying on other people for your
trade ideas or your trading system because one week a certain stock
analyst may come on TV and tell you to do something with the stock,
but next week they might not be around. Then you become stuck trying
to figure out what to do with the stock the next week. Not to mention
since you can't get consistency from these analysts, economists,
bloggers, and stock pickers, how can you expect yourself to be
consistent?

You really can't! Instead you need to create your own trading system
that works for you based on your risk management in your strategies
if you are looking to trade on a consistent and active basis.

That's why I always tell a lot of my followers on YouTube or my

newsletter is that they may get concepts, ideas, and theories from me,
but ideally they need to create a strategy that works for them. The goal
is for them to eventually walk on their own feet and not rely on me.

It is one of the reasons that I focus on education rather than stock

picking since I feel it has more value in the long run for people. By
focusing on education rather than stock picking it may not make
someone as much money today, but they will get more out of it for their
life in the long-run.

So what do you need to understand behind these game influencers?

Since I'm telling you to avoid most of the talk and the hype all you need
to know is that they can affect the game and most people will listen
since most people are followers and have a herd mentality. However,
you can still listen to them and watch what's happening in the markets
based on the reaction of what everybody is saying. Just don't always be
too quick to jump in based on someone else's recommendation.

Stock Pickers
Stock pickers can fall into a few different categories. You can have the
huge big guys who are picking stocks and calling you up to sell you
some shares or you can have the ones that are sending you e-mails
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

telling you which hot stocks to buy. You also have these guys in forums
and chat rooms spamming and pumping up certain stocks.

The point behind certain stock pickers is to pump and dump a certain
stock they have already purchased. They do this by buying shares
ahead of time and now all they have to do is pump up the stock with
some news article that they write up and then spread the word. This
allows them to get out easily with great liquidity because they may
have a large position.

Certain stock pickers are there to run a legitimate website to help you
based on their knowledge and expertise on trading. This is called a
feed-based website where you don’t have to think much on your own
and they tell you the picks that they have in mind of stocks that will
go higher or lower.

I don't think there's anything wrong with feed-based websites so long

as that person you are watching is one you can relate to. Meaning you
can actually learn from what's happening or they give you good insight.
Maybe they have a trading system similar to yours or one that you like,
and they may have a similar risk tolerance as you do.

However, remember that there is a deeper underlying condition with

these feed-based websites and usually you do have to pay your monthly
membership fees. As said before, there is nothing wrong with that so
long as you are learning in the process and that you can relate to the
person giving you the information.

Just always remember to do your own homework and research and

understand why are they picking the stocks that they are? That way it
makes you a better trader and takes you to the next level.

Bloggers
The bloggers are an interesting bunch. Some of them are writing and
sharing their ideas with the world because they love to contribute to
the world around them. They like to make an influence, an impact, and
for some they just like the attention.

Not all bloggers are stock pickers which is a common fallacy to think
this way. Stock pickers are specifically picking stocks that will head

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higher or lower in the future whereas bloggers will give you thoughts,
ideas, reports, and concepts that you can learn from. Usually there is
more information from blogging and a sense of substance than there is
from stock pickers, but both have their purpose in the world of stock
trading.

Other people blog because they like the additional income stream from
people reading their material, whether they attain that through
advertisements on their website or products that can benefit their
readers. I in fact fall into the blogging category if you haven't noticed
since I do have a website, share my opinion on some stocks, and have
a few products to sell as well.

Not all bloggers influence the stock market in a heavy way although
they may have an influence on you if you read their recent report ona
hot stock XYZ that you were watching or were interested in. This can
affect your trading decision and may impact the amount of shares that
you buy, set you out a new quest to find more reading material about
the company, or just play a mind tricks on you prior to the purchase.

If you find that by reading blogs it starts influencing your trading

decisions then you need to take a step back to the basics, and come up
with a plan for yourself. This way you can stick to your plan and not
worry about the influence of someone else on your investments.

Television
The people on television are usually major influencers on the retailer
independent traders because the majority of them do not have their
own trading plan. Even if individual traders have a trading plan, they
believe that the people on television know more or have more
experience.

The thing about watching television and getting your stock ideas from
what's being said by the broadcasters is that most of it is irrelevant to
you. The things that get reported on television is news. They report
things so that they have a bigger viewership and can boost their stats
to attract bigger sponsors in advertising.

Certain weeks they may talk a lot about technology and the next week
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

it might be a lot about industrials. The consistency behind following

the TV stations will not make you a great trader. You may get lucky
from time to time because they do cover stocks on the move and if you
choose those stocks you may get lucky, but this doesn't mean you'll be
consistent in the long run.

As far as the people that come on TV, like the experts, you have to
remember that some of them (not all of them) are lying to you. Some of
these people that go on the news channels may tell you to buy a certain
stock or that it's a great deal when in reality they are looking out for
their own self-interest!

When they are telling you to buy a stock they are actually looking to
sell their shares to you. Their goal is to pump up the stocks so that they
can get out with a bigger profit because they have too many shares to
get rid of. If they got out of all of their full position without pumping
up the shares it could take the stock down tremendously!

The same is true in reverse. When they tell you to sell it that's because
they want to buy at cheaper prices because they're trying to
accumulate hundreds of thousands of shares. It takes them months to
build up their position and when they are ready they will pull the
trigger for it to go even higher. They manipulate a stock price for their
own pockets and self interest.

It's not illegal to do this and they are just stating their opinion. If they
were a financial analyst or an investment advisor it would be a
different story.

Now I’m not saying that. everyone out there on TV, blogs, or stock
picking websites are going to be like this because there are a handful
of great people out who do want to help you and give their opinion. But
remember that their strategy is going to be much different than your
strategy because they are probably managing more money than you
are.

Analysts
A financial analyst is an interesting breed of influencer. They are
sometimes known as a securities analyst, research analyst, or an

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investment analyst. They are the people who perform an analysis on a

specific stock or investment as part of their job. Typically this involves
countless hours of research and evaluation.

They are the ones that write the reports or notes that express their
opinion. Most of the time their analysis is based on fundamental
analysis. However, certain analysts will take note of the technical data,
such as the charts depending on their style or techniques.

Some financial analysts are employed by mutual funds, hedge funds,

banks, and insurance companies and if you remember what I told you
earlier about how the people on television are looking to influence your
trading decisions, the analyst can do the same thing!

It is less likely for an analyst to manipulate their findings because it

will show over time that they are not consistent or a horrible analyst.
However, anything can happen in a market and you never know until
it's too late. Personally, I just don't trust the bankers, insurance
companies, and hedge funds because they're typically after their own
self-interest.

It is for this reason that you still have to do your own research because
you will not always get a chance to reach out to an analyst, even if they
are correct in their findings. You never know when they might take a
vacation, leave of absence, or just retire from getting their public
opinion. So always do your own research because all the finding that
an analyst reports on is based on public knowledge — if it wasn’t then
it would be illegal and could create a corporate scandal.

Economists
I tend to enjoy it when I hear economists reporting on their opinions
and thoughts on the market. This is because most economists that
report are typically college professors that teach economics. I like them
because they usually report on the global economy as a whole.

You don't often hear them talking about anyone in specific. Instead
they tell you about the GDP of different countries, how things stand
politically, and what they believe may happen in the future.

I find it more entertaining than really helpful listening to the

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economists. I don't use them to make my trading decisions just like I

don't use anybody else except my own research and study as well as
my technical data.

Alternatively, economists can give you a heads up about problems you

may not foresee. When you listen to them it could be interesting to
digest these concepts and using them as an alert system when things
change outside of the range. Then you can recognize this change and
make adjustments to your investments and your stock positions.

Beyond that I don't rely on economists in their opinion on my trading,

but I do know that some people use them heavily if they are investing
in a long outlook such as 10 or 15 years since economists have a broader
global outlook.

Program Trading & High Frequency Trading

The markets are controlled by program trading. These are the
computers and algorithms that are set up by huge companies that
automatically make trades. These algorithms are based on every single
concept you can think of. You can spot these computer trading systems
where even in quiet trading ranges volume spikes and trades get
executed.

This is because these computers and program trading systems are only
trying to capture a few pennies on their profit. This is called high
frequency trading. Their execution time is remarkable — faster than
any human. The computers are tied in with the highest connection
sometimes right near floor of the exchange to avoid latency or delays
by paying the big bucks to have them there.

Unfortunately the markets are not fair to the retail or individual

investors. We don't have the software set up to make trading to just
capture a few pennies on a trade because it would be very expensive in
brokerage fees.

As I mentioned before the retail investor are the little guys. In fact we
only make up about 5% of the market and therefore cannot move the
market in any one direction. Times have changed since the 1900s.
Today we have to anticipate the mechanical trading of program trading

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

and high frequency trading.

When you start looking into your own investment, remember that
many of the trades executed are probably computer algorithmic based.
They are looking for just a minor gain during those times when doesn't
move much to the upside or downside (this typically means a stock is
in a trading range).

However, once things get going in one direction or another (you will
notice it because there will be a trend the upside or the downside) is
the time that you can get in and execute trades. Your goal is to be
patient and wait for a solid opportunity to enter — not play around with
minor gains.

In order to do this wait for solid a moment that's based on fundamental

analysis or technical analysis where support and resistance are very
strong. If you are looking to just make a few pennies on the stock and
do high-frequency trading manually you're just asking for trouble.

There are people that have been high-frequency traders executing

trades manually. Unfortunately, it takes a lot of mental focus and
energy as well as a lot of practice to do it exceptionally well. As far as
me personally I don't care to add the additional stress to my life to
make a few dollars.

Look for opportunities to create the biggest run, in the shortest amount
of time, and hold it for as long as possible and it will be a lot easier not
only for your trading account but also your sanity.

THE MARKET AS A CROOKED INDUSTRY

Many people believe the stock market is a crooked industry or that it
is manipulated. The reality of it is that it can be manipulated.

If you ever read Jesse Livermore's book, Reminiscences of a Stock

Operator, you will know that the more funding and capital that you
have, the more you can manipulate a stock. It is not illegal, it is just
the way things work.

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I think of it like a professional painter who gets a few thousand dollars

for an hour of work whereas the school student spends months on one
painting and barely makes enough to put scraps on the table. It's just
part of the process you have to go through. When you get that
experience over time you can trade and invest with more capital. Your
success rate will be more consistent.

People are Naive

There are a handful of reasons why the stock market gets a bad rap.
One of those reasons is because the regular independent investors or
retail traders have no clue what they're doing. They expect to get into
this stock trading industry that requires a PhD amount of studying
time in just a few weeks. They want to fund their account, buy a stock,
have it go up, make their money, and retire in just a few months.

This is not how it works! If you're in an industry who has professionals

that have put their time and energy into studying something you won't
be the best from the start. That's like saying you're going to become a
professional doctor doing heart surgery the first time you hold the
scalpel. Or that you'll become a professional tennis player and win a
million dollars at Wimbledon your first week on the tennis court!

Results don't come this quick. It takes years to understand this

business. It takes time to put the puzzle pieces together and you'll have
to rack your brain to make forward progress. The good news is if you
keep moving forward you will eventually get to your destination.

It is Like Gambling
If you’ve been around people you'll often hear them compare the stock
market to gambling when these people have no clue how the market
works. When we break these things down there's always two sides to
every coin. Gambling is typically noted as when there is a
consideration, a chance, and a prize at the end. The outcome of a
gamble is typically seen within a short period of time.

When we compare casino gambling to the market there are people who
habitually trade that have a gambling mentality. They want those
riches from the stock market and that's not how the market works. In

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this case you can say that the stock market is like gambling.

In the end, whether the stock market is like gambling or not it's just a
matter of definition. It's like saying someone is skinny or fat. At what
point do you draw the line that someone is fat? Is it based on weight
requirements? Is height a consideration? Is it based on a portion of your
height to width? This is all a matter of perspective because where
someone finds one person skinny another person might find them fat.

So here's the breakdown behind stocks and gambling. When you are at
a casino there is a slight difference in how you can win or get your
prize. Typically in a Vegas style casino, you'd put your money down on
red, black, or pull the handle. If things don't land in your favor or don't
appear to be going your way, you can't just take half of your money off
the table. You will normally lose 100% of what you put in on that turn.

In the stock market if you see that a stock is not going in favor of your
predicted direction, you can always cash out! Not to mention you can
always take a part of your profits or losses off the table. You can't do
that at a Vegas casino. For example you can’t tell the dealer, “I want
half of what I put in on this hand back!” No — it just doesn't work that
way.

The next major difference between gambling and the stock market is
when you are at a casino the house or that casino has the advantage.
It’s been statistically proven that the casino takes a cut of your profits
and more people lose than they win. So in this case, the house is always
favored and the odds are against you.

When we take the stock market into account, it’s been historically
proven that the market goes up on average 10% per year. Of course in
some years it does have a pullback, but you always have the advantage
of it moving in your favor to the upside.

There are very few other differences if you break things down to fine
details, but I think it's irrelevant to defend one position or the other.
After all in the end it just comes down to your interpretation of the
word “gambling.”

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Scams, Frauds, and Insider Trading

One of the other major reasons that the stock market industry gets a
bad reputation is because of the scams, frauds, and insider trading that
happens in the market. There have been countless scams in the
markets over the years and although some are probably never
discovered, there have been quite a few that have affected many people
and their lives.

Scammers such as Bernard Madoff who took people on a wild ride since
the mid 1980’s. He was discovered in 1999 by the SEC siphoning off
over $50 billion. Martha Stewart also did time as a trader who had
insider knowledge of a cancer drug. She sold 4,000 shares when the
stock was in the 50s. Soon after the stock dove to about $10 bucks
giving her nearly $250,000 on the sale. She was sent to prison for five
months.

It's the scams that get publicized that really give the industry a bad
reputation. If a scam or insider trading does take place then news
coverage starts to report on the negativity. Remember that the goal of
the news stations is to gain more viewership and it is the negative
gossip that interests people and catches their attention.

In my opinion the scams in the stock market or on Wall Street are not
different than the scams that happen in professional sports. They may
not call it scams, but a form of cheating nevertheless is the end result.

Just think of all the sports players who use steroids to boost their
performance. There's thousands of them yet we don't broadcast all of
them all over the TV because most of the time it has little impact on
the general public. The incident could have happened in some smaller
city where the effect was not a big deal. If it's a major sports player
then you will see news coverage about it and you'll probably see it in
the tabloids.

In the stock market there's no way to disguise that you're a small

player if you're running a scam. Typically most stock trading scams
revolve in the multi-million dollar range or more! This typically gets
coverage because it affects our trust within our financial markets and
what the government is doing to protect us.

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So whether you're in the stock market, professional sports, or even

working for a church there are always scams, things that are not right,
and boundaries that someone will cross. People are notorious for trying
to take advantage of situations and it’s bound to happen again in the
future. In theory, the more money involved, the more press coverage it
will get.

YOUR GOAL AS AN INDIVIDUAL INVESTOR

There's really only one primary objective behind trading as an
individual and that is to take money from other people's account and
put it into your account. As sad as that sounds, that’s the simplified
version. If you want to look at things deeper then you could say you're
helping a company build its future products by giving them investment
capital.

If you're doing this with huge companies like Google with only $1,000
they really don't need your money that badly anymore. Instead, what
you provide as a trader is the liquidity when other large investors
purchase hundreds of thousands of shares to hold the stock for multiple
years.

As you're trading, remember that the stock market runs on imbalance.

If there was no imbalance in the markets then the markets would not
move. Think about it, if everything was equal and everyone was happy
then no trades would be executed. That's like someone coming up to
you and saying I will give you my pineapple for your pineapple. It's
irrelevant to make the trade since everything is identical.

Imbalance runs the stock markets and continues its trading, but really
what is the game all about? The game is set up based on inventory. If
you think of it in a business context, you always want to keep the best
inventory available so that you can get the highest price possible for
your goods.

For example, if you have a fruit stand business your goal is to always
get rid of the bad fruit first. If the fruit is still good enough to sell then
you can hold on to it, but if the fruit is going bad eventually you will

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have to throw it away and then it will be a total loss. It is much better
to sell the bad fruit at a discount and get something than to throw away
the fruit.

When you apply this logic to the stocks that you own, you always want
to keep the best stocks in your accounts. The stocks that are moving
the fastest and giving you the most return, those are the ones that you
want to hold on to. The stocks that are not performing well you want
to sell so that you can put your money to work in other investments.

In the end you are always moving and shifting your inventory.
Sometimes the greatest investments that you had will be due for a
rotation. It’s similar to people getting bored eating at the same
restaurants and wanting to try something new. People will rotate their
investments because certain stocks perform better during certain
market conditions and certain stocks just run too far too fast.

It's like trying to sell hotdogs downtown at 2 PM after everyone just

had lunch. Everyone already got their lunch — or in the stock market
world everyone already got their profits from a stock that ran up.
Stocks don’t go up forever.

THE 40-60 RULE

One of my favorite rules that works not only in the stock market but in
life is the 40-60 rule. The 40-60 rule states that:

e Nothing works all of the time

e Everything works some of the time
e Most things work 40-60% of the time

When it comes to trading most beginning traders want the Holy Grail
indicator. They want to know what charting software, method, or what
they can watch that will work all the time for them. If you understand
the 40-60 rule you know that nothing will work every single time.

That's why in the stock market many people lose because they are
constantly chasing for something to work all the time. They get a sense

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of hope from their indicator or the new shiny object working sometimes
(hence the other part of the rule that everything works some of the
time) — but they want the thing that works 100% of the time. I’ve had
few things work 100% of the time. Even then, eventually things fail,
parts have to be replaced, or things need to get updated.

Even if they have a successful thing set up that works continuously

60% of the time they still want something better because of those minor
losses that happen. It becomes a cat and mouse game where you get
into the loop cycle chasing something that you can never achieve.

If you can relate that nothing works all of the time including the
markets you start to realize that you just need something that works
most of the time. In fact, that's all you need to in order to be successful
in the markets. Even if you are right just 25% of the time on the
direction of the stock, as long as you allow your winner to run four
times as much as your losers you will be profitable. That is why I
mention in my book “100 Stock Trading Tips” to always watch your
reward to risk ratio.

Once we accept that we only need something to work a fraction of the

time, our life becomes easier. Taking into account the 40-60 rule, I
believe that most things work 40% to 60% of the time. If you are talking
about baseball hitting averages the odds are against you. With a stock
you have a one in three chance of getting it right. After all, a stock can
only go up, down, or sideways as it consolidates. Even if it goes
sideways eventually it has to go up or down, so in theory you have a
50/50 chance.

Where am I going with all of this? Don’t case every single indicator you
can get your hands on. You don’t have to look for the greatest broker,
or the best charting software. These things are all minimal at best and
will only help you marginally.

If you can be consistent at finding something that works for you on

picking the right stocks, at the right time, that are moving the fastest,
then you will be more successful. In my book those things are price,
action, and volume. Along with some general solid fundamentals, that's
all you need to read a stocks behavior and make an appropriate trading
decision.

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RISKY BUSINESS - ALL ABOUT RISK

For you to be successful in the stock market you need to focus on risk
and money management. As I often say, most people tend to focus on
the profits first because it is exciting to see the possibilities of the
things you can buy with your money. Conversely, focusing on risk and
money management is never that exciting.

This is another reason why so many traders fail is because they never
focus on these two major components. In this segment I want to cover
risk. If you focus on risk you will always see the worst-case scenario.
This will allow you to spot any issues in your trading plan before you
enter the trade. It's like looking 20 moves ahead if you are playing
chess.

One of the simple ways that I always like to look into my own risk
management is to imagine the worst-case scenario. This usually
humbles me or at least give me a realization of what is possible. Even
if the worst-case scenario happens or just slightly worse I at least have
some clarity and a plan. I may not like the outcome, but it will be less
of a shock if I planned things ahead of time or at least saw the
possibilities of what losses I could incur.

One of my favorite ways to plan for risk is at the end of the day to
always do a fire drill. That’s what I do each day before the market close.

If you remember in grade school how you would have to go and doa
fire drill once every few months to make sure that you are prepared if
there is a real fire. When the fire alarm goes off for the drill everybody
lines up quickly at the door and you exit the building as fast as possible
in acalm manner. This helps avoid panic situations where kids are in
chaos, get trampled, or someone gets lost.

Now I know in grade school we only did the fire drill every few months.
If you work for the fire department you do it more often because it's a
full-time job. If the stock market is your full-time job or even if you are
looking at stocks daily then you need to be more serious about your fire
drills.

At the end of the day always look at your positions and imagine what

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happens if the stock gaps up or down. How will this affect your
position?

By looking at these possibilities daily one hour before the market closes
it will give you an opportunity to adjust your position if necessary.

Here are a few different risks that you need to pay attention to when
evaluating your stock position or investments. Not all of them will
apply to every trade that you do, but these are the risks that could
affect your potential profits and your stocks.

Trade Risk
Trade risk is the amount of money you put in the trade that you have
the potential of losing. If you purchase $30,000 worth of stock then your
trade risk is $30,000. If you purchase only $5,000 worth of stock and
options then your trade risk is $5,000. The trade risk is the amount of
money that you have on the table similarly to what a poker player has
in the middle of the table.

Market Risk:
Market risk is what can happen in the stock market which will affect
your position. For example, if a war breaks out between China and the
United States this is a market risk. It typically revolves around global
economy factors, but it doesn't have to.

Simple market risk could be a computer issue at the New York Stock
Exchange. These glitches could create problems for you as a trader
from getting in or out of positions. The market risk is what can happen
to the overall market that is outside of your control.

Margin Risk
Trading with margin is like using borrowed money to purchase stock.
If you don't trade with margin then you won't have margin risk.

If you still don't have a trading system in place and you are not a
consistent trader then you need to'stay away from margin until you
are consistent. Using margin to leverage on your trades can be
powerful because it accelerates what you have riding on the stock

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market.

However, if you don't know how to trade properly and you are using
margin then you are simply risking more money and therefore
probably losing more money.

Liquidity Risk
Liquidity risk happens when you are trading stocks that do not have
enough volume or you are trading a large percentage of the volume in
the stock. For example, if a stock is only trading 30,000 shares per day
and you want to purchase 25,000 shares that they then you could have
a problem since you are trying to buy 90% of the shares. Even if you
accumulate your 25,000 shares over time, trying to sell or get out of
those shares in the future could be a huge problem. In fact, you may
get stuck if there are not enough buyers.

That's why it's always great to have a stock that's liquid. It's for this
reason the big boys or the hedge funds trade highly liquid stocks. They
trade the leaders or stocks that have a lot of volume and are trading 2
million shares or 5 million shares per day.

This means that when they purchase 20,000 shares it’s not a big issue
and it won't even be noticed on the radar. So trade stocks with liquidity
otherwise you will have liquidity risk and may have a problem exiting
your position.

Overnight Risk
If you are a swing trader or a long-term investor then you will have
overnight risk. If you are a trader and do not hold stock overnight then
you won't have overnight risk.

Overnight risk is not a big problem to have. The problem comes when
you have to deal with earnings that happen during nonstandard
market hours. Other things can also happen during nonstandard
market hours, especially if a company is global. For example, if
something happens overseas, it could affect that particular stock.

So watch out for overnight risks if you plan to hold a stock for a few
days or longer.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Volatility Risk
Volatility risk is the change or magnitude of your stock and how much
it moves on a day-to-day basis. It does not imply a specific direction; it
just means the amount of movement. If your stock is extremely volatile
it may move up large in one day and then the same amount down
another day. In theory, if you hold the stock, sometimes it may not go
anywhere even with high volatility.

The risk comes down to your human psychology level of where you start
freaking out. If the stock moves down for three days in a row and you
panic on the third day and exit your position, then you've just taken a
loss. The problem with volatility is that the next three days you could
get back to where it was.

I find that volatility fakes out a lot of traders because the movements
are huge every single day. These time periods can last from a few days
to a few months. If you are not comfortable with trading in volatile
environments then it is better to stay in cash or trade less volatile
stocks (these are usually the more stable companies that don't move
much in a single day).

PORTFOLIO & DIVERSIFICATION

A portfolio is a group or collection of investments. It can be held by a
single individual, hedge fund, financial institution, or an investment
company. Think of a portfolio as a basket of investments. You can
include stocks, bonds, commodities, forex, or any other investment that
you could think of.

For our purposes we will say that a portfolio is a basket of stocks. In

this basket you may have two different companies, such as Google and
Yahoo! You could say Google's risk is higher than Yahoo! because of its
price and fluctuations, but what the portfolio helps you do is to balance
things out and your investment as a whole.

A more balanced portfolio in this situation could be to have 100 shares

of Google and 1,000 shares of Yahoo!

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Imagine if you only invested in Google. All the risk, your investment,
and your future are riding on one stock. If Google goes down or
something terrible happens to the company, your account will go down
with it.

If you are diversified and you have multiple accounts, such as a Google
and Yahoo! it makes things slightly safer because now you are splitting
your money across multiple investment areas. This is what
diversification is all about. It’s about reducing your risk across multiple
stocks in various sectors, stocks, or industries.

Diversification
If you are an active trader, daily diversification may not be that
important to you.

As you become more involved on a longer-term basis it may be smarter

to be diversified to reduce your risk. Let’s say that you're interested in
investing in cell phone and mobile companies because you believe that
mobile is going to be the next biggest thing. As time goes on your
investments do fine. But, let’s say in one day the government decides
to raise taxes on the cell phone companies because they find out it
causes cancer.

If this happens all of your stocks would go down quite heavily and your
portfolio would suffer. Now you could spread this out in terms of having
investments in internet companies and data providers. However, if
something happens to the technology sector such as a ban on
technology goods from China for two months due to a disease it again
could be catastrophic to your portfolio.

The better route to take would be to invest in a technology company, a

railroad company, a medical company, and a food company. This
spreads your risk across-the-board in case something happens.

This is the whole point behind diversification. It is to reduce your risk

on longer-term conditions. The downside behind being diversified is
that if the mobile or technology sector skyrockets this year and the
railroads and medical companies do not do so well then your profits are
not as high as they could be.

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In the stock market, it all comes down to risk and you need to
understand what risk you have on the table. I think for individual
investors being diversified is not as important as for the large
institutions because you won't have as much money riding in the stock
market. You can easily get in and out of stocks much quicker than they
can and you won't be trading as large.

The downside is if you do have something happen, you should take

action quickly and be able to react and change your position if
necessary. Many beginner traders hesitate and then hope and pray
that their stock will change direction — you can’t do that with
investments. It all comes down to the numbers.

Remember that sometimes it is better to use a nail than a screw for the
job. Diversification is nothing more than a tool in the toolbox and
ultimately you have the final say how to use it, or not to use it.

TRADING TIME ZONES

Trading time zones are different segments where trades can occur. The
standard US markets trade between 9:30 AM to 4:00 PM Eastern
Standard Time.

Besides the standard market hours there are a huge difference in the
time zones where you can trade. Unfortunately, the other trading time
zones are not always as effective in terms of liquidity, getting in or out
of trades, or just convenience. They are often called the extended
market hours which are tradable time zones that are not during the
regular trading hours.

Here are the list of the trading time zones as I see them:
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

e Early Premarket: 4:30 am to 8:00 am

e Premarket: 8:00 am to 9:30 am
e Regular Trading: 9:30 am to 4:00 pm
o Jungle: 9:30 am to 10:00 am
o Lunch time: 11:30 am to 1:30 pm
o Closing time: 3:00 pm to 4:00 pm
e After Hours: 4:00 pm to 8:00 pm

Early Premarket 4:30 am to 8:00 am

You can start trading fairly early if you want. The early premarket is
tradable like any other part of the market. It's one of those sessions
that I try to avoid because there can be liquidity problems since most
people do not trade during this time frame.

If it is imperative that you get in or out of a position prior to the market

opening such as due to an earnings announcement or maybe you are
traveling overseas you can make some trades during this time zone.

Premarket 8:00 am to 9:30 am

The premarket is more active than the early premarket. It is still part
of the nonstandard trading hours. I still try to avoid trading in this
timeframe unless absolutely necessary. It is usually during this time
zone where some news reports will be released such as a jobs report or
housing data. These various reports can shift the market to the upside
or downside based on what happens in this early premarket.

Again during the premarket liquidity is still limited. It is tough to get

in or out of certain stocks so I try to avoid it. Some people do like the
premarket because you can take advantage of the inadequate traders
trading in the premarket.

I would only trade in the early premarket or premarket hours if you

have a few years of profitable trading experience during the regular
market hours.

Regular Trading: 9:30 am to 4:00 pm

Regular trading hours are from 9:30 AM to 4:30 PM. This is when the

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market is most active and the majority of the trades are executed. Just
like a bank has standard working hours, think of this regular trading
time zone as the standard operating hours for the stock market.

It is the easiest to get in and out of trades in this time zone. You will
typically get the best fill rates and the best prices. This is the time zone
where you want to place the majority of your trading unless you are a
specialist focusing on taking advantage of the extended hours trading
time zones.

The Jungle: 9:30 am to 10:00 am

The Jungle time zone is the time frame where everybody starts piling
into the trades from the opening bell. There's a whole cluster of people
trying to enter trades, exit trades, or protect their positions. So many
people are trying to pile in right from the start when the whistle is
blown.

If you've ever been stuck in a jungle or if you’ve ever watched how crazy
it can get in the jungle you know that you can get lost pretty easily.
Things are unclear in the jungle and you don't know which way to go
in order to get out of the jungle. That’s why I call the first 30 minutes
of regular trading the jungle.

I don't recommend that you start trading during the jungle until you
have some experience under your belt — it’s a classic mistake. Many
people think that if they get in early, their stock will move and that
later there won't be as much movement.

In theory the logic sounds correct because you can miss out on a slight
move. However, if you understand that the stock market is about risk
management you know that you need to be patient and watch for a
clear direction. Sometimes the first 30 minutes can be a fake out.
Things may appear that they opened higher, but then later they
reverse and go the complete opposite direction.

Remember that the jungle is a period of digestion. Everyone is

adjusting their positions due to overnight news or other reasons. It is
your duty and responsibility to see what is really going on beyond the
jungle. Sometimes in order to see this you have to wait until you see a
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

clear path. This usually can take about 30 minutes.

This is why I always recommend that if you've only been trading six
months or less that you stay away from the first 30 minutes during the
regular trading time zone. Trading in this jungle becomes very
confusing, it will play tricks on you, and make you want to hit your
head against the wall.

Lunch time: 11:30 am to 1:30 pm

The lunch time period is where most of the traders are getting lunch
or taking a breather. During this time zone trading is calmer. It's a
period of time where people are digesting the early sessions along with
their positions. Some people are researching other stocks and the
movement in the earlier session based on other stocks they were
looking at.

I like this time zone because it is a time zone that many people are not
as active in the markets (so it feels stealthy or like a hidden gem) if you
catch a movement or a pop in a stock during this time frame. In this
time zone, most people are busy eating their lunch and often times it
is a great opportunity to those that watch the markets and can catch
hidden movements or a run up in a stock giving you an early entry
point.

If you can catch the alert and get in at the stock early from an obvious
breakout you will have a huge advantage during this time frame
because the people that missed the move will try to pile in and get in
later after their lunch session.

This timeframe is also a good period to get into swing positions if the
stock has been trending well because it allows you to ride the stock
until the end of the day where you can sell some before the close to
reduce your risk.

Closing time: 3:00 pm to 4:00 pm

Towards the end of the day during regular trading hours we have a
session of trading that is the closing hour. During this final hour of
trading you can usually see volume picking up. Typically most of the
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

day traders get out by this time. Other people are selling part of their
position to reduce their risk.

In this last hour of trading you can see how stocks are reacting. If
stocks are heading higher and pushing higher towards the end of the
day as the market closes then that means the stock has strength.
However, if the stock is selling off towards the end of the day and going
back down near where it opens then it shows some weakness.

Since not every stock behaves the same way it's hard to compare one
stock’s end of the day action to another stock. Instead you need to
compare how it is behaving compared to its previous days.

When you learn to read the end of the day action it will give you more
confidence on what will happen in the future with your investment or
your position. Making risk adjustments during this hour could be
critical to staying profitable.

After Hours: 4:00 pm to 8:00 pm

The after-hours is another extended trading time zone. During the
market after hours more company news and data gets released, such
as earnings or other news events. Just like during the pre-market, the
after-hours trading has less liquidity.

With less liquidity you need to be extra careful in buying or selling your
stock. That's not to say it’s impossible, but just like with the premarket
you need to set appropriate limits and understand what you are doing.

Similarly, the after-hours could be great to trade if you are overseas or

you have a daytime job. Unfortunately, there are market inefficiencies
during this timeframe and I reemphasize how cautious you must be
when trading in this time zone. If you are a beginner, I would definitely
stay away from trading during the after-hours sessions.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Chapter 3:
GETTING SETUP TO TRADE

GET AS MUCH EDUCATION AS YOU CAN

Before you take an actual trade, I would highly recommend you read
some books and broaden your education. I find that books give a good
foundation and gives you some concept to think about prior to trading.
If this is the first book that you're picking up about stock trading here
are a few more to get you going.

e Reminiscence of a Stock Operator — Edwin Lefevre

e How to Make Money in Stocks — William Oneil
e How! Made $2 Million in the Stock Market — Nicolas Darvas
e Market Wizards — Jack Schwager
e Timing the Trade — Tom O’Brien

I think that it's important to build your education as much as possible

before you take the trade. For example, you might spend $100 on books,
but if you take your first trade without reading anything assuming that
you know everything your first loss could be $5,000+ or more making
your experience more costly than it has to be.

Along with books, definitely get some video training courses if you can.
I have created a library of stock market training video courses. Each
video course is very specific on the subject that it covers. I highly
recommend my “Stock Trading Foundation — Trading Basics
Explained” course after this book. It will take many of the concepts we
cover in this book and go deeper into them with chart patterns and
visuals.

Even if you don't decide to get my training material, get some other

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video courses or at least attend a seminar. Seeing actual charts along

with someone explaining to you what's going on in the charts is
exceptionally helpful!

It takes a great deal of knowledge as well as patience to become

successful in the stock market. So don't skimp out on your education.
It may cost you a few hundred dollars on some training material, but
it will save you thousands of dollars in stupid trading mistakes and
losses.

WHAT YOU NEED TO START TRADING

To purchase a stock you need to have a brokerage firm. A brokerage
firm is similar to a PayPal account that’s used to purchase goods
online. Instead a brokerage firm is a licensed company to trade various
equities for investors. The brokerage firms have to follow the rules that
are put in place by the SEC (Securities and Exchange Commission)
similar to the pattern day trade rule. Brokerage firms also impose their
own rules similar to how a US State can have speed limits, legalities
on death penalties, and other laws that are specific to that state.

Before you sign up for a brokerage understand that there are two types
of brokerage firms. You have a full-service brokerage firm as well as a
discount brokerage firm. Today more people are signed up with an
online discount brokerage firm. Depending on your needs and
requirements you may choose to opt for one or the other.

Full Service Broker

Before I get into discussing discount or online brokerage firms which
is what I recommend, I want to explain to you the full-service
brokerage firm so that way you understand what's going on beneath
the surface. When you see what's going on, it gives you an insight
behind the stock market and how the game is played. Pay close
attention to this section because it reinforces a lot of my other
statements about people who go on TV and tell you to buy a stock along
with listening to other people's recommendations.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

The full-service brokerage firms are the extremely popular institutions

that trade for individuals as well as they take companies public.
They're the ones that you know extremely well. Companies such as
Morgan Stanley, UBS, Bank of America, and Goldman Sachs.

These companies make money in two different ways. Number one they
make money when you buy stock with them and number two is when
they take a company public.

The majority of their money is made through taking a company public.

The banking division of these companies like the Bank of America’s,
make a great deal of money when a company decides to go public. The
banking division will handle most of the paperwork for young
companies prior to their IPO (initial public offering).

The brokerage firm makes money by keeping a profit on each share of

stock that they sell during this IPO. This industry is huge! Think about
a hundred thousand dollar home loan and compare that to taking a
multi-billion dollar company public like Facebook!

The second piece of their money making scheme is to sell the shares to
their retail clients or individual investors such as yourself. Now
remember they make money regardless if you buy stock or not since
they make money from taking the company public. However if you buy
a piece of that company they also make money from you on their service
fees.

Whether you get a good deal or a bad deal they don't care. All they care
about is that you purchase the shares and that you hold on to them
based on their research division.

The research division is set up to educate you as the investor on what’s

a good purchase for your money. Again remember it doesn't matter to
them if you get a good deal or a bad deal. They don't care if you make
money or don't. They want their fees and get it when you purchase
stock. This keeps the big companies happy that they took public,
especially if you hold on to your shares.

It is for this reason that the research division for these brokerage firms
(Bank of America’s, Morgan Stanley, etc) rarely put a sell
recommendation on stocks. At least they try to avoid it as much as

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possible.

Instead the recommendation that they stamp on the public documents

or analysis reports is a “hold” recommendation. This “hold” could mean
a variety of things such as “hold your cash” or “hold what you got in
shares” or “just be patient.” It’s never clear what hold means from these
reports.

The next division I want to discuss is the retail division. The retail
division is what the individual investor deals with. Think of them as
the sales representatives for the company. These people don't care
about you. They are only there to do their job and help feed their family
working for the big guy (these huge brokerage firms). That’s why in my
book “100 Stock Trading Tips” I mentioned they first care about
themselves, then their job, and then “maybe” you.

The sales reps in the retail division will call clients such as the
individual investor and tell them to buy certain stocks. Sometimes
these sales reps are other companies such as a telemarketing company
who will charge a huge commission (compared to the discount
brokerage firms) because they split the profits with the brokerage firm!

They say that you are paying more in commissions because you getting
great research. Remember what I mentioned earlier about the
research... It is FLAWED — and typically created for their own best
interest.

If we break this down a little more with an example let’s say I took my
company Rise2Learn public. The brokerage firm will make a killing for
taking me public then they will tell you buy some of my stock whether
it's a great company or not. They will make a fortune when you
purchase my stock. To give you a relative perspective; they are selling
you a $9 burrito at $75. Sounds like a great deal right?

This is why I always say — NEVER trust your broker. The person who
will take care of your money the best is Y-O-U. Don’t trust them! The
only thing you can rely on in this business is your cash and your stops.

Discount Broker / Online Broker

Discount brokers are completely the opposite of full-service brokers.

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They focus on giving you the best execution possible on your trade.
Since that is their primary focus, they make money when you buy or
sell a stock. They don't necessarily make money on any specific stock
that you purchase.

Since they don't have a dedicated research team or give you advice on
your stock picks, the commissions are much lower. The research they
do present are usually third party research from other companies. If
you were to purchase a 100 shares of stock with a full-service broker
you would pay $100 to $500 in commissions. To execute the same order
at a discount broker you would pay around $5 to $20 in commissions.

The Rise of Discount Brokers

The rise of discount brokers came about as technology started to
improve. Trading has become more algorithmic and computer-based.
Much of the things that are required to place a trade now are available
to anyone simply because of the advancements we made in technology.
In the 1940’s much of the trading was still done by paper so you have
to acquire the appropriate paperwork and fill the orders manually.
This is why it was helpful to have a broker because most people did not
understand what to do to place a trade.

As technology expands we turn to more computer-based trading. New

companies started to branch out into other areas of interest. They tried
to make additional revenue by fulfilling a need for individuals doing
their own investments. As a few discount brokers showed up on the
Internet, more followed. When I first started trading I think there were
only a few of online brokers. Now there is handful of major brokers that
many people will recognize.

Most of them compete against one another for giving you the best tools,
execution prices, account management tools, and so forth. This makes
it great for the individual investor because if everyone is competing for
your dollar every time you do a trade then you get the benefit of getting
the best of the best. They continue to improve their tools and their
prices keep getting better. In the end they are trying to have a long-
term customer. Imagine if you executed 2,000 trades in your lifetime
at $10 each. You become a $20,000 customer to them.

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The catch behind discount brokers is that you have to do your own
research and all of the responsibility is in your hands. Since they won't
advise you on which stock to purchase you have to take care of
everything from the researching to the order placing. Although you do
get research reports from company earnings, news, and can see a
company fundamentals usually within their control panel — you have
to do the legwork on your trades or investments.

To me this is not a bad trade-off considering what I told you earlier

about full-service brokers in which they really don't care if you make
or lose money. They care more about the company that they take public
than about your investments or your future. They are in it for
themselves. Even if you went with a full-service broker you still have
to monitor your position since the advice they give you is often useless.

With a discount broker you still have to monitor your position. The only
difference is you get to see the end result behind what your
investments do for you. Some people may not like this because they
hate admitting that they are not successful or things aren't going the
way they expected.

However if you're a person who likes to learn from your mistakes, likes
control, and wants to understand what's going on with your money
then you still have to do your own research, make adjustments to your
trading plan, and manage your investments.

If you want to be blinded and oblivious to what's happening with your

money and then 20 years from now get a shock (which could be to the
upside or the downside) then you can use a full-service broker. Of
course using them and checking your results year after year is helpful
but nevertheless you still have to watch what they are doing which still
takes your time and energy. Of course for risk management and
diversification I would always take money off the table or at least split
your money among two or three brokers if you have the flexibility to do
so.

After reading this book you will probably know more than the sales
reps at a full-service brokerage firm trying to sell you stock. So there's
no reason why you can't put a few extra hours of studying and manage
your own investments if you choose to do so.

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Here is a list of some discount brokers. Before setting up an account

at a discount brokerage firm — check my website at
http://www.tradersfly.com/resources/ to get the most recent list of
brokers along with my reviews.

e TD Ameritrade
e TradeKing
e Scottrade
e TradeMonster
e Zecco
e Fidelity
e Charles Schwab
e Interactive Brokers
e ETrade
e Lightspeed
e OptionsHouse
e OptionXpress

THINGS TO CONSIDER BEFORE PICKING

YOUR BROKER
When choosing a broker remember that you can't get everything that
you want. There are a few categories that we will talk about, but just
remember that you won't be able to get the best executions and the
cheapest commission with a broker that has great customer service.

Certain brokers are able to charge less because they don't employ
people to sit at the phones answering basic questions. Typically
advanced traders are happy with lower commissions and little
customer service since they rarely have to call in for problems. The
thing that advanced traders are concerned about are the executions,
commissions, and possibly the trading tools.

Other brokers charge premium price because you are able to call in
with questions. These bigger brokers have employees and technical
support teams answering questions as people call in. Since they have
a staff and some other expenses they won't be able to give you the best

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rate, but if you have problems with your order or don't understand
something the customer service makes it worthwhile.

As a side note: not every broker allows you to trade everything such as
stocks, options, futures, commodities, and forex. Some brokers are just
stock specific. Other brokers are focused on stocks and options. You
need to find a broker that fits your current needs for the next six
months to a year. They don’t have to do everything for you right now,
but it’s something to think about when selecting your broker.

Understand that you won't be able to get everything that you want.
You have to look at what's important for you currently based on your
experience. There is nothing that says you have to stick with the same
broker forever.

You can change your broker in a year from now from a very technical
support oriented broker to a cheaper broker with less customer support
next year.

Commissions
Commissions are probably the first thing that most people look at when
choosing a broker. It shouldn't be your ultimate decision-maker on
selecting the broker, but it does add up especially if you are an active
trader. I find for more active traders the commissions and fees, as well
as execution time, are fairly important.

When trading stocks you can find commissions anywhere between

$4.95 and $9.95. If you are paying more than $10 per trade then you
are either over paying or trading hundreds of thousands of shares.
These rates are related to internet trades. If you have your broker
assisting you which may include a phone order it may cost you $50 or
more!

Remember that a broker considers a trade one transaction. This means

if you buy stock that can be $10 and one fee. When you are ready to sell
it in the future this will also be another fee (or $10 if that’s your rate).

This can become a problem if you are trading by scaling in or scaling

out such as:
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

e Buy 500 shares of stock ABC ($10 fee)

e Sell 100 shares of stock ABC ($10 fee)
e Sell 100 shares of stock ABC ($10 fee)
e Sell 100 shares of stock ABC ($10 fee)
e Sell 100 shares of stock ABC ($10 fee)
e Sell 100 shares of stock ABC ($10 fee)

If you scale out of trades this will add to your commissions or fees. I
think this is a smart way to trade since you get to lower your risk as
the stock goes in your favor. The commissions do add up. Doing the
trade above would cost you $60 just in brokerage fees!

Commissions are unavoidable so you need to learn to live with them. I

know that when you are first starting out, commissions can be a huge
burden since you are not making as many profitable trades and not to
mention you may have a smaller account. This is one of the tricky parts
about this business. You have to build up to the next level slowly. Try
not to overextend yourself and add huge risk just because you have to
pay commissions.

One tip I do want to leave you with is that brokers will negotiate with
you on your commission rates. They usually will do this if you are a
more active trader. This means that if you like a certain broker for
their trading tools and you want to stick with them, but their
commissions are a little high, then you may want to call them up and
talk to a representative.

When talking to a representative make sure you outline that you love
using their platform and their tools. Mention how many trades you do
weekly or monthly and make sure you are able to prove it with your
account since they will look into it.

Then mention to them other brokers that charge less on their fees and
commission. I find that even if your broker will not match the rates of
other brokers they may at least give you a discount.

A phone call never hurts so don't be scared to pick up the phone and
talk to someone. The broker themselves won't call you and say that
they can give you a better rate. You need to go out of your way and
create the proper connections in your business so that you can pay less

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on your fees.

Customer Service
If you are new to trading and have not executed many trades then it
might be wise for you to choose a broker that will have great customer
service. Unfortunately, with great customer service comes more
expensive rates and commissions. Although at the beginning it might
be worth it since you are still learning how to execute trades, making
rookie mistakes, and there might be things that you just don't
understand where some assistance might be helpful.

I highly encourage you to get a broker that is customer service oriented

especially at the beginning. Once you've been trading for more than six
months or a year (depending on how quickly you adjust) then you can
switch to a broker that is less customer service focused and find one
that has lower commissions or better tools.

One of the best ways to test customer service is to call prior to setting
up your account with your broker and ask them questions or see if the
will walk you through the signup process.

You can see how fast they answer the phones, hear the friendliness,
and how well they handle your questions. You can also do a phone call
once your account is created to ask further questions about their
trading platform or something else that is technical. I find that the
sales representatives are different from the technical support. So make
sure to see how quickly you can reach the technical support and if they
are able to answer your question clearly.

Of course you may get one or two bad apples when speaking to people.
It’s only natural so don’t be too quick to judge. I tend to assume that
most people want to be helpful and friendly if they are in the customer
service field. For this reason I primarily look at how easy it is to reach
someone at various times of the day when checking the customer
service rather than judging them strictly on how friendly they are.

Remember that by having great customer service with your broker you
may have to pay more for your commissions, but if you are new to
trading this could be a necessary step for the first year of your trading

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Career,

Minimum Balance
You will have to take note of the minimum account balance
requirements when setting up your account with a broker if you have
less than $10,000. I find that if you have more than $10,000 you can
sign up to just about any broker you want.

If you have less than $10,000 you will need to pay close attention to
their rules and requirements about minimum balances. The minimum
balance is the amount you need to sign up and get an approved
account. It is similar to putting money into a new bank account. Once
that money is in the account it is available to trade with.

The downside is you can't use it like an ATM or a bank to write checks
from your trading account. So technically speaking, money that you
put into your trading account should only be used for trading.

Certain brokers have a minimum of $2,000 for a margin account and

others may have a $5,000 or $10,000 minimum. Minimum
requirements may be different for a retirement account so it's
important to check your minimum requirements based on the account
you would like to have.

The minimum is something to take note of because you need to make

sure you hit your minimum account balance for the broker to approve
your application. If you don't, you may be out of luck. Of course you can
always call them directly and see if things can be manually approved,
but I find that most account minimums these days are quite fair. I’ve
seen places where you can start with as little as $500.

It may not be the broker you want at the beginning, but if it's a broker
that will approve your application it will be a good broker to start with
until your account grows further and you're ready to move on with a
better broker.

Interface and Platform

The interface and platform is another fairly important thing. You need
to be comfortable with the interface and charting software that you

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use. Some brokers have exceptional execution time and amazing

commission rates, however their platform may be horrible!

Typically what most active traders and professionals do is get an E-

Signal account and link it with their broker. They use the E-Signal
interface and platform, but their broker executes and routes the trades.
E-Signal is just an interface platform and not a broker since they don’t
handle orders. In simple terms, E-Signal is like software to use for your
trading.

For most people this method is unrealistic since most people will not
need professional capabilities. For the average person they will just
need a good interface that's easy to buy and sell their orders.

Depending on what you are trading whether it's stocks, options, or both
you should get a platform that fits your needs. Certain brokers have
platforms that are very friendly for stocks, but not for options. Other
brokers have a friendly platform for options, but not futures. You
should choose a broker that has a good platform for what you intend to
trade.

If you are looking to just trade stocks with simple buy and sell orders
then most brokers will fit this requirement since it's one of the most
common trading instruments. However, as you start to improve or get
into trading other equities and securities then you may need to find an
interface that caters to your needs.

Research
Research may be another consideration for choosing a broker, but I find
that I rarely use my broker to do research. Normally the research that
they give you includes chart data, company information, and
independent ratings from companies such as Zacks, Standard and
Poors, Morningstar, and a few others.

If you're looking to choose a broker based on research I would skip that

and just subscribe to the Investor’s Business Daily (IBD) 50 list. If you
get the digital version (eIBD) rather than the printed newspaper you
can save some money. Currently it’s around $30 for 3 months, but of
course prices may shift. If you're really watching your pennies you

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probably could find it at your local grocery store and read it for 10
minutes while you wait in the checkout line.

In either case, most research is easily available. You shouldn’t have to

choose a broker based on the best research available because I always
say you need to do your own research and homework. You can’t rely on
someone else to make your trading decisions and this is part of it. You
can’t just look at what rating a research company gives a stock and
decide to buy or sell it. Get in the habit of doing your own homework
and research.

If you are strictly a technical trader then you need to have access to
great technical data rather than reports in which case great charting
software like TC2000 or www.freestockcharts.com will be more than
enough for your needs (the gold edition is more than enough for most
people).

SETTING UP YOUR ACCOUNT

Once you decide which broker you want, you'll need to sign up for an
account. There are a few different types of accounts that you can set
up. If you are just getting started I would recommend setting up just
one account. There are tax advantages to having certain accounts over
others so it’s important to choose the appropriate account based on
your goals.

You can always change your account type in the future or shift your
positions. For example, you may start with an individual account and
then later add a retirement account. Once you have kids, you could
create an account for them such as a trust account or a student 529
account.

Keep in mind with all of these accounts you can trade normally as long
as you have the credentials or the account minimums according to the
terms set by the broker.

As a side note; if you want to see how the signup process works, just
look on my resources page at http://tradersfly.com/resources/ and I
show you the step by step process of signing up in a video format for

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some common brokers.

Account Types
Individual Account: An individual account is a standard brokerage
account with one owner. When the account owner dies, the assets are
passed to the estate. This is typically what most people refer to when
they talk about having an individual brokerage account. Think of this
plan like an individual cell phone plan. There is only one account owner
and one person who manages everything.

This type of account can be a margin based account. Meaning if you

trade above the amount of money that you put in you're able to use
margin or leverage to make more money. As mentioned before you don't
want to use margin until you have established a consistent return with
stocks over a few years.

Joint Account: A joint account is similar to a family plan where the

account can have two or more owners. This means that anyone on the
account can regulate the account, make trades, or adjust the positions
on the account.

With the joint account when one owner dies, the surviving owner
retains the right to the entire account. Typically a husband-and-wife
team will get a joint account making things easier to deal with if one
person dies rather than playing with paperwork and lawyers.

Traditional IRA: I like to think of a traditional IRA account as an

individual account setup for retirement. This account type is an older
retirement account where your earnings grow tax-free, but you get
taxed at the ordinary income tax rate when you withdraw your money.

Roth IRA: A Roth IRA account is another retirement account setup

where you can withdraw the contributions you made tax-free. Earnings
of course grow tax-free and you are limited to withdrawing your
earnings penalty free at age 59.5 or later if your account is at least 5
years old.

Trust: A trust account is a type of account where the account owner is

an entity. The assets are then managed by trustees. For example, you
can set up trust accounts for your children if they are young and then

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be a trustee on the account managing their stocks and investments as

they grow older until the point that they are ready to take over their
own investments.

With all of these account types, especially the retirement accounts like
the Traditional IRA or the Roth IRA, you want to talk to an accountant.
This way you can see how you would be taxed or which type of account
you should register for based on your goals and investment plans. Not
to mention your accountant will know the rules and regulations that
are up to date since tax laws change from year to year.

As your trading evolves or investment needs change, you may want to

adjust your accounts or create another one. There is nothing that says
you can’t have multiple accounts such as one account to trade riskier
stocks like an individual account and a Roth IRA account to trade very
stable stocks that pay dividends.

Device with Internet Access (Computer / Tablet / Phone)

Once you have your account established with the brokerage firm it's
time to make your first trade. Before we do, let me discuss some
equipment and tools you may want to have. You don't need the greatest
equipment to be able to place a trade with your broker. In fact the same
tools that you used to register with your broker is all you need.

Today, all you need to place a trade is a device with Internet access. In
today's modern world most brokerage firms have apps that you can
download and execute trades with a standard smart phone. It makes it
convenient especially if you're working and you need to adjust your
position midday.

As you evolve your trading career and you decide to become more
involved you may want to go with a tablet device. Now the tablet won't
give you any different software than a phone would, but the screen
resolution is bigger and this is something that's valuable to a trader as
you will learn quickly once you start looking at charts frequently.

If you continue your involvement in the markets, you need screen real
estate, and if you happen to find yourself on a destination vacation it
might be a good time to purchase multiple tablet devices. You may have

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four, six, or eight tablets while you travel and I can attest that it is
worth it if you need the screen real estate. I understand that most of
you probably don't want to get this far in depth into trading, but for
those that want the insight, that's how you do it when you're overseas
is by having multiple tablet devices.

Of course you could take the route of bringing a laptop, unfortunately

to have more screen real estate with a laptop is very difficult. It looks
a little suspicious if you are carrying four or six laptops.

Regarding your home office setup all you need is a standard computer
with great Internet access. Personally I like buying a great computer
because you don't want it to freeze in the middle of a trade.

Think of it this way, if you plan to have a computer in the next five
years why not sell the current one you have for $400 and get a new one
for $1,500. Then just keep rotating every two years and spend $1,500
and get back $400 dollars. Some people wait four years and then end
up throwing away their full $1,500 computer at the end of its lifecycle.
Personally I like to work with the best machine I can because to me my
time is precious..

I normally custom create my computer. These days it's quite simple to

build your own computer — it's just snap and go. It takes about five
hours, but any 15 year old with decent computer skills can help you for
just a few hundred dollars.

I even list the parts that I use for my most recent computer if you're
interested on my website.

Keep in mind that you may want to adjust the parts depending on your
needs, but it may give you an idea to create something similar. One of
the most important things that I always have with my computer is an
abundance of monitors! At minimum I like to work on six monitors on
my desktop.

Yes, I still use a desktop. They are much better than laptops as they
can be water cooled therefore allowing them to not freeze during major
stock trades. One bad execution could cost thousands!

Now you know that you don't need a lot of equipment to trade or

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Fe
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

manage your investments. However as you continue to trade you can

step it up a few notches to make sure that you have the professional
tools required. These tools may cost you more than $2,000 per year, but
it is important to have the right tools at your fingertips to ensure the
safety of your money and reduce your risk on any technological
failures. I think the end price tag is worth the cost.

TRADING BIG VS SMALL PRICED STOCKS

There's always a debate between trading smaller price stocks, such as
penny stocks, or larger price stocks. The argument is that smaller price
stocks have more room to move to the upside whereas larger stocks
have already ran up an excessive amount.

Although this concept is technically true, unfortunately I have seen

very few small priced companies break out and become leaders in the
market. There can only be a handful of leaders in the market. Cheap
stocks are cheap for a reason.

Unfortunately chasing after the shiny object or lottery mentality

always attracts humans. I think we are prewired to go after these
smaller price stocks. Not to mention you can purchase more shares of
smaller priced stocks than larger priced stocks.

There are a couple of problems though with trading smaller priced

stocks. If you understand the issues and the risks, but you still want to
trade them then there's nothing wrong with that.

Some things to be aware of is that smaller priced stocks usually trade

with less volume. As we discussed it is essential to have volume to be
able to purchase shares and get out of your position. If you do not have
the volume or the liquidity is very thin, then you may have trouble
getting in a trade.

Since lower priced stocks usually trade with less volume you need to
ensure that when you're trading these stocks that the volume is
spiking, or you're trading lower priced stocks that have great volume.

In addition, I normally trade these lower-priced stocks to the short side

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or the downside since most of the companies are crappy companies.

Even if they have a decent volume spike, eventually they do reverse
and sell off with time. Again, remember that they are cheap for a
reason. Usually the spike is due to a news announcement or some kind
of hype from spammers. This means that the move is not authentic and
there is no substance behind the stock. This does not mean the stock is
not tradable. It just means be more cautious.

Let’s say you have $5,000 to invest or place a trade...

cae ee enete eae ete ea
eee ae eco aa

Bee ee

Take a look at the following breakdown. Notice if we have $5,000 for

our trade that we would probably make the most trading a stock that
is $5 or less. Since they can move about $1.12 (on a good run) we would
make around $1,120 from the trade.

We can do the same thing and evaluate a $50 and $250 stock. Since
these stocks move more on a day-to-day basis you can see that we
would make around $800 profit from a $50 stock if it moved $8 and
about $900 from a $250 priced stock if it moved $45. These are
hypothetical values, but I can truly say that big dollar stocks move
more than low dollar stocks.

I find that as you start looking towards the stocks that trade at $20 per
share or more, the difference between your profits is very minimal
whether you trade larger stocks or smaller stocks since the larger
stocks move much faster. Although most people want to trade smaller
stocks since there is a slight larger profit potential as you can buy more
shares with the same capital.

In my opinion there is more risk than it is worth because smaller

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companies or lower priced stocks are cheap for a reason, however if you
learn to trade the smaller stocks well then you can do just fine.

Here's where the problem will start to occur on smaller priced stocks.
Let’s say you have $500,000 to use for a single trade (you are now a
professional).

As your account starts to grow and you put more money into your
trades such as $500,000 per trade, things start to get trickier for
smaller priced stocks.

“Price Shares YouCanBuy Swing Trade. Profit

$5 ; , 100,000 shares Moves $1.12 $112,000

“$50 -—=«*10,000shares SS Moves $8.00 —»=—_—$80,000

| $250. . 2,000 shares. a | Moves $45 ay $90,000

The more money you put into a stock, the more you will move the
company. This is why the huge institutions do not trade lower-priced
stocks. They like trading the leaders. For example, if you look at the
table above and you purchase 100,000 shares of a $5 stock this could
be 20% of its daily volume depending on the company.

That can be very dangerous getting into the stock or getting out of it.
You will move the company too much on any transaction that you do
and you won't be under the radar. This is one major disadvantage to
trading smaller companies. As you can see, the profit potential
relatively speaking is not much different between the $250 stock and
the $5 stock.

Of course the movements can change and be different. I merely

estimated the numbers to show you that smaller price stocks move
much less than larger companies. In fact, you can make a great deal
more in the larger companies if you spot the right stocks to trade at the
right time. The same is true for smaller price per share stocks. You can
find penny stocks that breakout more than $1.12 if you're good at
reading charts.

However, what I’ve found over the years is that it's harder to find a

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smaller price stock to breakout than to find a larger leader stock to

breakout. Not to mention I'm more scared and walk on egg shells if ’m
holding a cheap stock versus a quality company.

Whether you choose to trade smaller price stocks or larger stocks the
choice is yours. They both have their advantages and disadvantages.
Just be aware of the risk you are undertaking with each strategy. Once
you start trading larger capital amounts you will be forced to trade the
larger companies due to the liquidity that will be necessary for each
trade. If you don't plan to trade large in the future then you can stick
to penny stocks or stocks that trade a lower dollar value per share.

HOW MUCH INVESTMENT CAPITAL TO

START WITH?
One of the most common questions I get asked is “how much money do
I need to start trading?” If you're planning to be an active trader I
normally tell people to start slowly to avoid major losses. You don't
want to jump in the lion’s den without the right tools and experience.

I always recommend that people start paper trading until they get
comfortable with the tools and their trading platform. Once you've
mastered the trading platform then you can start moving into real
money. Trading with real money will give you the emotional
experience. It's important for you to recognize how you deal with these
emotions and make adjustments since trading success requires both
parts (the outer game and the inner game).

One of the ways that I recommend people starting is to trade a few

shares in the beginning. If you trade just 10 shares it will allow you to
build to more shares in the future, but minimize your learning curve
expenses. Learning curve expenses are those trades that you do
mistakenly that are problem trades to learn from. This could be
entering a ticker symbol wrong and hitting the submit button without
double checking. It might be where you accidentally entered the wrong
quantity of shares. If you get these mistakes out of the way at the
beginning and keep your mistake costs low, then to raise your income
potential all you have to do is push a different number on the keyboard.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Trading with a smaller amount of shares will cost you some additional
money in commissions because you might not be making much profit
from your trading. In fact it will often cost you money. However, this
will help you avoid any major losses.

Imagine you enter a trade with 5,000 shares and the stock goes down
$2 — you are now at a $10,000 loss in one day. Whereas if you trade just
10 shares, it would have been a $20 loss. Until you are consistent keep
your education as cheap as possible.

As you get better you can increase your shares and continue to scale
your account upward. Remember that if you trade the big stocks they
typically move $3, $5, or $10 in a day. If you trade stocks that are less
than $100 per share then they may only move $2 on a good day.

Here is a progressive timeline of what you can do as a guideline to grow

as a trader. Of course you can adjust this guideline or create your own
to match your growth goals.

e First week: Get familiar with your trading panel and watch
stocks.
e First 3 to 6 months: Paper trade until you are consistent
e Month 6 to 12: Trade light (less than 20 shares) — Forget
about commissions while you are trading (you can multiply
your share amount times 100x if you would like to see what
your true profits would have been).
e Ifyou are profitable at a low share amount then slowly raise
your share amount every 3 months. This will give you the
confidence to trade at the next higher level.
e Ifyou are not consistent then you need to go back a step and
trade less.

If you are setting up a plan based on capital usage per trade then you
could set it up like this:

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

e Month 3 to 6: Paper Trade

e Month 6 to 12: Use $1,000 per trade
e Year 2: Use $2,000 per trade
e Year 3: Use $5,000 per trade
e Year 4: Use $7,000 per trade
e Year 5: Use $15,000 per trade

Of course you can adjust your plan based on how you feel. In addition
you can use this capital system and change it to profit meaning that
each month you are targeting a certain profit — if you don’t hit your
profit target then you stay at that level until you can do it for 3 months
consistently.

Just be careful not to accelerate too quickly with your learning curve.
If you try to move to the next level too fast, you may not have an
opportunity to experience a bad trading environment. Your goal during
your training is to consistently get better rather than playing like the
Tiger Woods of the stock market right away. You want to get better
and reach that level with time — not overnight.

STOCK MOVEMENT - NOT STRAIGHT UP -

SWING POINTS
One major problem that most people have with the stock market is that
they believe a stock should go straight up or straight down like a
rocket. Even if people know for a fact that this doesn't happen they still
want to believe that a stock will go straight up especially when they
enter the position.

Just like in natural human behavior we want things that come to us

instantly. We want it right now or even yesterday. We love instant
gratification and society teaches us this concept. This may include how
fast we get our food at restaurants or products delivered from the
internet. After this constant programming for years, we expect our
trading results to be instant although it's far from the truth.

What we want is the minute we enter a trade for the stock to go up.

LO]
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Then we want it to continue heading higher without any pullbacks. We

wanted it to blast off just like a rocket ship going to the moon. The
thing is the stock market doesn't move that way. You may get a few
great movements of nice pops in a stock or a couple of days or weeks,
but it won’t have enough energy to go straight up forever. That’s not
realistic.

Stocks like to go back and retest their breaking points. They like to test
areas to find which level is the path of least resistance. This is how the
game is played and you need to constantly adjust your position to
match the movement. When stocks go back to test support and
resistance levels this is known as retracements. When they retrace and
bounce those points are called the swing points.

Learning how to read swing points and the energy of the stock or the
market can be very helpful to predicting where the stock will head
next. However you can’t expect for a stock to start heading higher from
the moment you purchase it and you can't expect it to move higher
forever.

Patience pays in this business, so learn to be patient for the right set
ups and to spot the breakouts.

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SATSLA (Weebly) 229.54

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

PHASES A STOCK GOES THROUGH

When we look at the long-term lifecycle of a stock it moves through a
few different phases just like humans move through phases throughout
our lives. When we are first born we are infants, as time evolves there
are different names for the stages we go through. Some of those stages
may include toddler, adolescent, teenager, adult, parent, and
grandparent.

All of these stages happen in time as a natural progression. With stocks

they too have a progression or lifecycle. Stocks go through four main
phases. They are the accumulation, markup, distribution, and
markdown.

In the same way that not everybody lives to see adulthood because of
sad early deaths or other people don't get to see fatherhood because
they never had a kid, not every stock will go through all the phases. If
they are healthy stocks and have the “right” movement then they
should go through all of these phases, but some stocks just get stuck in
an accumulation phase for example and never breakout.

Phase 1: Accumulation
The accumulation phase is the stage in a stock where large institutions
like mutual funds and banks start buying up large quantity of shares.
This accumulation phase can last for a long time. Depending on the
stock, the amount of shares available, and how many institutions want
the stock the accumulation phase may last from a few weeks to a few
years.

From my past experience I would say a couple of months to a year is a

healthy time frame for this time period. The reason is that large
institutions need a huge amount of shares. They cannot purchase
everything in one day because they would move the stock too much and
it would hurt their overall strategy.

Instead they accumulate stock slowly over a few months during

pullbacks and sell some on bounces. When they are ready to pull the
trigger they do an explosive stage of buying and this is where the stock
pops taking it into the markup phase.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

TSLA Tesla Motors inc. Nasdaq oS

SPSecckCharrncom
20-3un-20 0 Open 200 78 High 275.64 Low 208.20 Close 229.59 Volume 47.1m Chg +23 17 (+ 11.22%) «
;
GATSLA (WWieekly) 223.59

Accumulation Phase

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Weekly chart on Tesla showing the accumulation phase.

Phase 2: Markup
The markup phase starts when the stock starts breaking out of the
accumulation phase. This means most of the big institutions have
completed their accumulation of the stock and it’s ready for prime time.

The markup phase is when a stock starts climbing higher. It starts

making higher highs and higher lows. This is the opportunity that you
want to be patient and wait for. You want to enter right when the
markup stage begins so you can capture the accelerated run.

It is during the markup phase where you see certain stocks skyrocket
quickly. Some stocks have a steady momentum to the upside which is
healthier. Other stocks have an accelerated growth like move.
Typically the stocks that move up quickly are due for major pullbacks
eventually.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

TSLA Peay,Motors inc. Nasdaq SS

20-Jun-2041 ne StackChaitscom
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Weekly chart on Tesla showing the markup phase.

Phase 3: Distribution
When the markup phase ends, the distribution phase begins. A stock
will start to consolidate or prepare itself for a selloff due to a huge
overhead supply. This is because everybody that wanted to get in the
stock is in it or at least most of them.

The major institutions may still have a large supply of stock to get rid
of. They want to get rid of it quickly without taking the stock down.
Similar to the accumulation phase and they can't get rid of everything
in one day — so it takes this distribution phase for them to exit and
liquidate their position.

They slowly start selling off shares and if the stock dips too low they
will buy back quite a few shares to pop the stock higher. This makes
the retail or individual investors think that the stock is going higher
when in reality that’s not the case.

When the stock pops in the distribution phase the big institutions
continue selling more stock. Eventually there comes a point where
most big institutions are out of the majority of their positions and then
they start dumping the stock. This then takes us into the markdown
phase.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

eStock Charts cos

AA Alcoa, Inc. nyse
S-Ost2008 Open 12.68 High 12.93 Low 11.67 Close 12.74 Volume 1248 Chg+028 (*2.28%) «
(SA (Monthy) 12.785 Ger)

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Monthly chart on Alcoa showing the distribution phase.

Phase 4: Markdown
The markdown phase is where most of the people that got in the stock
during the accumulation and markup phase start dumping the stock
heavily. The markdown phase is the last phase of the stock cycle and
is typically spotted when prices start making lower highs and no new
highs.

Certain institutions that did not liquidate their position in the

distribution phase may be late to the party and get caught in the
markdown phase. This can happen if you had a huge position from the
beginning.

This markdown phase is typically where individual investors get

caught since they probably purchased stock in the distribution stage
after the stock already ran up.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

AA Alcoa, Inc. NYSE @ StechkChart som

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Monthly chart on Alcoa showing the markdown phase.

Here is an Alcoa chart showing all four phases in a quarterly (multi-

year) perspective. Remember that you can have these four phases of a
stock on a daily chart, weekly chart, yearly chart or even intraday. The
longer the time span, the stronger the support and resistance levels.
However just know that you can have phases on other time frames even
though the time period below is quarterly because some companies
have tighter consolidation periods.

A& Alcoa, inc. NYSE *BstockChartscom

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

READING A STOCK QUOTE (LEVEL 1)

Reading a stock quote is essential to understand the different
components prior to purchasing a stock. By the time you start trading,
reading a stock quote will be second nature and as easy as reading the
price for a loaf of bread.

Although reading a stock quote is more difficult than reading the price
of bread, you can attain more data from a stock quote. There are a
variety of components ranging from how the stock has performed over
the last year such as the 52 week high and low to the beta of the stock
which refers to the volatility of the stock or how violent the moves are
on any given day.

There are many different fields and information. Take a look at the
following table to get an idea of the different fields that you will find
on a stock quote.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Field Value Poscnten

Gea! VZ Licker, symbol of

0 theVet

ce Verizon . Chae name

Price 48.15 Pee helari

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Change ©0.
00)
4 Radian ab ke PTET
tee
Time 10:54 AM
sabe:7sfal ie oe Wo ee Pe
Range 48.01— 48.34

52 dived 45.08 — 53.67 Range of prices in the last 52 weeks

Open 48.32 Stock price opened at

Vol Avg
/ 3.44M / 22.45M
~ Volume for the day and average daily
volume
Market capitalization iisthe total value —
Mkt Cap 199.40B of the issued shares. Share price times
..the number of shares outstanding.
P/E 10.77 Price to
P pecameaee, Ratio

Div/yield 0.53 / 4.40 Dividend andoes yieldpaid

EPS 4.47 ees per share

pleres. 4.14B Shares outstanding

~The measure of volatility compared to _
sea 0.36
_ theoverall markets. fee go
Inst. Own 46% Institutional Ownership

Here is an actual example from a real stock quote of Verizon using

Google finance. Notice how the items below match to the ones I
mentioned in the above table.

Although the information is arranged differently, essentially it is the

same information.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Verizon Communications Inc. (NYSE:VZ)

Range 48.01 - 48.34 Div/yieid 0.53/4.40

48 . 1 5 52 week 45.08 - 53.67 EPS 4.47
Open 48.32 Shares 4.14B
-0.01 (-0.02%) — vol/Avg.3.4410/22.45M Beta 0.36
Real-time: 10:54AM EDT Mit cap 199.40B inst. own 46%
NYSE real-time data - Disclaimer P/E 10.77
Currency in USD

Here is what a quote looks like from Yahoo finance. Very similar to
Google finance, but of course arranged slightly differently.

| Verizon Communications Inc. (VZ} -syss & Fotew

48.05 0.11 {0.23%} 12:51PM EDT -NYSE Real Time Price

Breviolose: 48.16 Day's Range 47.98 - 48.34 Ra ie: Communications inc, Com —
4826
» Open A833 Bawk Range A508 - 53.87
iy 48.20
Bid: 48.08 x 2200 Volume: 6,281,724 ( ee ae : ag38
Ask 48.08 x 2000 Avg Val Qn5 43,467,600 sf 4 48:10
254 Ao : EyH 48.95
ly Target Est: §3.72 Market Gap: 198.988
B00
Beta: 0.04 P/E (ite): 10.74 DH NSTRRt at o6
Next Eamings Date 22~Jul-1a ERS (ity: 4.48 am pm oe ate pane

Civ & ¥isid. 2.42 (4.49%) 4d Shes ty YY me

SUSOMES Hiatt
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Chapter 4.
THE TRADER IN YOU

TYPES OF TRADERS
Before you become and transform into your own trader you need to
know the path that you want to take. You'll need to know what type of
trader you want to become so that way you know the skills that you
need to attain.

In theory, it’s similar to becoming a professional basketball player. You

may become a great basketball player, but you may be more suited as
a point guard. Or you may be better suited to play center. Regardless
of what position you play, you are still a professional basketball player
no matter which role and duties you have in the game.

When it comes to trading there are a few roles or types of trader that
you can become. Each one has their advantages and disadvantages. I
think the type of trader you become will be based on your personality,
risk tolerance, and future goals. Everyone is different so the style you
like, someone else may hate.

Let’s go over them so you can better understand the different types of
traders there are and experiment with your own trading personality.

Day Trader: A day trader is a person who holds a position for one day
or less. This can be for the full 6 % hours since there is 6 % hours ina
trading day or it could be for 10 minutes.

Swing Trader: A swing trader will hold a stock for multiple days. They
may hold a position from a few days to a few months.

Long Term Investor: Long term investors are usually the people that
hold all their stock for one year or longer. Some of these people hold

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

their stock for just a few years, others a few decades, and some for life
allowing their children to cash out their stock positions.

As you can see, the holding time between each type of trader is
different. You have certain traders that are more active such as day
traders and others who are more hands-off like long-term investors.

Depending on how active you want to be in the markets will depend on

the type of trader that you want to be.

Commissions:
Commissions are just part of life. It’s like paying to fill up your car with
gas. You can’t get away without paying them. For every trade that you
do, you have to pay brokerage fees and of course the more trades that
you do, the more you will be paying in commissions.

If you are a day trader, you will pay a large percentage of your profits
in commissions. Commissions are similar to having overhead expenses
when running a business. The less you trade, the less you will have to
pay commissions. A long-term investor may only pay $200 in fees over
their lifetime since they may only trade 20 times in their life.

A swing trader on the other hand will have more commission fees than
a long-term investor. Depending on how active of the swing trader you
are you may be making 50 or 100 trades per year. This would mean
you have a few hundred dollars in commissions per year.

If you are day trader the number of trades you do amplifies and
therefore your fees are exponentially higher. If you are an active day
trader you may pay a few hundred dollars in fees per week.

Overnight Risk:
Overnight risk is a risk that you incur if you hold the position for longer
than a day. Day traders do not have this risk since they close their
position by the end of the day. It’s one of the advantages of being a day
trader. You won't have a stock that gaps down on you taking away a
huge percentage of your gains.

If you are a swing trader or a long-term investor you will have

Le
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

overnight risk. When traders hold their positions for more than one
day, they do have the possibility of a stock gapping on them. The
gapping can be in your benefit to the upside or it can hurt you and move
to the downside.

Since we are always concerned about risk and money management you
have to be aware that there is overnight risk if you plan to hold the
stock. If you are the type of person that cannot sleep at night wondering
what the next day will bring, then it’s probably better you stick to day
trading or trade smaller quantities until you become more comfortable.

One of the worst things that you can do to yourself is add stress to your
life. You don’t want to be worried about your investments for positions
while you are grilling or swimming with your kids. You want to enjoy
that time. If you are stressed about your investment or your stocks
when you go to bed then you are probably putting on too large of a
position or trading may not be for you.

Compounding:
Compounding is when you reinvest the earnings you make from your
profits to generate additional earnings. This sometimes can be referred
to as compound interest when you talk about investing in bank CD’s,
but for our purpose we will just call it compounding.

With some investments such as real estate, compounding happens only

after you sell the investment house and purchase another house with
your profits which you also sell. The turnover on real estate is slower
than some other investments. It can take a few years for you to see
your investment profits from the first real estate deal.

If you are quicker at the real estate game you may have 30 homes in
your lifetime, but it’s not a fast turn over compared to a stamp or a gold
coin collector. Those items are much smaller they can be turned over
quicker in most cases unless you are dealing with very rare items.

When we apply this to stocks, if you are a day trader you have a greater
turnover on your inventory or your investments. You can then use
those profits from the previous day for investing more money into
another stock. This helps you compound your earnings quicker.

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 Start Trading Stocks: Beginners Guide te Trading on the Stock Market

For a swing trader you may have to wait a few weeks, a few months,
or if you are a long-term investor a few years to use those earnings and
reinvest them. The compounding factor is slower for a swing trader or
a long-term investor than it is for a day trader.

I wouldn’t put all of my decision power on the type of trader you want
to be based on compounding. Like I said before, if your personality
doesn’t match the style of trading you are attempting then it isn’t the
right path or style for you.

Of course it’s nice to have a faster compounding rate, but it isn’t the
end of the world if your money compounds once a month versus once
every two weeks. The important point is to stay profitable and be
consistent.

Mental Attention:
As we start getting into the psychology aspect for the different types of
traders this is where you can see a large difference in how it will affect
your lifestyle. A person who is active in the market like a day trader
needs to have a focused mindset while they are trading. This is because
you are more vulnerable to micro-movements in the market when you
are a day trader.

If youre a day trader, you'll need to be extremely focused on your

trading screens and you won't be able to leave your desk for long. You
will need to hone your attention on your trades, constantly listen for
alerts, and at certain times you may even have to be quick to use the
restroom. This is because any small shift in your stock price could
affect your profit and loss dramatically. The speed of your response is
essential if conditions change.

Depending on how attentive and focused you want to be in the markets

will depend in part the type of trader that you are. The more active you
want to be, the more mental attention will be required.

If you want to check your positions once a week and not worry about it,
then you may want to be a long-term investor. On the other hand if you
don’t mind checking your positions a few times a day then you could be
a swing trader. If you want to be a day trader then you need to be at

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

the computer screens most of the day.

Personality Type:
In the end the mental focus you want and willing to give to trading will
determine your personality type. A person with an A-type personality
may want to be a very active trader. They’re a littlebit more hands on
and move very quickly and rapidly throughout their day. A-type
personality people are better suited for day tradingbecause they want
to be involved more and need to have that control more frequently.

Someone who is a B-type personality is one who is a little calmer. They

like to flow through the day and are not as fastidious in their day-to-
day life. The B-type personality people are better suited for swing
trading or long-term investing.

Who Makes More and a Better Life?

As we get further into our discussion between the different types of
traders you may be leaning towards one or the other by now. The
decision that you make is going to be specific to you, your personality,
your future outlook, and your risk tolerance.

Trying to force someone to become a long term investor if they are

created to be a day trader is exceptionally difficult because the persona
does not match the person — but it doesn’t mean it’s not possible to
retain yourself.

One of the major decisions that may make you lean towards one side
or the other will be depending on who makes more money and who has
a better lifestyle. From my experience, I have seen successful swing
traders that can hold positions for months and make more money than
day traders. In addition, typically swing traders are more relaxed than
day traders since they don’t have to worry about every single tick.

However, it is important to recognize that if you are not created to be

a great swing trader and are better fitted for day trading, then you
should take that route or you will have to work exceptionally hard to
make changes to yourself, your mindset, and be uncomfortable until
your habits and way of thinking is transformed.

entbe
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

This process can be very difficult because most people do not want to
change. If youre not interested in changing and don’t like to be
uncomfortable then you will be doing what you are created to do even
though it may not be the outcome that you want — otherwise you may
fail miserably.

Here is a breakdown of the 3 types of traders that we discussed. Keep

in mind that there are hybrids of these, meaning that you can have a
person who day trades during certain market conditions and swing
trades during other market conditions. You may have a person who is
a swing trader, but a very extended and long-term swing trader. On
the other hand, you may have a swing trader who holds a position just
for a few days making them a short-term swing trader.

So when looking at this chart remember that there’s more sub-

categories in between each column. Don’t think of it too linearly, but
have an open mind.

: Long Term
Category Day Trader Swing Trader fivenede

: : Less than 6.5 2+ Daystoa 12+ Months to

Hoidisieniiess hours Few Months Multiple Years

Overnight Risk No Risk Have Risk Have Risk Daily

‘em Most
Commissions Repeat Less Expensive Cheapest

Compounding Fast Normal Slow

Mental Highly
Attention Focused pecuss Relaxed

Who Makes
More? It Depends

Who Hasa
Better Life? It Depends
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

UNDERSTANDING TRADING SYSTEMS

In the world of trading you'll often hear more about trading rules than
you do about trading systems. So many traders will tell you that you
need to develop rules, that it’s your rules that will get you through
trading, and that it’s your rules that will keep you profitable.

This is all true — unfortunately you need to have a base to start with
first. That base should be your trading system. Without a trading
system you have no process for making a profit.

Think of a trading system like the process of making ice cream in a

business. There are certain steps that you go through and specific
ingredients that are needed to make ice cream. If you don’t have those
ingredients then you can make something else, but it probably won't
be ice cream.

A stock trading system could be as simple as entering a trade once it

crosses a moving average on the 50 day and exiting that stock once it
gets under the 50 day. Another system could be that you enter a stock
when it starts making 52-week highs and then trail the stock with a
two dollar stop from its highest highs as it continues moving higher.

You can create any system you like. We will go over some more system
examples a little bit later, but you are probably wondering, “Why would
you want a system and what are the benefits?” Here are a few major
benefits that I see with systems:

e consistency
e time-tested
e eliminates emotion
e eliminates decision-making
e manages risk
e better money management

Consistency
When you have a system in place you will have a certain percentage of
consistency. You may be consistent 30% of the time, which may not be
something that you like, but you will know your consistency rate to

Je,
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

make improvements. Then you can aim for 60%, 70%, 80% consistency
or even higher.

The consistency rate will allow you to see problems in your process and
your system. The goal will be to make improvements to the system to
have a higher consistency, but you need to be honest with yourself
where you are so that you can make improvements.

Time-Tested
After testing your system for some time you will know the percentage
of success on your system. You may not like the percentage that you
get, but you will have a read on your percentage. The longer that you
test your system, the more accurate the percentage of success will be.

Testing your system over years will help you fine-tune your system to
various market conditions. It may make your system a little more
complicated if you start taking into account bear markets and bullish
markets, but it will allow you to be flexible to the changes that come
with the market.

Eliminates Emotion
One major flaw that most humans have with trading is the emotional
aspect. Emotions get in the way and skew our decision-making process.
As humans we tend to make our decisions partly due to how we feel.

There may be days where you feel great and you might make certain
decisions. Then there may be days where you feel crummy and you'll
make decisions completely differently from before in similar
circumstances. There won't be much consistency in your trading
success rate if you are trading off your feelings as your feelings change
daily.

With a system your emotions get eliminated since things are

systematic. There’s a process to making your trading decisions. No
more will you be the victim of your own emotions.

Eliminates Decision-Making Process

The other great benefits that you will receive when you create a system

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is that it eliminates your decision-making process. We are not equipped

to make thousands of choices daily in our lives.

Making choices takes a great deal of time, from the time that the
signals fire off in your brain, to the time that your body reacts, and
finally when you take action and the task is complete.

The more efficient you can make your decision-making process and cut
that time down, the better off you will be. You will be able to enter
trades quicker, with less stress, and work less if you know exactly when
to pull the trigger — whether that’s to buy something or to sell
something quickly.

Manage Risk
Most of the time when we get into trading as beginners we tend to focus
on our profits and the things we can buy with our profits. We rarely
look at our risk in the trade.

When you create a system, it forces you to look at your risk

management and potential loss. Your system is based on factual math
so long as your numbers are correct. With this in mind you will be able
to see and interpret what’s happening with your system whether it’s
failing you or it’s successful.

Money Management
Systems can help you make personal money management decisions. In
the market it’s all about risk and money management. If you don’t have
these things down, how do you expect to make a profit?

Knowing when to take money out or when to put money in is a key

component to trading stocks. You need to know when to use leverage,
when to scale in, and how to scale out. All of these concepts are related
to money management and you need to know how to work with money
if you are trading stocks.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

CREATING YOUR SYSTEM

Finding a System:
Before we get into creating your own system, you need to understand
that to find the system takes time, energy, and money. It’s like finding
a good relationship. What works for you may change over time just like
your friendship with people. You need to believe in your system and
trust it. Adjustments will need to be made over time as you work
through problems.

Just like in relationships hopping back and forth is really a stupid

thing to do. The same thing with system hopping. Jumping from one
system to another hoping to find a golden system does not work well
for your money. You need to live with your system for a while to see
what you like, what works, and make some adjustments to see its full
potential.

System Types:
You should make your trade choices based on price, action and
behavior, and the volume. Not emotions or things that cannot be found
the next time. Your stops should be figured out before you enter into
the trade. I say this because once you enter a trade, most people get too
emotional and move their stops.

Your exits should be based on key support and resistance levels not on
your dollar amount of loss — meaning base your stops on the technical.
Write out your system and frame it next to your desk so you can always
have a reminder.

In general, there are two types of systems. Those types are:

e Trend System: looks at how the market is moving

e Pattern System: focuses on specific happenings or occurrences

Trend Systems:
A trend system focuses on following the trend of the market or the
stock. Depending on the state of the market it could even be a

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countertrend system. This would mean that your system goes against
what the trend is doing.

You can easily find the trend of your stock or the market on a 50 day
or 100 day moving average. When looking at these lines, you can see if
the line is moving to the upside or to the downside. I like to always say
if you look at what’s happening on the left, then that’s what will
typically happen on the right.

Pattern systems are slightly different then trend systems. Pattern

systems focus on specific events or happenings to the stock.

Your pattern system could be set up where it would run based on

technical or fundamental data. Here are some examples of pattern
systems:

e Astock opens five times in a row to the upside so you enter

the trade.
e Astock has a close of 3% or higher in a single day so you
enter the trade
e The FDA approves a drug, so you enter the stock
e Earnings are $0.50+ above the original estimate so you decide
to enter the stock.
e Itcould be a mix or combination of the above such as for every
1,000 shares purchased an option PUT for protection is
purchased.

The possibilities are endless. These are just some examples that you
could use. The above were just ideas to get you to understand a pattern
system. Your overall system may be more complicated such as:

When a stock opens up 38x in a row to the upside I will enter 200 shares
long with a $2 stop. If it continues on the 4‘ day, I will add another
100 shares trailing my stop to always $2 from the highs. This way if
the stock pulls back, I will only risk $2 from its maximum high.

Remember that it’s not whether a system is a pattern system or a trend

system to create your own system. The ideas above are concepts to get
you started. You can take this subject deeper. I just wanted you to be
aware of how you could start thinking about your trades and to give

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you some insight and knowledge behind systems so that you can start
playing with these ideas.

Issues with Systems

Systems are not perfect. There will always be problems and issues with
systems. Remember the 40-60 rule? Nothing will work all of the time!

Assumptions: People assume that systems will work 100% of the time
and this is not true. You cannot assume that something will work a
certain percentage of time until you’ve done real testing. Paper money
is a great way to test your system, but it will skew your results since
buying or selling real stock will impact other people to buy and sell
their stock.

Time Spans: The longer you test your system, the more accurate your
percentage of success will be. To have the most accurate system you
need to apply it to a long timeframe. You need to also apply it to the
right market conditions in which it was designed for.

You cannot apply a daily trading system to a weekly chart. In the same
context you can’t apply a weekly system to a 10 minute intraday chart
and expect to get the same results.

Unexpected Things: Unexpected things do happen in the stock market

and it’s possible that your system may not work during these moments
or events. Be aware of things like dividends and stock splits because
they do happen and they can impact your system depending on the type
of system you created.

You will either have to make adjustments to your system during these
events or not trade during this time period.

Multiple Systems: Not every system will work in every single market
condition. You may want to have multiple systems at your disposal.
For example, one system may work great for bullish markets and
another may be great for bearish markets.

You may even choose to split your systems into various stock brackets.
For example, high-end stocks above $200 a share would have a certain
system. Stocks that are less than $200 would use a different system.

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You could even create systems for choppy or trending markets as well
as long or short term investments. The sky’s the limit! What you don’t
want to do is create too many systems where it becomes unmanageable
or confusing for your to put on a trade.

Final Notes on Systems:

Systems won't solve all of your trading problems from the start. The
greatest thing you want from any system is consistency. Whether it’s a
30%, 50%, or 75% consistency, you want to know your numbers so that
you can make adjustments.

If you have a low win ratio it’s okay so long as your payoff ratio is a few
times higher. Without knowing your consistency, you are trading from
the gut or your feelings — in other words, gambling. Stick to a
systematic approach as it will stand the test of time over your trading
career.

Remember that your trading system is your best friend. It will bring
you a lifetime of great companionship and consistent profits if you
spend the time playing with it, nurturing it, understanding it, resect
it, and believe in it.

THE POWER OF RULES

One of the best ways to keep our children in line is to have common
rules that apply in various situations. Even if you don’t have children
you probably remember from your childhood how rules kept you in
order.

As we grow older and become adults, we still have rules that we must
obey, such as red lights mean to stop in traffic. Without these rules the
world would be chaotic. People would do what they felt like doing, and
many of us would have tension with one another. Not to mention things
would not be as efficient in our world for the greater good.

In the stock market there are certain rules that have been created by
the SEC (Securities Exchange Commission) that everyone must follow.
However, these rules and regulations do not guarantee a profitable

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outcome. These rules are strictly there to ensure people stay in line and
fraud is not committed.

There are no rules that will lead you to profitability and that’s the
beauty behind starting with a clean page is that you can create your
own rules that work for yourself. I have to be honest: one of the hardest
things to do as a human is to stay disciplined to the things that we are
accounting ourselves for. In part, one of the reasons why many traders
fail is because they don’t have the discipline. The rules that you set up
for yourself can mean the difference between major success and
catastrophic failure.

So what exactly are rules? If we think of the stock market as a game

we can think of rules as things to keep us in line and manage youasa
trader. A trading system is your strategy for winning the game
whereas the rules define what you can and can’t do within the game of
stock trading. They are a guide to working within your system and
making yourself a better and more profitable trader.

In the regular world we have all kinds of rules, but not all of them are
followed 100% of the time. When you create your own rules,
understand that you may want to break them. Sometimes this is a good
idea as you progress and become better. Other times you will suffer a
huge consequence for breaking your rules. You need to realize when
it’s time to update your rules versus time to break the rules.

For example, a stop sign in the middle of a desert where you can see
360° around may not make sense and it’s possible that you can break
the rule and save yourself a bit of time. On the other hand a stop sign
in a busy New York intersection can have catastrophic and deadly
consequences if you run through it and ignore it.

Here are some sample rules to get you started. Feel free to take these
rules and modify them to your liking.

Sample Rule #1: No trading once the day loss exceeds

Sample Rule #2: No more than trades per day. If you are trading
over 10 or 15 trades per day, you are probably over trading. It’s possible
that commissions are eating you up as well.

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Sample Rule #3: No trading the same stock on the same day after
taking a loss. If you are not reading the stock correctly — you should
stop trading it until it stabilizes.

Sample Rule #4: No trading of pink sheets or OTC (over the counter)
stocks. Stay away from crappy companies — why trade junk — they are
cheap for a reason.

Sample Rule #5: Set monthly and yearly goals. Never look at daily
fluctuations. Each day the market is different — you will have wins and
losses, but as long as you are profitable in the long-term — that is the
key.

Sample Rule #6: Never trade earnings plays or events. You never know
where things will head after earnings, so it’s best to close out at least
90% of your position or all of it prior to an earnings release! Sometimes
stocks will sell off even if the earnings are great.

Sample Rule #7: Always have a trading plan before entering a trade. If
you go in with many emotions or because it looks good — you should
define why it looks good. When will you exit or when will you take
profits? This all comes down to having a trading system in place.

Sample Rule #8: Never chase bouncers, gaps, or stocks up 10%. Stocks
gap up all the time. Don’t chase stocks if they gapped up. There are
other trades out there — be patient for the right setups.

Sample Rule #9: No trading the first 30 minutes of the market unless
there is a surge in volume and a break on resistance on a stock you
were watching. The first 30 minutes is the jungle. Wait until stocks
break out and move on their own — this is safer especially for beginners.

Sample Rule #10: Never let a winning trade turn into a loser. If you
are already profitable and you are not taking profits then you are
waiting for disasters. Stocks move up and down often. You only have
to be right a small percentage. Then let the stock run. Don’t let a
profitable trade that you are already up a significant amount turn into
a major losing trade.

Take a moment to create some trading rules of your own. You can use
the rules above as a guide to creating your own rules. As you trade
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

more frequently and look at the mistakes that you make, you should
adjust your rules accordingly so that you don’t make the same mistakes
again.

This means that you need to become a rule follower and not a rule
breaker if you expect to be profitable in this business. If you are the
type of person that likes to break rules then you will probably break
your own stock trading rules. As a warning — if this happens and you
start breaking your own stock trading rules that you personally create
then chances are you will fail in this business!

So follow the rules and you and your bank account will be happier.

HAVING THE RIGHT TAX MENTALITY

The mentality of certain people really fascinates me at times. I've ran
into a few retired people in my days, some being extremely wealthy
and others average. I find it interesting that some of the extremely
wealthy people that have $100,000 Mercedes or a multi-million dollar
home struggle to put food on the table. Some even pinch for the lowest
grade food products while they shop.

This baffles me because it's not congruent to their situation. In the

meantime while they're struggling to pick out food every single week
at a discount grocery store, they drive their with a $100,000 car. The
ride to get there is nice, but the headaches make it not worth the
hassle. However, that's my perspective and everyone has their own
view. You might be thinking the reason they can afford that Mercedes
is because they do go and hunt for bargains. Although this might be
true, I personally prefer not to have headaches.

If you can see how this mentality affects you from a bigger picture you
get the actual or true view of something. It allows you to decide if you
want the shopping and budgeting hassles every single week to drive a
$100,000 car or you can drive something that's average, but be
headache-free.

What I'm getting at is how this relates to the tax mentality among
stock traders. I often see many traders focusing on the taxes that will

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come next year because of their capital gains. People start making
decisions about holding on to positions for a longer time because of the
tax implications.

Let me simplify this tax thing for you with stocks. If you have a
standard margin account you will be taxed on your gains. If you hold
your stock positions for less than one year, then you will be taxed a
short-term capital gain. However if you are able to hold your stocks for
a longer time period such as one year or more, then it is considered a
long-term capital gain and you will be taxed less than a short term
capital gain.

Of course the tax laws change from year to year as well as the
percentage you will be paying. These kinds of questions would be better
off asking your accountant on how you should structure your
investments or portfolios for tax reasons.

What I want you to understand is that you shouldn't focus and make
your trading decisions based on tax implications. Always make your
trade decisions based on the stock and your trade. Instead what people
do is say, “Well let me see if I can hold on to this position for another
two months and pay less in taxes.” The problem with this mindset is
that the position starts heading south or much lower in the next month
and they end up losing far more on their position.

Rather than worrying about the taxes, focus on managing your

position. The more profits that you have the more taxes you will pay
and this is where you want to get to.

You want to have huge profits so that you pay incredible amount of
taxes. Okay, that’s probably not the best way to phrase it, but if you
start thinking that you want to pay more taxes, you'll start worrying
less about taxes and more about your position and your trades because
the more taxes that you pay, the more profits that you'll have.

As you start trading, stop worrying about tax implications and

changing your strategy to help your tax situation. Instead, focus on
making the best trades possible from your system and your strategy.
In the end, this will result in great profits. With greater profits come
bigger taxes, but who cares if you are making great money!

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JOURNALING TO SEE YOURSELF

Journaling is one of the best ways to improve your trading. When you
journal you write down what happens from each trade. I’m not talking
about writing down which stock you traded on what day along with
your profit and loss.

I'm talking about writing down exactly what's going on when you take
that trade. Why are you taking the trade that you are? What signals
are you seeing when you take that trade? How do you feel right before
you put on a position? Are you feeling confident, scared, or impartial?

All these different things will help you figure out how to improve in the
stock market. By writing these things down in a journal you are able
to see where there could be improvements. The whole purpose behind
a journal is to self-reflect. If you write down what's going on before you
place the trade, while the trade is going on, and the end result after
the trade, but you don't look back at your journal then it’s of no use to
you. You might as well not keep a journal!

On the other hand, if you're able to self-reflect and figure out where the
problem lies or where you can improve, it's only going to benefit you.

Now the only way that you can improve yourself is to be honest about
what's happening with you. You have to be able to see yourself from an
outer perspective. I like to call this as observing ego.

Observing ego allows you to see yourself from a third person point of
view. I know most people will say that they can do that and it's
probably true, but unfortunately they are usually only half-honest with
themselves.

Humans love to distort the fact of what's true or not. We also like to
generalize things and put the blame elsewhere. It is human nature to
not want to admit to our faults. This is one of the major reasons why
many traders fail because it goes against human nature.

Far too many people just don't want to be honest with themselves
saying that they failed at so much. They don't want to look at where
their mistakes are because we live in this fantasy world thinking that

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we are great. And you are great — it's just it's going to take some time
to become a great trader. It doesn't happen overnight!

So if you're convinced that you're ready to keep a journal, what do you

keep in it? I think as you get better you will adjust the journal to fit to
your liking. The reason for this is that you will create your own style,
your own system, and you will know what you need to self-reflect. Until
that point I have created a trading Journal that you can get if you
would like me to get you started.

Just search for “My Trading Journal: Your Workbook to Tracking and
Managing Your Stock Trades” on Amazon and you will find it.

If you want to create your own, here are some things that you can
record and track.

e Time and Date e Total Weekly Profit

e Ticker e Account Total
Entry Win Ratio
Stop Commission Ratio
Shares Largest Winner
Total Cost Largest Loser
Fees Average Winner
Net Profit Average Loser
Personal Notes Payoff Ratio (Avg Winner /
# of Weekly Trades Avg Loser)
# of Wins Total % of Profit / Loss
# of Losses Emotions before the trade
# of Scratch Trades Emotions during the trade
Gross Cost Emotions after the trade
Weekly Fees

You don't have to track every single thing. You just have to track the
things that matter to you most or the thing that you would like to work
on and get better at.

Personally, I like tracking things in a regular notebook with pen and

paper as this helps keep my screens clear while I'm trading. It is much
quicker for me to have my notebook right next to my desk, open it up,

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record my information, and be done with it.

If I have to constantly remember to open up a certain file or go to some

online collaboration software, it's just too much work. I find that if I
take this approach, I normally forget about tracking and recording the
information within a few weeks.

It's up to you whether you take an online approach or do it manually.

This is just what I found from my own personal experience.

Regardless of which approach you take to tracking, recording your

trades, and creating your journal the important part is to have one so
that you can become a better trader. The journal is only there to help
you — so have one and take at least one day per month to self-reflect
over your notes!

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Chapter 5:
STAYING CAREFUL

Buying and Selling

I would like to discuss some basic terms and lingo because the
terminology that is used in the market is different than what an
ordinary person would use to discuss the market for trading stocks. As
a trader there are certain terms that may be better suited to discuss
certain positions or trading strategies.

First off, when we talk about buying and selling stocks the term:

Buy: purchasing a certain equity. Of course, an equity can be a stock,

bond, commodity, options, Forex, mutual funds, etc. This usually adds
a positive amount of shares to your account.

Sell: selling an equity, or getting rid of something. Usually removes or

subtracts the quantity of shares from your account.

Short Selling
Short selling might be confusing to people that have limited experience
in the market because it is not commonly used in the real world. Short
selling is the concept of selling something even when you don't have it.

Think of this as you going to a retailer and making a deal with them
saying that you will sell them 200 laptops for $500 each ($100,000
deal). You shake on the deal, get paid (or at least a deposit), and now
you are heading to your manufacturer to pick up and deliver the
laptops.

As it stands currently you've sold 200 laptops to a retailer, but you

haven't delivered yet. You will get paid $100,000, but you are SHORT
200 laptops and you better deliver or you will be in big trouble.

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When you go talk to your source about delivering the laptops you notice
that they hiked their price from $250 each (which would have given
you $300 profit per laptop) to now $700 per laptop! This means that
you will lose $200 for every laptop you sell to the retailer!

In this case you have to bite the bullet on your profits and take a hit.
Rather than making money, you lost money on the deal. Since you have
to deliver 200 laptops at $700 each it will cost you $140,000 even
though you only make $100,000 — giving you a $40,000 loss!

This is how short selling works. When you are SHORT something that
means you have to deliver it. If the price of the laptops went down you
would have made even more profit. For example, if they lowered their
price from $250 to $200 each you would have made an extra $50 per
laptop than you originally projected.

In the markets you can short stocks. Meaning you can sell the stock to
someone even if you do not own the stock. As the stock heads lower you
can buy back your shares. You can even buy back half of your shares if
you want to reduce your risk. This is what people are referring to when
they are talking about shorting.

So rather than looking for upside in the stock you are looking for a
downside move in the stock. Typically this is done by barrowing shares
from your broker to sell to someone else. Not every stock can be shorted
easily. Some stocks that do not trade with great liquidity can be
difficult to borrow shares from your broker.

If you are looking to short major companies like an Amazon or Apple it

is easier because those stocks exchange hands frequently. There is an
abundance of shares and brokers have many shares that you can short.

Unfortunately, if you are trying to short a stock that trades low volume
such as a penny stock, you may have a hard time shorting the company
and there may not be many available shares to short.

There is one major risk when it comes to shorting that you need to be
aware of. When it comes to purchasing a stock, the maximum loss that
you can incur is limited to the stock going to zero. However with
shorting — you are betting that the stock will head lower. The fact is
you lose money when the stock goes higher. The problem is that a stock

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can technically go up to infinity or let’s just say $400 per share. This
can be a huge loss!!!

If you buy 500 shares of a $30 stock your cost and maximum loss if the
stock goes to zero is $15,000. However if you short 500 shares of a stock
at $30 and the stock goes to $400 per share your maximum loss is
$185,000 !

The math: $400 is the current stock price minus $30 where you shorted
it is $370. This is your price per share loss. $370 x 500 shares is a
$185,000 loss.

You can also do: $400 x 500 shares = $200,000 (what you sold at)
$30 x 500 shares = $15,000 (what you gained)
$200,000 - $15,000 = $185,000 (difference)

I could write a whole book about short selling. The topic is one that
requires extensive study. For now please understand that just like you
can buy stocks to the upside and sell them later to make a profit, you
can also do the same thing in the other direction: sell them to the short
side and buy them back later at a cheaper price.

Long and Short

Sometimes your trades on the stock market may become complex as
you start adding to your position or selling part of your position. To
avoid confusion the terms “long” and “short” are used to describe your
position in a specific stock or the market as a whole.

Let’s say you:

e Bought 800 shares of Apple

e Then sold 100 shares of Apple

If someone asks you what you think of Apple, you could say that you
just sold 100 shares of Apple. They then may think that you are “short”
Apple since you sold 100 shares. However the truth is you still have a
positive +700 shares of Apple and you are looking for Apple shares to
appreciate over time.

To avoid this confusion the terms “long” and “short” have been adopted

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by the market. If someone asks you about your opinion on a specific

stock you can say “I’m long the stock” or “I’m long 700 shares of AAPL.”
Meaning that your overall outlook for the company is positive. If you
were short the stock then you would say “I’m short the stock” or “I’m
500 shares short AAPL.”

Long and short do not have to apply to just a specific stock. It can be
used to talk about the overall market direction such as “I’m long the
market.”

These terms are great to avoid confusion as your trades become more
complex such as:

e Bought 10,000 shares of XYZ

e Sold 2,000 shares of XYZ
e Sold 2,000 shares of XYZ
e Bought 5,000 shares of XYZ
e Sold 2,000 shares of XYZ
e Sold 2,000 shares of XYZ

You can see that the overall weight in this position is that it’s looking
for stock appreciation, but depending when you ask the person you may
be misled if they told you “I sold 2,000 shares.”

So stick with the terms “long” and “short” when communicating to

others. To simplify things you can use these terms in your own personal
trading journal.

Bullish and Bearish

Just like “long” and “short” are used to describe your position in a
specific equity or stock, the term “bullish” and “bearish” are used to
describe your outlook on a stock.

You may have heard before that the stock market is a bull market or
that it’s a bear market. These are referring to the sentiment of the
market. This doesn’t refer to a particular position like “long” or “short.”
Instead it is just your outlook, opinion, or someone’s outlook for that
matter.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

The term bullish and bearish were derived from the ways the animals
attack. Bulls typically attack with their horns from low to high. So if a
stock is “bullish” or it is a “bull market” that means a positive market
or that the person believes the market is heading to the upside.

As for the bear, it attacks downward with its massive paws slicing
anything it can. So if the market is a “bear market” or “bearish” then
the market is negative and the person speaking about the market
believes it will head lower. Of course they can be speaking about a
specific stock as well.

WHAT ARE STOPS?

Stops while trading are probably one of your greatest assets to risk
management. The simple way to think of a stop is that it’s a level in
which you are prepared to exit your position. This can be a lower level
where you are planning to exit and take a loss. It can also be a level
that a stock reaches where you sell a part or all of your position to take
profits.

I like to think of stops as insurance areas. In the regular world you get
to set your own insurance policy for your health or car insurance. You
get to determine what risk you take and how much your policy will
cover if there is an accident.

In our daily living this can be difficult to determine since you can’t see
what may happen in life — there are virtually unlimited situations.
With the stock market it is easier since there are only a few things that
can happen with a stock. A stock can go up, it can go down, or it can
stay where it is.

There are of course some unforeseen events that do happen such as an

earnings surprise, company trouble, or a change in management.
However that doesn’t change the fact that the stock can only do one of
three things and that is either move up, down, or stay where it is.

Since we know these are the three outcomes of any stock or equity we
can create a risk profile for ourselves on every trade by saying that if a
stock goes to a certain level then we are completely out. These stops

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are known as mental stops.

Mental stops are triggers in your mind where you are going to get out
of your position in order to protect yourself. If you’ve recently entered
a position then your mental stop may be a few dollars below your entry
price. This would mean that you would take a loss in that position if
your stock hit your stop.

However if the stock continues to move up over time you may decide to
raise your stop above your entry price. Let’s say you purchase the stock
at $50 — your original stop was $47. Over time the stock moved to $56
so now you may decide to raise your stop to $54. This way if the stock
hits your stop at $54 you are still exiting with a nice profit.

You can continue raising your stop as the stock moves in your favor.
Then once it hits your stop you would get out. A stop that follows a
stock is known as a trailing stop. I like trailing stops because they
continue to raise the bar and keep you in a profitable position as the
stock moves in your favor.

Many times beginner traders that have had a profitable position allow
a stock to roll over and go negative on them. They continue to hold it
hoping the stock will reverse and continue higher. Even if the stock
goes to their original entry price they will still hold onto it because they
remember the earlier profits they had. This can be dangerous because
you are holding onto a losing position where things now might be
different.

If you have a stop, especially one that’s tight or close to the stock price
as it moved in your favor, then you would stay profitable.

That’s why it’s very critical that you have stops if you are trading.
Without stops you don’t know what you're willing to risk and how much
room you are willing to give a stock to retrace. All stocks retrace. No
stock will move in a straight upward pattern. The purpose behind the
stop is to protect your emotional capital, your profits, and to live
another day.

Stop Limit Order

Beyond just mental stops there are hard stops that you create with

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your broker or trading software. For example you can create a stop-
limit order which would instruct your software to submit a buy or sell
limit order (at the price you specify) when a certain price is triggered
or hit.

These types of orders have two main parts: the stop price and the limit
price. After the stock hits your specified stop price then the order is
active. Once the order is active you can be filled at your specific limit
price. It is at this point where you may get filled.

These types of orders are great for people that are not able to access a
computer or trading screen during the day. If you have a daytime job,
you can set up these orders on your stocks and if your requirements
are hit you will either enter a trade or exit a trade.

For example: you set a stop-limit order to Buy 100 shares of Boeing
(BA) if the stock starts breaking out at $130. Your goal is to pay
$130.50 or less. To setup this order you would set your stop price at
$130 and your limit to $130.50.

The moment Boeings stock hits $130 your limit order of $130.50 will
be active. Since the stock trades actively with millions of shares daily
it should be easy to get filled around the $130 mark. You could get filled
at 130.01 or 130.49. The thing that you are specifying is that you do
not want to pay more than $130.50.

If the stock did not have great liquidity or traded very few shares you
may have to have a larger limit like $131.50. This way if the stock
moves up very quickly your order would still be filled.

If the stock blasted through these levels quickly then your order may
not have a chance to get filled and you would miss out on your entry
price. That’s why you need to make sure your limit price gives you
enough cushion for the stock movement.

Stop Market Order

A stop-market order is similar to a stop-limit order in the sense that
you can do the same thing with the exception that when your trigger is
hit your order is created as a market order. This means that you could
be filled at a much higher priced, but you are more likely to get filled.

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So if you set your stop-market order at $130.00 on Boeing then once

the stock hits $130 your order will be active as a market order. Market
orders just look to get you filled regardless of price. This usually
happens almost instantly. Unfortunately, there is a downside because
if the stock continues to jump higher and higher, but you haven’t been
filled on your order, it’s still active as a market order. The stock could
jump to $139 and if you have a market order then you may get filled at
$139.

These types of orders can be dangerous if you do not understand how

market orders are processed. Usually if you want to get in quickly, or
are doing day trades then market orders are great. For stop-loss orders,
market orders are usually that great. I prefer to manually execute my
market orders and cancel it if I do not get filled quickly. However these
orders do have their purpose for certain types of people and certain
trades.

WHAT IS HEDGING?
You have probably heard the term “hedge”. Sometimes these terms can
get convoluted especially when professionals use them. Let me simplify
it for you: the term hedge means to offset your risk. Think of it like
adjusting or reducing your risk in your position or portfolio.

Imagine you own a bucket of gold that is sitting in your living room.
That’s a very solid investment, but it’s focused on gold. To hedge this
position you could buy a bucket of silver and place it in a bank vault
just in case your gold was stolen.

If you wanted to hedge your investments further you could have a few
thousand dollars in various currencies in a safety deposit box or
collectible stamps. This is the simple way to think about hedging. Once
you start looking at things multi-dimensionally, meaning relative to
time, you could hedge a position for as little as six months or for
multiple years. This is where things can become more complicated.

When it comes to stock trading there is an incredible amount of ways

to hedge; you just need to learn what strategy or system you like to

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implement.

For example, if you have a basket of stocks in your portfolio one way
you may want to hedge is to buy some gold or currency ETF’s. You may
also purchase some stock option puts as a temporary hedge.

Remember that the goal of hedging is to offset risk. These positions are
great to have if you have a large investment or multiple investments.
If you are aiming to reduce risk in just one position and you only trade
one stock at a time then typically there is no reason to hedge.

I say this because as commissions add up, you need to manage more
investments, and instead the cheaper route would be just to purchase
less shares of stock.

However if you are looking to hedge your stock portfolio position then
you can purchase some equities that move slightly different than
stocks like those Gold ETF’s, currency ETF’s, or even bonds.

If you are looking for a temporary hedge then one of the tools that I use
is to short sell a stock temporarily. It does require a bit more risk
management, but in my opinion this is my way to hedge. This method
can be a little more complicated to understand, but here is how it
works:

Let’s say you have 2,000 shares of Nike (NKE) and it’s been going up
for the last few months. You purchased it at $50 per share and now it’s
at $70. You notice the stock is rolling over and it appears it may go
lower for some time. Rather than buying a put contract (which may
expire over time). You could just “sell-short” 500 shares of your stock.

This would give you a 2,000 long position and a 500 share short
position. In theory you are only 1,500 long. Some brokers will not allow
you to have simulators long and short positions on the same stock.
Instead it would put you at 1,500 long so it is important for you to be
aware of how your broker handles things.

However you short sell 500 shares or minimize your position to 1,500
shares temporarily until the stock stabilizes and starts to continue its
appreciation.

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The way you hedge is up to you. Just remember the end goal is to
carefully watch your risk in your position so that if there is a sudden
shift with your investments that your position is still safe to your risk
tolerance level.

SHORT SQUEEZE
If you are selling a stock short, you need to be aware of short squeezes
because they can be dangerous especially if you don’t have firm stops!

A short squeeze occurs when a stock that is heavily shorted moves

sharply higher and forces other short-sellers to close their short
position (by buying the stock). When these short-sellers are forced and
squeezed out of their position to buy back their shares it accelerates
the stock price upward.

The situation that you have to be careful with short squeezes is that
they happen usually to stocks that are heavily shorted. This doesn’t
mean the stock had to be going down for a while, but just stocks that
have a large percentage of short-sellers.

Short squeezes can happen at any time in the stock. You can check how
heavily shorted a stock is by checking the percentage of short-sellers
or the amount of short interest. Some things to pay attention to about
shorting would include the days to cover a short and the percentage
increase or decrease of shorts recently. These little things would give
you clues if a short squeeze is on the horizon.

I could write a whole book about shorting in short squeezes so getting

into further detail about short squeezes is beyond the scope of this
book, but I did want you to understand the risks you could incur to your
position if you were shorting a stock, especially a stock that already
had a large short interest.

WHAT IS THE VIX?

The VIX is known as the Market Volatility Index. It is a measurement

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of the implied volatility of the S&P5 500 index options. Sometimes it is

referred to as the “fear index”.

The VIX gives an indication of the volatility (which is the magnitude

or the amount — not the direction) of change in the market over the
next 30 days. The more the market moves, the higher the VIX because
typically if the moves are violent then there is more fear.

VIX and the direction: The market moves fastest when the vix is
declining. When people are in a panic they just want to sell everything
imaginable and get out because they want to feel safe. When things are
cozy, the market is moving up steady, but it’s usually slower than to
the downside.

The VIX moves higher typically when the market is moving lower
because the speed of the market is faster when the market moves to
the downside. The VIX decreases typically when the market moves
higher. I use the word “typically” because the VIX can go up even if the
market is going up since it is a measure of implied volatility (and not
direction).

VIX and rules to live by: There are a few famous phrases regarding the
VIX that have become little rhymes to follow in the stock market
community. These phrases are not concrete stock market disciplines to
live by, but they are something to think about if the VIX gets
exceptionally low or high.

Phrase #1: “When the VIX is high it’s time to buy.” To explain this
phrase remember what usually happens to the market when the VIX
is high. If the VIX is high, the market is usually at lower levels. This
means it has been selling off for some time. If VIX is at extremely high
levels this means the market is overall at cheaper prices and it may be
a good time to step in since you are buying at a lower price than before.

Phrase #2: “When the VIX is low — look out below.” When the VIX is
low this usually implies that the market is not as fearful or scared.
People have been buying things for a while and the market has been
rising. This usually implies that the market is at higher levels since
fear is out of the markets and that means things could change quickly.
Remember that the market doesn’t go straight up and it moves in

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cycles. When the VIX is low, the market is at higher prices, which in
result states that things will probably turn around soon and a sell off
may be around the corner.

TRADING WITH MARGIN

If you’ve ever owned a house you know that to purchase it usually
requires a loan. Not everyone can afford a house and buy it outright
with cash. Even if you do have the cash you may want to leverage
someone else’s money if you can get a low enough percentage to flip the
house.

In the market we have financial instruments similar to loans called

margin. Margin is similar to a loan in which a counterparty (usually a
broker) will give you money to add more to your trade or position. You
normally have to have a certain amount in your brokerage account to
qualify and use margin.

Just like you pay interest for using a loan to purchase a house, the
same is true in the stock market. The broker won’t give you free money
to use leverage. You will have to pay some kind of interest or fee to use
margin and it will depend on your broker.

There are a few dangers behind using margin and one of those is that
you have to pay to use it. The other danger is that you may get a margin
call where you might be forced to sell your position because your
account falls below the minimum margin requirement. Having a
margin call will force you to take a loss on your position and liquidate
your stock and there is nothing you can do about it.

Understanding margin is not difficult. It’s about learning the rules

behind using margin at your broker and knowing what you can or can’t
do.

I would never recommend you use or trade stock on margin until you
have a proven risk and reward strategy. Once you have been trading
successfully for more than one year then you can start thinking about
using margin. Until then there is no reason to leverage and add more
into an investment because you don’t know enough to make a rational

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decision — you're just adding more risk to your trades without first
being consistent.

If you try to start trading on margin the first week or month that you
are trading stocks then it’s like trying to buy five businesses the first
time you try to open a business. You need to learn how to get the first
business running profitably and then you can start a second one.

Often beginners get excited about using margin because they feel they
can make more money or they can use additional money to make one
big trade that saves them from the previous losses that they had.

However you should stay away from margin as long as possible unless
the right conditions are in place. In fact, I rarely use margin with the
exception of a few times. When are those times?

It is when the market is in a solid bull market and has a good trend.
Earnings have been strong and the stocks I am looking to purchase are
ready to break out. When I have the right market conditions, the right
stocks, and I catch them at the right time then I may use margin on
my position. Other than that, there is no need to use margin since it
adds risk to your positions and gives you another thing to worry about.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

_ Chapter 6:
FUNDAMENTAL ANALYSIS

BASICS OF FUNDAMENTAL ANALYSIS

Before you get into stock picking and finding investments you need to
figure out how to pick your investments. There are a few different ways
to choose stocks. One of those ways is technical analysis and the other
being fundamental analysis — which is what we will go for in this
chapter.

Fundamental analysis can be a broad subject and can be confusing on

where to start. I want to give you guidance in this chapter about
fundamental analysis so that you can use it to your advantage before
you pick your stocks.

The whole concept behind fundamental analysis is to understand the

business that you are purchasing and the business model. Typically
this involves looking at company financials. In essence you are really
looking to see the profitability and the growth potential of the
company.

You can attain company financials at any time since they are public
records. The companies you will be investing in will be obligated to
provide these figures to you. Just about every publicly traded company
has their financial statements available for download and they are
easy to find.

When you download these financial statements you are looking at

things like the revenue, expenses, liabilities, and their current assets.
All these numbers and figures should tell you how well the company is
doing. However just because these financial statements are easy to
download does not mean they are easy to understand.

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Often times investors get confused when looking at balance sheets as

well as income statements. This is because they don’t understand
business and how business works. They may have ran a small mom-
and-pop business before, but not a large corporation. Large
corporations handle things slightly differently — that’s where the
confusion comes in.

In order to understand these financial statements you need to know

basic business practices. If you don’t know the basics behind business
and how business works, you may struggle with investing based on
fundamental analysis. Not to mention you will be investing on
knowledge that you are not qualified to understand.

If we were in a chemistry lab and I asked you to take two chemicals

from the table and mix them together, you may be preforming an action
you are not qualified to do. If you are not a chemist then you are
definitely out of your league.

Let’s say by accident you mixed Hydrogen Sulfide and Nitric Acid —
this will have catastrophic and explosive consequences. This is in
theory what people do when they invest in the stock market. They
perform an action that they are not qualified to perform.

So before you make investment decisions based on the company’s

fundamentals you need to make sure you understand how the company
functions.

You need to know how it’s performing based on the financial reports.
Earnings are a great place to focus on when looking at company data.
However if you want to dig deeper, learn to read the financial data. If
you don’t want to perform this task then it might be better for you to
focus your energy on technical analysis and becoming a technical
trader.

SIMPLIFIED INVESTMENT DESCISIONS BASED

ON THE COMPANY
I want to give you a few basic business concepts and ideas to think

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about. Once you start thinking about numbers and how businesses
operate, you will be able to apply these concepts to financial data. So
let’s dig into some word problems and business scenarios.

Car Business Example: (Simple Example)

e Overhead is $96,000/month
e They buy and sell 75 cars per month
e They making approximately $1,000 per car that costs less
than $15,000

Result: They make $75,000 per month since they sell 75 cars each
month at $1,000 profit each. Since their overhead (rent and expenses)
is $96,000 they lose $21,000 every single month! Not the greatest
business model is it?

They have slim margins making $1,000 per car (a big clunky thing that
depreciates over time). Transportation costs are expensive! You need
to have the land or space to hold the car. If it gets damaged the repairs
are not always cheap. It’s a tough business. After looking at the
company financials and seeing they lose $21,000 a month, this just
sucks!

Fitness Classes Business Example: (Advanced Example)

e They charge $100 per class and you have 3 classes per hour.
e They make $300 per hour.
e They are currently running 5 sessions (3 classes per session
so that’s 15 classes total per day)
e This equates to $1,500 per day.
e They are closed 6 hours out of the day and only operate 4 days
per week.
e Current profit is $35,000 per year
e Total revenue is $450,000 per year

Result: What does this mean? Well the company is making only
$35,000 in cash in the pocket for the business after they took in

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$450,000. That is only 7% profit out of their total income coming in.
This means that 93% of the business income is going to expenses. Does
this sound like a healthy company to you?

We know that the business is closed 6 hours per day. Let’s say they
hired another three people to work on staff for those extra 6 hours
paying them $20 per hour. This means our staff expenses would cost
$60 per hour or $360 for the day.

If they had just half the classes full they would be in better shape. Half
the classes full would mean they are making $50 from each class.
That’s only $150 per hour in profits rather than the $300 from full
occupancy. Running these sessions for an additional 6 hours would give
us $900 in additional revenue at just half occupancy!

The employees would cost us an additional $360 and our revenue is

$900 so the business makes an added $540 in profits! (Minus some
other expenses — so let’s say $300 in profits).

The Purpose of Where We Are Going:

I gave you the basic examples above based on home businesses. The
principle behind them versus running a huge corporation is not much
different.

The numbers and figures of course will be different and you won’t know
everything behind how exactly a company operates, but there is
nothing to say that you can’t talk to people in the store and find out
how they feel their experience was with the company.

Most of the other information you will have to dissect from the
company financial statements and spotting where the profitability is
coming from. If you have a hard time figuring these things out already
you may need to put some time in with some accounting books or learn
some things behind businesses.

The point I’m trying to make here is that you need to learn or find out
how a company is making money. You need to see what things look
good for a business and what things don’t. This is what will in part
determine the health of the company and its future profitability.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

When looking at company financials and how profitable they are, you
have to get rid of the emotions that go along with the financial
documents. Even if the company is producing the latest and hottest
thing in the marketplace and all the teenagers have it — does not make
it a great business model! Although a booming, hot product, that
everyone wants or has to have does help, you still have to look at the
financial records!

Now of course looking at the big picture you can make investment
decisions purely based on trust and your experience with the company.
You really can if you want to — it’s up to you (although it may not
always be the wisest investment).

If the product is booming and the company is handling the demand to

put a cell phone in every hand then this product may have potential.
However looking at the financials gives a better picture of how well the
company is doing.

For example if it’s a cell phone company making the majority of its
profits from selling accessories than the greater part of their business
may not be doing so well.

This is what the financials will help you discover. They will tell you
where the revenue is coming from whether it’s the sales of the cell
phone subscription plan and mobile devices or if it is from replacement
chargers and nice cases. Knowing these revenue sources of a company
and how it’s doing is a critical piece to knowing the company’s
fundamentals.

COMPANY EARNINGS AND EPS

Do you ever wonder why certain stocks like Amazon, Apple, Google,
Netflix, Chipotle Mexican Grill, or Priceline have ran up so high and
so quickly?

I do believe that their products are great, but many other companies
have great products. We can also look at the charts and say that they
had an amazing stock chart prior to them breaking out, but so do
hundreds of other companies.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

The ultimate major difference between these leaders and stocks that
stay at their subpar $50 price range is that these companies have
phenomenal earnings. Their earnings have stood the test of time for
multiple quarters with a large increase and major wins quarter after
quarter.

In fact most of these companies have amazing earnings at least one or

two quarters prior to their major breakouts! This means that you could
have gotten in the trade before the major breakout just strictly based
on the earnings report.

I can’t stress it enough how important it is to pay attention to the

earnings per share and watching which companies are beating their
earnings.

What to Watch
What your end goal, and ultimately what you want to see, is a stock to
show a major percentage increase in their current quarterly earnings
per share when comparing it to the prior year’s quarter.

You need to make sure you are comparing the same quarter of the
previous year. This allows you to compare apples to apples because
certain quarters have different things that influence their revenue.

For example if you target a retail storefront they may have a higher
earnings per share increase at the end of the year (reporting in
January) due to Christmas and holiday sales. So you need to compare
this Christmas quarter with the Christmas quarter of the previous
year. This would mean January 2015 with January 2014. You can't
compare a spring quarter (July) to a Christmas quarter (January)
because the results will be skewed.

The earnings season happens during the JAJO months WJanuary,

April, July, and October). Not everybody reports exactly on these
months. For some companies it will be the next month just because
earnings season may rollover for them or they report after many other
companies have reported.

It’s during these moments that you need to pay attention to which
companies have a surprise boost in percentage of earnings and then do

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a little research and compare the previous year’s report.

The Numbers and the Reports

The number you want to watch is the EPS (earnings per share)
number. This number is calculated by taking the company’s total after-
tax profits and dividing it by the number of common shares
outstanding.

So the question then remains is how much increase do you want to see
on the earnings percentage gain? I would say at least a 15% to 25%
gain is a good starting point. A 30% or more increase I would be more
comfortable with the earnings increase.

I say these numbers not out of thin air, but because any company can
have a 5% or 10% increase one quarter by just doing the right things,
luck of the draw, great marketing, better management, or cutting
expenses from the last quarter.

However to get a 30% increase from one quarter to the next year’s
quarter really shows a company that is penetrating the market and
growing at a fantastic rate.

One of the things that I often see investors struggle with when it comes
to the reports is the lingo or the language used by these huge
companies. Remember that in these reports they won’t say something
like...

The last few months have been hard with the winter snow storm and
we lost a bunch of money. Although we did well on our sales, it was
very expensive to heat our stores and the foot traffic was not fantastic.
We just got 50 new distribution stores to carry our product, out of the
1,000 companies we contacted. Things really were just bad this quarter
for our company.

That sounds like a crummy report doesn’t it? Of course it does!

However in the same way that you wouldn't write negative things
about yourself when you apply for a job, companies don’t like to say
negative things about themselves in their earnings reports! Instead
you may get something like:
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Super-Duper company reports quarterly sales of $5.8 million versus

$4.6 million — a 26% increase for the ended on December 31. Net-
income increased 29%. The earnings per-share for this quarter was
3.07 versus 8.00 the previous year for the same quarter.

This all sounds great, but as my mom always told me you have to read
between the lines. Let’s break a few of these things down. The earnings
per share (which is the number you should be concerned with)
increased from 3.00 to 3.07. This is a 2.3% increase.

You may think that’s great as an investor because “hey they beat the
number.” You may also see the 25% increase in sales and think that’s
fantastic! Remember what I said about the percentage of increase? You
want to see 15%, 25% or even 30%. A 2.3% increase is nothing
phenomenal when you are looking for stock leaders.

Next, if the sales increased 26% and net income increased 29% why did
the net income only gain only a few percentage points? In addition,
remember that you are not concerned that much with the net-income.
You don’t own the whole company. You own shares of the company so
your focus should be on the EPS.

In the end, you want the leaders and the best companies! You only need
two great companies to make a million bucks in the stock market. Take
$10,000 and get a stock to run up 10 fold (such as from $20 to $200 like
Apple) and you have $100,000. Take that $100,000 and do it once more
with a stock like Priceline and now you have $1,000,000.

You don’t need to trade many companies. You need to find the leaders
that have great earnings, are moving well, and continue to perform
well quarter after quarter.

TOP-DOWN VS. DOWN-TOP ANALYSIS

When it comes to the fundamental analysis many investors struggle at
picking stocks. There are a few different ways that you can approach
this dilemma. Some investors believe that you should focus more on
the company (microeconomics focus first) and how it’s performing and
then focus on the global view. Other people believe that you should

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focus on the global view (focusing on the macroeconomics first) and

then how the company is doing.

One way is not better than the other. The method that you choose is
going to depend on your personal preference and your trading style.
What you need to do is find a consistent groove in what method works
better for you.

From my personal experience and what I see certain traders doing is

that I find the longer term traders look at the global view first and
make it a greater priority. The shorter term traders (like day traders
or swing traders) typically focus on the company ~health (or the
microeconomics) first and then look at the global health secondary.
Again this is just my personal outlook and what I’ve seen over the
years, but I have not done any research if this hypothesis is correct.

I will go over the top-down approach first and then you can reverse the
process for the down-top approach since it is similar just in reverse.

Here is the process of both approaches for analyzing your investment.

Top-Down Down-Top

Global View The Stock

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Global View
If you are doing a top-down approach to choosing your investment then
you would start with looking at the overall global view first. You can
evaluate how the world economy is doing by looking at the GDP growth
over the last few years or decade and estimate the growth moving
forward. Most of the time emerging markets will have better growth
than established countries.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

During your evaluation of the global view you should take into account,
political issues, tensions between countries, any wars happening, and
so forth.

Market View
As you dig deeper, start zooming into the trends of the U.S. economy
(or your economy) along with how the market is doing. Has it been
moving up and growing the last year? Has it been declining the last
year? When was the last major sell off or market correction? Was it
recent or was it years ago?

How are the interest rates, employment, inflation, and taxes currently?
It is said that the stock market leads the economy and is usually 6
months or more ahead of what is currently happening in the economy.
This is because the market trades based on future perception of prices.

Looking at Sectors
Once you've nailed down that everything is great with the global view,
the market, then you can start evaluating different sectors.

A sector of the market is a set of businesses that are similar. Think of

this as an industry group. For example you may have a broad sector
like the transportation sector, which may include FedEx, American
Airlines, or Canadian Pacific Railway. This sector would include
airline transports, railroads, trucking, and even Marine shipping. If
you go to a more specific sector or a subsector of airline stocks then it
would include companies like Delta, American Airlines, and Southwest
Airlines.

Of course there are many different sectors that you can look at. One
strategy to picking a sector is to start from a broad category and see
which ones are performing well could predict future performance. In
our case this would be the transportation sector. Once you choose a
broad sector you can fine tune your selection and go to a subsector of
that category like the Airline stocks.

It’s up to you how specific you want to get for your sector. If you believe
the airlines will do well in the future then it’s good to look at
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

specifically airlines. However if youre discussing transportation in

general then you would stick to the broader category of transports and
then look at all the stocks in this category.

The Stock
After you've found a category that interests you whether that’s because
of its recent growth or you believe that it has a large growth potential
in the future due to developments in the industry — then it’s time to
find a winning stock.

You can approach your stock pick based on its past price movement,
the recent development of the company’s products, it’s latest earnings
report, or another route that you choose of your liking based on your
trading system. The methods or variations to choosing a stock are
virtually unlimited. You can even take a technical analysis approach
at this stage if you choose (which we will discuss in the next chapter).
Technical analysis is my personal preferred method.

Down Top Approach

The down-top approach is the reverse way of choosing your investment.
You first choose the stock, then you verify the sector, check the
economy, and the double check the global view or outlook. The principle
is the same, although you are focused on the micro view (the stock)
first.

This means that you are looking at the stock first and everything else
is secondary or things you are verifying.

The method that you choose whether its top-down or down-top

approach is up to you. There is no right or wrong way to picking a stock
or choosing your investments so long that you have an appropriate plan
in mind and adjust it over time to fit your needs.

In any picking strategy whether its fundamental or technical you will

never have a 100% accuracy. You need to make sure that you also have
the right money management strategy in place as well to continue to
grow your investments.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Chapter 7:
TECHNICAL ANALYSIS

WHAT IS TECHNICAL ANALYSIS?

Technical analysis is the process of making an investment or
forecasting future prices through past market data. The primary focus
behind technical analysis lies in price, action (which is behavior), and
volume. These are the key concepts that you should focus on when
looking at technical information about a particular stock or equity.

People who study technical analysis have very different approaches

from one another, but their end goal is always the same which is,
“What direction is the market heading?” In other words, people who
study technical analysis (also known as technicians or chartists) look
at the trend of the market or an equity to better understand the future.

Just like there are multiple ways to choose a stock based on the
fundamental analysis, the same holds true for technical analysis. One
of those ways is through patterns. If you understand that just like we
humans have repeatable patterns in our daily life from the things we
eat for breakfast to our workout routine — so do stocks.

Prices typically move in trends and are repeatable. For example

similarly how businesses give discounts during certain times of the
year or certain products get expensive year after year shows you that
price patterns are repeatable.

So why do prices, stock charts, and patterns repeat in the markets?

Much of it has to do with the drive of human behavior. Since our human
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

behavior repeats and moves in cycles, stocks do the same thing.

People naturally have habitual behavior. We normally like the same

kind of food, listen to the same type of music, and we have similar
schedules throughout our lives. It’s just that we get into these routines
that constantly repeat through our lives.

Just like we repeat cycles in our daily lives, we repeat investing

decisions. People naturally tend to invest in companies that they know
about. People will often trade the same companies month after month
or year after year. They feel comfortable with the stocks they know.
The reason they feel comfortable is because the stocks themselves have
a certain rhythm that one can follow or relate to.

Technical analysis is a huge topic and there is a great deal to learn

when studying technical analysis. I will hit the major points for you in
this chapter so you can get an idea of what it’s all about, but further
study is needed to have the necessary skills to trade properly using
technical analysis.

DIFFERENT TYPES OF CHARTS

There are a few different types of charts that are used by traders to
find trends and patterns. Each chart has advantages and
disadvantages. Here are a few of those charts.

Line Chart
The line chart is probably the most basic chart because it only
represents the closing price over a specific time. Since it is the most
basic type of chart, it is the easiest to read. When you look at a line
chart its similar to looking at connecting the dots over time.

Line charts do not provide a range of information for a specific point in

time such as the high or the low for the day (something that a
candlestick chart does provide).

136
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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Bar Charts (OHLC)

A bar chart typically has more information than a line chart. A bar
chart is a series of lines integrated to form a pattern or trend. Each bar
represents the highs and the lows for that day.

Typically if the stock closes higher than what it opened at, then the bar
is green or black depending on the charting software. If the close is
lower than the open then the bar is red.

You can see the opening price by the dash indicated to the left of the
bar. The closing price would be the dash on the right side of the bar. As
you start combining these bars together, you can slowly see a pattern
emerge along with additional information for a specific time period for
the stock.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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Candlestick Charts
A candlestick chart is similar to a bar chart. The primary difference is
how the bars are constructed. With a candlestick chart they use fat
bars and call them candlesticks. In theory it is the same type of chart,
just with fatter bars.

Coloring can be different depending on the website or charting

software that you use. For example, on any given day the candle may
be white, green, or not filled. If the candle is a bearish candle then it
could be red or black.

Different websites and charting software use different color schemes.

Not to mention sometimes you can adjust the defaults to your liking.
This can be confusing at times, so make sure you know the color code
that is used in your chart since there is no specific standard to the
colors with so many things now being customizable.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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UNDERSTAND TRENDS
The basic concept behind technical analysis is to understand and
predict trends. You want to see which way the market or the stock will
go. Simply put, a trend is a general direction where your equity or stock
is heading. A trend tells you who is in control!
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Trends are not difficult to spot with certain stocks and chart patterns.

159
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

If the chart is clean and easy to read then the trend is easy to find.
However if the stock is more volatile, a trend may be more difficult to
read.

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When this happens it may be a good idea to switch your time period of
the chart. For example, if you are looking at the daily chart and things
are messy then switch it to a weekly chart and the trend could be easier
to see.

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Trends are typically categorized to the upside when a stock is making

160
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higher highs and higher lows.

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If a stock is making lower highs and lower lows then the trend is to the
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To help you see trends you can use trend lines underneath the stock
prices by extending the supporting line at every point where the stock
is bouncing.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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If you have a second line above the trend line and the stock is moving
between both of these lines it’s considered a channel. In geographical
terms a channel is a path that is relatively narrow and outlines the
confines of that river.

In our case, a channel outlines the path of the stock. Typically channels
are slightly more narrow than the overall movements of the stock. Note
that not every point will hit perfectly to create a trend line or a channel
— there may be some outliers. This can be called confluence.

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CHARTING TIME PERIODS

When youre looking at a stocks chart you can look at it in many
different time periods. You may look at a chart that covers one day with
5 minute candlesticks or ticks. These types of charts are usually best
for day trading. You could look at a chart that spans multiple months
that has daily ticks. This would give you multi-day view perspectives.
You can look at a chart that covers two or three years showing you ticks
that are each one week or even a month.

Since there are so many time frames, which one should you focus on
the most? I would say you need to look at multiple time frames to get
an accurate read.

Look at the long-term chart first so you can see where the stock has
been and where it’s possibly going — this includes monthly and weekly
charts. Example: Buffalo Wild Wings (BWLD) weekly chart.
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Next you may zoom in closer into its current time range and look at the
daily chart where every take represents one day. This will give you an
idea of the day-to-day movement. Example: BWLD daily chart

163
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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After evaluating it on the daily chart you may want to zoom in even
further and look at the 10 minute, 15 minute, or 30 minute time frame.
Personally I prefer to trade off the daily or weekly charts. If I do look
at the intraday chart and want to watch my stock’s movement, then I
watch the 10, 15, or 30 minute — not the hourly.

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The reason why I do not usually look at the 1 hour chart is because the
trading day is 6.5 hours and a 1 hour chart does not break down evenly

164
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

into 6.5 hours. It tends to skew the results slightly so I try to avoid it
when possible.

So out of all these different time frames which one should you trade off
of? Well, it will first depend the type of trader that you are. If you are
a day trader you may have more focus on the 10 minute chart.

However, I personally like the daily chart and even the weekly chart.
The reason I like these two charts is because the longer the time frame,
the stronger the support and resistance. Think about it: if there is a
large weekly support area at a certain price level such as $115. Then
this price level will work on the daily chart, 30 minute chart, 15 minute
chart, etc. The support level is more critical if it is a daily chart than
an intraday chart. If you look at a weekly chart then it will have even
more precedence over the daily chart.

I can’t stress it enough to always check at least the daily chart. People
who trade from just the intraday charts get burned often because their
support and resistance levels get blown out by the stock and they then
wonder “what happened?”

SUPPORT & RESISTANCE

Support and resistance levels are areas where the bulls and the bears
fight one another. Think of support as a price floor and resistance as a
price ceiling. These are key areas where the stock usually bounces or
reverses in the other direction.

The longer the time frame of the chart that you are looking at, the more
critical the support or the resistance is. For example, if you are looking
at a weekly chart that has support at $130 then it’s more critical and
prevalent than support on the daily or the intraday charts.

Example: Autozone, Inc. (AZO) support level at 510 and resistance

level at 550.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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Why Stocks Hit These Levels

There are a few different reasons why support and resistance are
created. If you remember that the markets move because there is an
imbalance then you understand that support and resistance is the area
where control is being shifted from the bulls to the bears or vice versa.

These are psychological levels where supply and demand are being
fought over. Once we know who the winner is, the stocks will then move
to the path of least resistance. Similar to how a waterfall doesn’t fight
gravity, the same thing is true with stocks. If there is not enough rocket
fuel, juice, or buyers to push the stock higher — then sellers will come
in and overpower the buyers. This in return will take the stock lower.

Price Levels and Round Numbers

Support and resistance can be hit at nice round numbers such as 10,
20, 25, 30, 50, 100, 200, 500, 550, etc. Anything that can be seen as
psychologically critical could be considered an area where support or
resistance may be more prominent. These levels can make it difficult
for stock to push through because there is an increase in buying and
selling action.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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Think of it like a battle in a field. Most of the time the battle is

concentrated in certain areas of the field, but it’s not evenly distributed
everywhere. If you think about chess towards the end of the game most
of the pieces are focused on one area of the board. They are not evenly
distributed throughout the whole board since they are looking to attack
a piece or defend the piece concentrated in one area.

The same premise goes with stocks. This is what happens at support
and resistance levels. A bull and bear battle can happen at various
price levels. It can happen at very nice round numbers or it could be
some number where the buyers and sellers decided to trade at such as
37.35. The longer a stock trades at a certain level the more critical a
support or resistance level becomes.

Resistance Transforming Into Support

If the stock has been pushing up against resistance for some time and
it finally breaks out, then the resistance will now transform into
support. Remember that support and resistance are price levels where
there is action. Once the stock breaks to resistance it becomes a support
level.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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The same thing in reverse. If a stock breaks a supporting level and

continues lower then that level will become resistance if the stock tries
to go higher in the future.
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These roles switch back and forth throughout a stock’s movement. It

can come back and test these levels multiple times. Support and
resistance are essential concepts that every trader should know.

You can use support and resistance levels to spot a trend reversal.
Some traders like to purchase stock at support levels looking for a

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

bounce. Other traders may like to trade to the long side and purchase
a stock once it breaks through a major resistance level rather than
playing the bounce. They are still both trading to the long side: it’s just
that they have different strategies.

Bearish traders like to sell a stock short at resistance levels looking for
a stock to rollover and sell off. They may also sell a stock short if a stock
breaks a major support level since at that point the stock has
momentum or fuel coming into it.

Be careful not to place orders directly at support and resistance levels

because there is confluence involved in stocks and they like to bounce
around these areas. It is at those levels where many traders get faked
out and misdirected entering the wrong trade at the wrong time only
to see their stock go the other way soon after.

Remember that trend lines can also be considered lines of support. As

we get into channels, the top of the channel could be considered lines
of resistance.
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169
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

VOLUME

What is Volume
Volume is the number of shares that are traded over a given period of
time. You can interpret volume for 10 minutes, 30 minutes, 1 day, a
week, or any other time frame you wish.

Think of volume as gas for a gas grill where the more gas that you
release the hotter and bigger the flame. The more volume that is traded
in a stock, the more active a stock.

Oftentimes volume is at the bottom of the chart. This allows you to see
the increase or decrease in volume during a stocks movement.

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Importance of Volume
I can’t stress the importance of volume enough when it comes to
technical analysis. I would say that I focus more than half of my
emphasis on volume because it is that critical.

Most beginners tend to ignore volume as they look for the shiny
indicator that can bring them great profits. Unfortunately these
indicators are usually lagging indicators. They usually tell you what
has happened rather than tell you what is happening.

170
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

With volume you can see exactly what’s going on with the stock in real
time. I like to think of volume as people voting for their stock. If the
stock is heading higher and it is going up on heavy volume that means
many people are purchasing the stock. Therefore the move is real and
is likely to be sustainable since people are voting for the stock to go
higher.

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On the other hand if volume is weak, but the stock is still heading
higher that means that someone is manipulating the polls. In other
words, there are not enough buyers to move the stock properly. Instead
it is moving up because there is a lack of sellers — but there are still no
buyers. If there is not a huge influx of buyers for the stock, but the
stock price is still heading higher then eventually the move will reverse
and the stock will selloff. Lack of volume means there is no conviction.

Always be careful when a stock is heading higher on lighter volume. It

will run out of gas eventually.
 tart Trading Stocks: Beginners Guide to Trading on the Stock Market

Inc. Nasdaq GS SStsckChartscom

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You can make great money in the stock market if you learn to read and
spot quality volume and then combine it with price action and
behavior.

Do not ignore learning about volume. It will be one of the greatest

technical tools you will ever have!

GAPS
You've probably looked at a few stock charts by now and you've seen
some gaps to the upside and gaps to the downside. A gap is an area on
a chart where no trades were made. Gaps can happen on the stock
chart on an intraday chart, daily chart, or weekly chart, but you tend
to see them on a daily chart more frequently.

There are a variety of things that can cause gaps to occur in the stock.
Some of the reasons that gaps occur can include news driven events
such as an earnings report, FDA approval, fraud with the company,
new product release, etc.

All these things can influence the stock dramatically, especially if the
news release comes out after hours when the stock market is closed.
For example, earnings that are released when the market is closed can

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

drive a stock price higher or lower depending on the report. If it’s a

huge surprise the stock will gap up or down. It is one of the reasons
why I always say stay away from trading during earnings because they
can burn you!

Other things that can cause a stock to gap up may include a company
event such as the latest tech toy they've been working on. If the buzz
is extremely huge this can cause a stock to gap up.

There are different types of gaps. Not all gaps are created equal. In
trading we have four primary gaps — common gap, breakaway gap,
runaway gap, and the exhaustion gap.

Common Gaps
Common gaps are fairly common, hence the name. Sometimes they are
called a trading gap. Since they are very common they usually get
filled. When a gap gets filled that means a future price cuts into the
empty region (or gap) which can take anywhere from a few days to a
few weeks.

Even though most gaps get filled not every gap gets filled. The longer
a stock moves without a gap being filled, the less likely it is to be filled.
Also if the current price has moved far away from the gap then the gap
is less likely to be filled.

For example, if a stock gaps up from $15 to $20 and has been above
$25 for over 5 years it is less likely to be filled. Or if the same stock
moves to $150 over the next few months then again the gap from $15
to $20 is less likely to being filled.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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Breakaway Gap
A breakaway gap is more exciting than the common gap. There is
enthusiasm with the stock when a breakaway gap happens.

Just like any other gap, a breakaway gap still has a chance of being
filled, but it may happen later than a common gap. It could take
months for this to be filled since the volume is supporting the stock.

Breakaway gaps often happen when there is an increase in volume.

Usually there is some juice or momentum behind the stock unlike a
common gap that gaps up without any volume.

Breakaway gaps usually occur when there is a consolidation or

congestion period that has happened over a few weeks or months.
When a stock has the potential energy to consolidate, it eventually
explodes in the direction where the momentum was building.

Think of this like a rubber band being wound up until you release it
and it has all that energy to unwind itself very quickly or shoot itself
across the room. This is because all that energy was wrapped up in the
rubber band and it took some time to build that energy up. However,
the explosion takes just a second.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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Runaway Gap
Runaway gaps happen when a stock is already moving in its uptrend
and an increased interest in the stock causes it to pop and gap up. The
increased interest usually happens quickly and unexpectedly.

This may be caused by a few different reasons, but possibly traders

that did not get in at the initial break have decided that the stock will
not retrace so they pulled the trigger with their buy orders. In addition,
runaway gaps can happen due to news events that help accelerate the
stock movement such as a new product release, update, or partnership
that takes place.

When a runaway gap occurs to the downside it’s sometimes caused by

traders who did not exit the position as soon as the stock started to
break down lower. As the stock continued to the downside, these
traders become more impatient and decide to liquidate their position
in a panic state creating the runaway gap.

The runaway gap is sometimes called the measuring gap. It is often

referred to as the measuring gap because it can mark the halfway point
between the run-up in the stock.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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Exhaustion Gap
Exhaustion gaps are gaps that happen at the end of the solid uptrend
or downtrend. When an exhaustion gap happens, a stock is
overextended. It might be that consolidation has not run its course.

When an exhaustion gap occurs the stock jumps higher in the state of
panic on volume so they can be easily be mistaken for runaway gaps as
they resemble one another. However, exhaustion gaps are quickly filled
as the price reverses.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Gaps can be dangerous if you are new to the stock market. I always
advise people to sell some shares or take some profits into strength if
your stock gaps in your favor. Remember to be careful with gaps as
they typically get filled.

Always trade the gaps cautiously assuming they will get filled. When
you think like this you will be thinking ahead like a chess player and
focusing on your risk.

Always be cautious with gaps and never assume a stock will be a rocket
ship heading to the moon in a straight line.

MOVING AVERAGES
Sometimes chart patterns can bounce all over the place and it makes
it difficult to figure out the direction or an overall trend. Something
that’s helpful to determine where the trend is heading is to use moving
averages.

A moving average is the price of a stock or equity over a certain period.

Rather than seeing daily fluctuations you are able to see a nice smooth
line with moving averages where the prices are averaged over the last
few days, weeks, or months.

There are a few different types of moving averages which put more
emphasis on certain factors than others, but all of their goals are the
same. They are there to help you see a clear picture of the trend over a
smoothed out period.

Simple Moving Average (SMA)

The simple moving average is the most common moving average. It is
the moving average that I use most of the time. To calculate and create
this moving average it takes the sum of all the previous closing prices
and divides the number of prices that it used.

For example, a 20 day moving average takes the last 20 days of stock’s
price, adds them together, and divides by 20. As the days progress, the
moving average continues to adjust and takes the most recent 20 days

177
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

and averages them together to get a final value.

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Some traders say that the simple moving average is not as effective
since every single day is balanced evenly throughout the calculation. It
gives the same amount of weight and emphasis for every single day
that is used to create the moving average. Some traders believe that
the most recent days should have more emphasis since they are more
prevalent. For this reason we have linear weighted average and an
exponential moving average.

Exponential Moving Average (EMA)

The exponential moving average was created to combat the weight
factor on the most recent data points. With the simple moving average
every data point is equal. With an exponential moving average the
most recent data points generally have more emphasis on the average.

Typically the exponential moving average is more responsive in the

most recent trading days. You don’t need to understand how the
exponential moving average is calculated as most charting programs
will do the calculation for you. Just know that they give more value
and weight to the most recent days and less value to the points as you
get further away from the current day.

Take a look at the chart below that shows you an example of a 50 day

178
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

simple moving average versus a 50 day exponential moving average.

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Using Moving Averages

There are a few different ways that you can use moving averages to
your advantage. For example, one of my favorite methods in using
moving averages in trades is to buy a stock as it breaks and holds above
the moving average. Then you can exit the stock once it breaks below
the moving average.

179
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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Another technique that you can use with moving averages is watching
them for areas of support and resistance. Typically many people watch
moving averages and the critical moving averages such as the 10, 20,
50, 100, and 200 day moving averages tend to be very popular.

Since they are popular, many people watch them and these are the
areas where people like to get in or get out of stocks based on a bounce
or a break of these levels.

You too can play this game and anticipate what the stock will do at
various levels of those moving averages. Normally I prefer the simple
moving average for this technique rather than the exponential moving
average.

Here’s an example of a stock bouncing off of a moving average.

180
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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A third way to use moving averages to make trades is to put two

different speeds of moving averages together such as the 50 day and
200 day and watch for a crossover pattern.

The crossover pattern often will indicate a shift in the trend. It is

similar to how a stock dipping below a moving average can show a
bearish signal and a stock that breaks above a moving average can
show a bullish signal.
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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

LOOKING AT CHART PATTERNS

Chart patterns are specific formations that can be used as trading
signals to anticipate a future price movement. Chart patterns are
based on the concept that history repeats itself. If we acknowledge this
concept, after looking at thousands of charts over history you will
notice that often times stocks will repeat their breakouts or
breakdowns.

The reason we look for these patterns is because there is a higher

probability of an outcome if we enter the trade after a stock breaks
these patterns rather than just jumping in a stock at any given point.
Remember that nothing in the market is 100% guaranteed and chart
patterns are no different. There is no Holy Grail chart pattern that will
predict a bullish stock for you 100% of the time. Instead, look at
patterns as higher probability trades.

Over time you will start merging to certain patterns due to personal
preference. This is because your risk tolerance will match the patterns
that you are looking at. When this happens you will start to gain
confidence because you will recognize patterns that have a higher
probability for your style of trading than others. This may allow you to
enter larger positions during breakouts or breakdowns if you choose to
do so.

Just like we talked about looking at stocks over multiple time frames,
chart patterns can be seen at just about any time frame. The key
difference is that looking at a chart pattern in the daily or weekly
timeframe will make it a stronger chart pattern and the outcome will
be more probable.

When it comes to charts, there are two types of patterns:

1. Reversal patterns: changes the direction of the stock after the

pattern is formed.
2. Continuation patterns: continues the trend further after a
period of consolidation or pattern development.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Cup and Handle Pattern

The cup and handle pattern is a bullish continuation pattern. This
means that after the pattern evolves and develops the next move is
predicted to be to the upside (hence the bullish continuation pattern).

The pattern will form a circular “C” shape which appears to look like a
cup and then followed by a slight retracement which creates the
handle.

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As soon as the price pushes above the channel or the top of the cup the
trend can continue. It can take the cup anywhere from a month toa
year to develop.

Head and Shoulders Pattern

The head and shoulders pattern is a popular reversal pattern which
means that the trend changes direction after the pattern is complete.

There are two versions of the head and shoulders pattern. The first is
a standard head and shoulders pattern which signals an end to an
upward move.

When the pattern is created it appears like a triple top. There is two
shoulders on each side with a longer top in the middle that is slightly
higher than the two shoulders. When you connect the two shoulders

183
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

you create the neckline. In our example, the neckline will slope
downward creating.a lower price on the 3"4 pop (or second shoulder)
than the 1st pop (or the first shoulder).
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The second head and shoulders pattern is the inverse head and
shoulders pattern. This pattern usually happens when the stock has
been heading lower for some time. The inverse head and shoulders
pattern may then evolve and the stock will reverse its direction to the
upside.

This pattern is similar to the standard head and shoulders pattern and
has two shoulders, a head, and a neckline.

184
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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Double Top & Double Bottom

Double tops and double bottoms are common reversal patterns. In the
case of a double top, a stock it tries to push higher multiple times, but
could not break through successfully.

We can think of it as there was not enough juice, volume, or energy to

continue the pattern so therefore the stock must reverse in the other
direction and head lower since that is the path of least resistance.
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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

In the case of a double bottom a stock attempts to head lower, but finds
a support region where it bounces. The bounce may be short lived as it
was created by value buyers (people who thought the stock was very
cheap).

Shortly after, the stock continues lower to reattempt to go lower, but is

short-lived by more value buyers that get into the stock. Since the stock
tried to head lower multiple times and was unsuccessful the trend
reverses and the stock continues higher.

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Triangles
Triangles are unique patterns since you can have a breakout or a
breakdown to the pattern. There are a few different types of triangle
patterns such as the symmetrical, ascending, and descending triangle.

The ascending triangle is usually considered to be a bullish pattern

and has a flat upper trend line.

186
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

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The descending triangle is usually considered a bearish pattern and

has a flat lower trend line.
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The symmetrical triangle is unique in that it can be considered a

bullish or bearish pattern. With the symmetrical triangle, both trend
lines converge evenly until a break occurs in the stock either to the
upside or the downside.

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Flag and Pennant

The flag and pennant patterns are continuation patterns. These

patterns are developed after a spike in price movement. When these
patterns are created they are consolidating the recent rise in the stock
price. Both of these patterns can take anywhere from one week to a
month to develop.

The flag pattern looks like a declining channel with the channel being
the flag and recent pop being the flag pole. When the upper trend line
becomes broken this is the time to enter the stock.

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TECHNICAL INDICATORS
Technical indicators are secondary indicators. This means that they
add additional value in the analysis based on price movement and
volume. They look for trends, volatility, momentum, where the money
is flowing, and the strength of various movements.

Normally technical indicators are considered lagging indicators since

they are secondary indicators. This means that they are usually
delayed behind real-time data. It could be just by a few seconds,
minutes, hours, days, or even weeks. However they do lack the market
similar to how a moving average is always slightly behind the actual
price.

How to Use Them

With the technical indicator you may have it be delayed just slightly
like a 10 day moving average or it could be delayed quite a bit such as
100 day moving average. Just remember that they are delayed and
they should be used as a secondary indicator.

So how do you use the secondary indicators or technical indicators?

Typically there are two primary ways that you can use them:

1. Confirm the price movement and quality of a chart pattern

2. Buy and sell signals

The first way is my preferred method which is to confirm the price

movement and the quality of the chart pattern. I like using technical
indicators for move confirmation because many are lagging indicators.

Lagging indicators are those that follow price movements so their

signal happens after the price movement. A leading indicator precedes
price movement so the signal happens during the price movement or
anticipates the price movement.

I prefer to make my trade decisions based on price, action and behavior,

and volume because you can see them changing real-time and they give
you a signal without delays. These are leading indicators. If I wanted
to add a lagging indicator to my chart, I would only add it to verify my

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decision.

The second way that people use these indicators is to find buy or sell
signals in a particular stock. Personally for me this is not as helpful
with these indicators because often times you miss the move if you
don’t get in quickly, but on long trending patterns these indicators still
work well as buy or sell signals.

Difficulties with Indicators

There is always a balancing act that you have to play when it comes to
using indicators. In a perfect world we would like an indicator that
gives us early signals, few false or fake out signals, but an indicator
that is sensitive to price movements.

If we increase the sensitivity to price movements then the indicator

will give you more signals, but it will have more false signals. On the
other hand if we decrease the sensitivity you will have a slower
reaction to price movements, which means you may miss the move on
certain break outs, but you will have fewer false signals.

Different indicators work in different ways. For example there are

centered oscillators which fluctuate above or below a center line and
there are banded oscillators which fluctuate between two extreme
levels (such as overbought or oversold level).

MACD: Moving Avg Convergence Divergence (Centered)

The MACD is a centered indicator that turns two trend-following
indicators like the moving averages into a momentum oscillator. It
does this by subtracting the longer moving average from the shorter
moving average. The end result is a trend following and momentum
indicator.

Since the MACD fluctuates among the center line it can go above and
below this zero line as the lines crossover, diverge, converge, and rise.

Sometimes the MACD includes a histogram. The histogram is positive

when the MACD line is above’ the _ signal line.

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 Start Trading Stocks: Beginners Guide te Trading on the Stock Market

Here are the calculations:

e MACD Line: 12 day EMA — 26 day EMA

e Signal Line: 9 day EMA of MACD line
e MACD Histogram: MACD Line — Signal line

These are the typical calculations of the MACD indicator using the 12,
26, and 9 as the values. As you start increasing the sensitivity to the
MACD such as the 5, 10, 9 you may get more signals, but many fake
out signals. If you set the indicator to be less sensitive then you may
get less signals and less fake outs, but you may miss the move on some
breakouts. It is important to have a balanced settings on your
indicators to give you clear buy and sell signals without many fake
outs.

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There are three primary ways traders use the MACD for trading or
interpreting data.

Crossovers — Crossovers can happen to the upside or the downside.

When the MACD goes below the signal line then it is said to be a

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bearish signal. If the MACD goes above the signal line then it is said
to be a bullish signal.

Sometimes these signals can be fake outs as the lines may touch or get
close to one another. It is for this reason some traders wait for a
confirmed signal or watch another indicator such as volume to give
them more of a confirmed signal.

Dramatic Rise — A dramatic rise in the MACD can give you a signal of
a stock being over bought. When there is a dramatic rise in the MACD
this means the shorter moving average breaks away from the longer-
term moving average. Usually this signifies an unhealthy move.

In theory, this means the stock is overbought and will probably reverse
soon and pull back.

Divergence — A bullish divergence happens when a stock creates a

lower low and the MACD creates a higher low. The lower low in a stock
confirms the down trend, but the higher low in the MACD shows less
down side.

A bearish divergence occurs when the stock makes a higher high, but
the MACD line falls short of its prior high and creates a lower high.

Always be careful with divergences. It is one of the reasons I am always

cautious when using lagging indicators. Signals can be difficult to
interpret if you do not understand the data being presented.

RSI: Relative Strength Index (Banded)

RSI or Relative Strength Index is a banded indicator. This means that
it has a high and a low range between 0 and 100. RSI indicator aims to
predict how overbought or oversold an equity is. Often times the RSI is
considered overbought if it is over 70 and oversold when it drops below
30. Just like the MACD, other signals can be interpreted from
centerline crossovers, divergences, and magnitude of the swings.

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Of course there is more you can learn about the MACD and the RSI
from a book that is more technical analysis oriented, but for our
purpose and to get your feet wet about indicators I wanted to share
some insight about the basics of indicators and how they are used.

There are probably hundreds of indicators out there. In fact you can
create your own technical indicator and name it after yourself.
However, I find that most of these indicators are secondary indicators
or just a confirmation signal.

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Remember that I focus on price and volume to make most of my trading

decisions. Other indicators, especially lagging indicators, I try to avoid.
After you master price, action and behavior, and volume you can start
adding indicators to your trading toolbox. However, don’t try to use a
table saw if you have no experience using a hand saw — it can do some
damage if you don’t know what you are doing!

WRAP UP ON TECHNICAL ANALYSIS

When it comes to technical analysis there are many different
indicators, tools, and techniques that you can use to enhance your
trading. Be aware that they are all tools and can be used effectively if
you know how to.

Remember that the overall picture is to become a better trader, not to

overcomplicate things for yourself. I often find that many traders want
to employ every single technique possible for their trading. It’s very
difficult to be successful when you start adding five different moving
averages, volume, seven different indicators, and looking at chart
patterns.

Trying to put all of these things together in figuring out when to enter
a trade will become difficult. You will then wonder what was the reason
that you entered a trade? Which indicator did you follow to execute
your entry or your exit? The more simplified your system can be, the
easier it is to make adjustments. If you have 50 different things on your
screen it’s hard to know what you should watch in order to place a
trade.

Don’t get wrapped up in the hype or the shiny objects behind all the
technical data that you miss the bigger picture. Keep things as simple
and as effective as possible without confusing yourself.

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Chapter 8:
PUTTING ON A TRADE

KNOWING YOUR INITIAL GOAL

Before you put on a trade you need to know what your goal is behind
trading and second behind the trade that you're looking to put on. If
you're looking to do a day trade and hold the stock for only a few hours
or a few minutes then you may trade differently than if you're looking
to hold the stock for multiple years.

Knowing your goal and purpose before you take the trade will help you
keep a clear focus on your strategy and it will keep you from being
reckless and over trading.

The key here is to always have a plan whether you're looking to trade
for the day or constructing a position to hold a stock for multiple years.

All too often I see traders putting on the same type of positions and
trades in their retirement account as they do in their individual
account. This is not a great strategy! Your retirement account should
be traded differently than your individual trading account.

Have a plan and strategy in mind before you take any trade. You need
to have a plan for your overall lifestyle. Have a plan for each specific
account whether you have an individual account, retirement account,
or a trust. Finally, you should have a plan for that trade that you are
looking to do.

Think about the goal of the trade. Is it to increase your individual

account for a short-term gain or is it a longer-term trade that will be
used to grow your retirement? Always have a plan in mind before you
take any trade.

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FINDING
A STOCK
The next step to putting on your trade is to find a stock. You can use
the top-down approach that we discussed earlier as well as the down-
top approach.

In addition, you can use the technical analysis approach if you like such
as buying the stock when it breaks above a certain moving average or
breaks a trend line.

There is no particular formula or golden rule to picking a stock.

Everyone will have their own personal preference and what
methodology works best for them. It will depend on your trading style,
the length of your investment, and your risk tolerance. Regardless of
the type of trader that you are, you should always have a plan for every
trade along with a plan for your overall account.

If you're curious about my personal methodology for picking a stock, I

normally trade stocks that are leaders, big companies, companies that
move quickly, and stocks that are breaking trend lines.

I like these types of stocks because I want to pick the stocks that move
the fastest in the shortest amount of time. Why buy a stock that moves
$0.20 in a day when you can get a stock that moves $5.00 in a day?

That’s just my take on the matter, but everyone’s trading style will be
different so look at yourself and adjust your trading style according to
your goals and what you want to achieve.

POSITION SIZING
Your position size or the amount of shares that you plan on purchasing
will depend on the type of stocks that you are trading along with your
trading style.

Trading the leaders: If you're looking to trade the leaders in the stock
market they may be anywhere between $100 per share to $1,000 per
share. With a $50,000 account even if you put all your money into one
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

stock you may only be able to purchase anywhere between 50 shares

and 500 shares.

As a reminder, don’t stress yourself about the amount of shares that

you can purchase. Remember that the expensive stocks move quicker
than the lower priced stocks.

Percentage of account: If you don’t want to put all your money in one
stock you can still trade the leaders, but you can select your position
size based on a percentage of your account.

Some famous traders recommend that 2% to 5% of your account for any

one trade is a good starting place. So if you have a $50,000 account, 5%
of your account would be $2,500. In this case you would use only $2,500
for every trade that you make to be on the safe side.

If you wanted to trade even safer then you could use just 2% of your
account which would be $1,000 for any given trade.

Percent risk formula: If you would like to calculate your trade size
based on a formula and the percentage of risk you want your account
and here’s how you do it and here’s the formula.

(Your Risk Amount — Commission)

Trade Size =
(Exit Price == Entry Price)

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In simple terms this is what the equation breaks into:

What you are willing to risk

Trade Size ==
Distance between stop loss & entry order

As an example, if you are willing to risk $1,000 and you have a $2 dollar
stop, that’s 500 shares. This means that if the stock goes down $1 —
you lose $500. If you lose $2 on the stock (meaning stock goes from $30
to $28 that’s now $1,000. This was the most you were willing to risk.

As we get back into the formula rather than the simplified version let’s
say you wanted to risk 5% of your account per trade. To calculate this
you can take the total account size and multiply it by 5%. This would
equal your risk amount.

Risk Amount Example: $50,000 total account x 0.05 = $2,500 would be

the amount you invest in at any one given trade.

To calculate your trade size you then apply it to the rest of your
formula.

($2,500 — $30 commission)

Trade Size =
($48 — $50)

In this example it’s a $2 risk. We want a tight risk and a tight stop and
the most we want to risk is $2,470. So we take $2,470 /2 = 1,235
shares. So the most shares we should trade is 1,235, if the most we
wanted to risk was $2,470 with a $2 stop.

The first dollar (stock goes from $50 to $49) we would lose $1,235 on
1235 shares. The second dollar (if the stock goes to $48) we would lose
$2,470. Hence our total amount we wanted to risk.

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I know that the trade size formula can be a bit complex and tricky to
understand. That’s why I wanted to break it down above in simple and
easy to understand language as well as apply it to the formula.

Longer Term Trades: When you're looking to put on a longer-term

trade you may approach it differently than putting on a shorter-term
trade.

With longer-term trades you need to make sure that you have enough
flexibility in the stock in case of pullbacks for a few weeks or months.

If you anticipate the pullback or at least plan for a pullback you may
decide to enter a smaller position at the beginning and then add the
rest of your position when the stock pulls back or bounces.

Normally I am against adding during pullbacks. Although, if you are

averaging slowly and building your position over time then it may not
be a bad idea. Remember, the key here is that you are going in with
half, 30%, or 25% of what you normally would put on the trade.

This means that you will have a very tiny position to start with, but as
the stock goes in your favor or has slight pullbacks you can continue to
add a few times over the next few years.

Keep in mind your big plan for this long term trade. Is it going to be
focused on collecting dividends over a few years? Will it be based on
making money through appreciation for the stock? Or will it be a
company that you hold for the next 10 years to help your retirement?

Whatever your goal is, remember that any time you hold the stock for
longer than a year it will likely have pullbacks. You need to anticipate
for these pullbacks. This could mean you buy less shares at the
beginning or sell some shares as the stock moves in your favor and then
purchase the shares back when it comes back towards your entry price.

Shorter Term Trades: With shorter-term trades you are looking to ride
the wave. Of course you will still have days that are down or days that
have slight pullbacks, but you may not have a multi-month
retracement like you would with longer-term positions.

For shorter-term trades you may decide to go in harder with more

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shares than you would with a longer-term position right from the
beginning. Then as the stock moves higher or in your favor you take
and peel some shares off into strength.

You can use this strategy of taking profits into strength almost
immediately, even on the first day. This helps reduce your risk and
that way you start trading with the house’s money.

Remember that your short-term trade is a short term trade. For some
people short-term could mean one day, one week, or one month. I like
to hold stocks as long as I can, but if it’s not acting right then I will
close out the position.

Never convert your short-term position to a longer-term position. I’ve

seen it countless of times where people have a profitable short-term
trade and then it goes against them. Eventually the stock goes down
and they are in a losing position. They start trying to convert the trade
into a longer-term trade adding more shares and doing things they
naturally would not do.

We get sucked into this because our human nature does not want to
take a loss. The same way that we don’t want to admit to our faults we
don’t want to say that we lost money. Avoid this mentality at all costs.
Take your losses as soon as possible so that you can get back in the
game with a clear mindset.

Never attempt to convert your losing short-term trade into a longer-

term trade. If that wasn’t the plan from the beginning then don’t do it.

TIPS ON TRADING PENNY STOCKS

Trading penny stocks is different than trading the leaders of the stock
market. First off you have to remember that normally penny stocks are
crappy companies. There is a reason that they are cheap. If they were
great companies then they would already be higher in price. Do you
honestly think that the huge institutions would not have invested in
them if they were great companies?

If you are mindful and aware that the majority of penny stocks are

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crappy companies then you know that all the momentum and energy
continuously pushes them to the downside.

These stocks do pop from time to time and you can make great money
on the pops. However soon after they pop, they roll over to their original
levels — if not lower.

Even if you short a penny stock you have to think how low can a $5
stock go? The most that it can move is $5 and that’s if it hits zero.

For a Large Upside

There are a few different reasons why people opt to trade penny stocks.
One of those reasons is they believe the stock will have a large pop
since it is near zero or a low price and it has lots of room to the upside.

Remember that stocks can get delisted from the stock market. Just
because they are trading at low levels does not mean they are great
trades or investments — always be careful.

Buying More Shares

Another reason people may be interested in penny stocks is that they
don’t have enough capital in their account where they feel comfortable
trading the larger companies. They believe they cannot purchase
enough shares to make any money.

Let me put it to you this way. Penny stocks do not move much in a
single day. They may move just a few pennies whereas large companies
may move a few dollars in a day.

e Youcan buy 10 shares of a $200 stock ($2,000 total

investment) and have it move 30 points making $300.
e Or youcan buy 400 shares of a $5 stock ($2,000 total
investment) and have it move 75 cents and still make the
same amount.
The more important question is which trade is more risky? A $5 stock
moving 75 cents and a 30 point move from a 200 stock is both a 15%
move. However which company is a better company? Usually the $200
company.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

The point I’m trying to make is that if bad news comes out for both
companies of the same caliber the $200 company is a stronger company
to handle a bad snowstorm.

Movement of Penny Stocks

You can of course trade penny stocks if you are interested in taking
that route. You have to be patient and watch the news that comes out
on the stocks.

By the news, I’m talking about the message boards on the Internet
because regular TV channels are usually not allowed to discuss penny
stocks. This is because they are considered risky investments.

So how do these penny stocks move? They move based on hype and
pump and dump. Often times spammers, message board writers,
bloggers, or email bombers will send out messages talking about a
specific company that’s about to head higher. Typically this is a penny
stock and the reason they do this is because they already own some
shares. Now they are ready to pump the price up higher by getting
other people to purchase the company. When the company shares head
higher they get out of their position making a profit and leaving
everyone else the trashy stock.

Eventually investors realize that the company is not going anywhere

fast and slowly start to sell it off. This process starts to accelerate faster
to the downside causing the stock to tumble further towards its original
breakout point or even lower!

This is typically the cycle of penny stocks and this is why they usually
stay at low prices and never seem to break out. Earnings are never
exciting and the investors are typically short-term investors that have
no long-term view for the company.

Properly Trading Penny Stocks

If you are interested in trading penny stocks you can trade them and
make great money so long as you know what you are doing. They fit a
different type of personality, but can be profitable for the right person.

I typically do not like trading penny stocks, but I want to give you a

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few tips to consider if you are interested in trading penny stocks.

Know the Behavior: Before you get into trading a penny stock know
that most penny stocks are always being pushed to the downside. It’s
what they’re naturally set up to do.

Think of this like a school playground where the nerds are the nerds
and the jocks are the jocks. This is their normality. For a penny stock
the normality is that the penny stock is a penny stock, and typically is
acrappy company. Therefore it will usually push to the downside more
often than to the upside.

So before trading penny stocks you should really be comfortable with

shorting and be able to trade quickly since they move very fast once
they start moving.

Watch the volume: As with any stock always watch the volume.
Volume will tell you the strength of the movement whether it’s to the
upside or the downside. If a stock is moving with little volume then you
want to avoid it. A higher increase in volume means a more likely
breakout or breakdown.

With penny stocks they typically do not trade with heavy volume. So
when they do start breaking out the increase in volume may be
minimal, but it is a breakout nonetheless.

It’s for this reason you need to learn how to read the subtle differences
in volume for penny stocks. The signal sometimes can be minimal and
tough to spot, but it’s there when you learn to read it properly.

Make sure it’s liquid: Some penny stocks do not have a lot of trading
volume. You need to ensure that there is enough liquidity in the stock
for you to get in and out when the time is right.

If there is a breakout usually an influx of volume comes in. This means

it may not be difficult to get in, but it may be difficult to get out as
volume subsides.

One of the scariest things that can happen to a trader is being stuck in
a position with a major loss and nowhere to sell the shares. The more
you sell, the lower the stock price goes. It feels like getting caught in a

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black hole with no way out.

MEASURING YOUR RISK VS. REWARD

You should always measure your risk to reward. What do you stand to
lose versus what you stand to gain. All too often many people neglect
looking at the potential of what they will gain from a trade and the
possibility of their risk.

I think the simple processes are ignored because it is brushed off by

people because they don’t think of it as important. Even some of the
professionals do not stress the importance of risk to reward even
though it’s so natural to them. Before you take any trade always do an
evaluation of what’s your risk and what’s your reward.

When it comes to stocks it’s nice to have a 3x reward to your risk or

better. For example if a stock has pulled back to $100 from $150 per
share and you get in the trade at $100 thinking the lowest it would go
would be $90. This means you have a 10 point risk and a potential of
50 point gain. That makes it a 10 to 50 risk to reward or in other words
1 to 5 ratio (5x the potential payoff to the risk).
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it sounds like a lot, but remember that the stock recently had highs at $440. This gives us a potential
gain or reward of $170 (almost a 7 to 1 in our favor), You can see the stock continued moving
higher afterwards. i

These are the types of trades that you want to go after. You don’t want

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to go after trades that have a little risk to reward payout. There is no

reason to take a trade that has a little payoff. Why take the additional
risk?

For example, if you see a stock has a potential to go up $2, but your
risk is a $1 stop then you are risking $1 to possibly make $2 if the stock
moves the full predicted move. That is not a great risk to reward payoff.

HES Hess Corp. NYSE @ StockChartscom

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if we enter the trade at the end of October during the popat $62, our risk is approximately $15
since the next level of support is $47, Our potential reward is until the $73 mark which gives us
a possible reward of $12. So $15 risk versus a possible $12 reward. It is almost a 1 to 1 ratio
and these are not odds | like playing with. ! prefer the 7 to 1 ratio much more.

The only way you will be able to measure the risk to the reward is by
knowing charts. You will have to learn to predict a stock’s projected
movement to calculate the risk and reward. It is very difficult to
calculate the risk to reward ratio using only fundamentals.

The better the payoff ratio you can find, the safer your trades will be.
The key to this business is to minimize risk and if you're always looking
for a higher payout ratio these larger wins will be able to offset your
losses. This means that you will be able to be wrong more often so long
as that your wins are greater (let’s just say a winning percentage of
20%). However, if you have a risk to reward ratio of just 1 to 2 your
winning percentage will need to be right about 75% since you will not
be making as much return from each trade. This means you have to be
correct on more than half of the trades you enter!

Always look for great risk to reward ratio in trades as it will help keep
you profitable and give you cushion for losing trades when they come.

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SETTING YOUR STOP

One important skill you need to learn in this business is to set
appropriate stops. If you have a trading plan and a system, but you
don’t set your stop before you enter a trade then eventually you will hit
some major problems with certain trades.

As I always like to stress you need to know exactly what you're willing
to risk on every single trade! A stop allows you to set these parameters.

Since certain stocks move differently from one another you need to
have the appropriate stops for the type of stock that you are trading.
Stocks that are volatile may need more room for the additional
volatility. Otherwise they may give you fake out signals and you will
always get in at the wrong time. Stocks that are stable may need to
have a tighter stop so that way you don’t get burned as things continue
to go against you.

I find that most of the time the movement or the volatility of the stock
is related to the price of the stock. The more expensive a stock, the
more room you need to give it because the higher priced stocks whip
around more.

Here is a little breakdown of how stocks at different price levels move

in a single day and about how much room you should give your stop
from your entry price.

Please note these are approximations and will change depending on

market environment, conditions, and the volatility of the individual
stock, but this chart should give you an idea of where to set your stops.

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Approx Movement
Stock Price Approx Stop Amount
Per Da

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Stocks that are $25 or $50 may only move $1 or $2 per day on average.
For these types of stocks you may want to give them a $1.00 stop and
no more.

For stocks that are $200 or $300 per share, they move more violently.
These stocks usually move a few dollars per day and can move $5.00 or
$10.00 in a good or bad day. These stocks may need at least a $5.00
stop. If you’re planning to trade a $500 stock and you only give them a
$1.00 stop you will be whipped around too quickly and get stopped out.

For a $500 stock you need to give them at least a $3.00 or $5.00 stop.
They just bounce around too much.

One final point I want to make is make sure you don’t adjust your stop
if your stock hits it! I find that many people continue to lower or adjust
their stop even after their stock has blown past their stop.

Always stick to your rules and your game plan in a good or bad trade.

EXECUTING YOUR ORDER

Executing and placing your order is not difficult. The more you do it,
the more it will become second nature or as easy as turning on the TV.

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The difficult part is always picking what show to watch on TV,

similarly to finding and picking your stock.

For you to execute or place your order there are a few things you need
to check.

Ticker Symbol: The first is to make sure you have the right ticker
symbol in the order window. I’ve had my fair share of fat-finger or
incorrectly typed ticker symbols when I first started trading. It has
happened to me a handful of times when I was entering orders quickly
and another stock had a similar ticker symbol and I screwed up my
order.

Enter the Share Amount: Once you have the ticker symbol entered,
type in the amount of shares you would like to purchase. Remember
that if you buy 100 shares of a $12 stock it will cost you $1,200 so double
check that you have sufficient funds in your account before you place
your order.

Don’t try to max out the amount of shares you can buy. You may need
additional capital for transaction costs or a future stock.

As a side note, it’s always better to purchase stock in lots of 100 shares.
People like trading round numbers to make calculations easier. Even
if you round up or down to get a nice even 50, 20 or 10 shares it is
better. For example, buying 1800 shares may be easier than 1827. Even
buying 1820 shares is better than 1827.

Check the Price and Order Type: You are buying and selling stock
based on the price, so always check the price you are willing to pay or
the current price of the stock. If you are entering a market order the
price may move on you quickly. You should monitor your order until
you get filled so that the price does not run up on you too fast.

It is for this reason I like to set my order type to limit orders. You can
choose a market order if you need to get into the stock quickly, but limit
orders are typically safer to ensure you get a good fill price.

Hit the Button: The last piece to complete your order is to hit the button
and submit your order. Certain platforms will want you to review your
order and hit a final confirm button, but I find that depending on the

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order you have created this can make you miss trades. Always double
check your order in the initial window.

If you are day trading or waiting for an entry point, I like to prefill
everything in the order window and then wait for the stock to get to
my entry price. This way everything is setup, cocked, and loaded like a
hand gun. All I have to do is pull the trigger when the time is right.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Chapter 9:
MONEY MANAGEMENT

MONEY MANAGEMENT BASICS

Money management is a key component to success in business, trading,
or in life. If you have horrible money management skills, are an
extreme spender, or do not understand how money works, then you
may struggle as a trader.

You need to make sure you have impeccable money management skills
if youre managing stocks. The fact is most people focus on money
management last! As I always like to tell every trader they need to
focus on risk and money management and not the potential profits they
can make.

I believe that when you first start trading in the stock market we
always look at the potential profits that we can make. Our dreams get
overlaid with our newly acquired education and we think about the
things we can get as well as our earnings potential.

Unfortunately, you don’t make great profits in the stock market by

focusing on your dreams, what you can make in the market, or the
Lamborghinis you can purchase. You make great consistent returns
when you focus on risk and money management.

Importance of Avoiding Major Losses

Losses do happen in the stock market! You will not have 100% accuracy
in your stock picks or trades in this business especially if you plan to
be around a long time.

It is important to keep your losses as small as possible that still give

 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

your stock enough room to move and bounce around if necessary.

Remember that stocks do not go straight up so you need to have some
wiggle room. Still you should strive to avoid major losses because it
takes more effort and a greater profitability on the next trade to make
up the difference for a big loss.

Suppose that you held $4,000 of stock and your stock dropped 50%!
Now you are down to $2,000. In order for you to get back to $4,000, it
would take a huge gain. If you invested your $2,000 and had a 50%
gain that would give you a $1,000 gain therefore bringing you to only
$3,000. In order for you to get back to your original $4,000 you need to
have a 100% gain!

You have to remember that you are starting with a lower value of
capital if you have a loss, therefore it takes a greater percentage to get
back to where you were. If you look at it in reverse you can think of a
50% loss will erase 100% gain.

The whole point behind me sharing this with you is to get you to
understand that you should watch your losses closely to know that it
takes a greater win to make up a loss.

Take a look at the next table. It will give you an idea of the recovery
percentage needed to get to your original capital depending on your
loss amount. You can see that a 20% loss in your capital would require
a 25% win to get back to where you were. If you had a 40% loss you
would need a 67% win. With an 80% loss you need a 400% win which
makes things absolutely crazy to just get to your original.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Loss % Recovery %

Risk Ruin
If you’ve ever wondered what your probabilities are of going completely
broke, than risk ruin is the thing to understand. Risk ruin is a concept
that I learned from the book called “Money Management Strategies for
Futures Traders” by Nauzer Balsara.

By understanding risk ruin you will know what you need as far as a
win ratio and a payoff to stay alive in this business! The hard truth is
so long as you only invest about 10% of your income on each trade your
probability of going completely broke is minimal so long as you make
changes and adjustments in your actions to trade differently when
things aren’t working so that you can become better.

Take a look at this table below which gives you the probability of going
bankrupt based on your win ratio (which is how many wins to losses
you have) and your payoff ratio (the amount you are winning to the
amount you are losing).
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Risk of Ruin Probabilities with 10% of Capital at Risk

Win Pay off Payoff Payoff Payoff Payoff

Ratio Ratio 1:1 Ratio 2:1 Ratio 3:1 Ratio 4:1 Ratio 5:1
25% 100% 100% 99% 30.30% 16.20%
See asia Eee ices rie ca 5i gage: anal Rie 2

"35% 100% «60.80% 8.20% 3.60% 2.30%

“BB% =——«*1B.20% «0.20% «0.10% += 0.10% = 0%

Let me give you an example on how this table works. Let’s say you win
just 1 out of 4 times (a 25% win ratio) and when you win, you make 4x
the amount than when you lose because you allow the stock to run
longer. This means that your payoff ratio is 4:1 giving you a possibility
of a risk ruin of 30.30%. This 30.30% is your chance of going completely
bankrupt on your account.

Think about this for a moment. You have be right just 1 out of 4 times
and then if you allow your winners to run you still have more than 50%
chance of survival! Of course if we can eliminate the risk further it
would be better.

So let’s say we are right just 45% of the time and only let our winners
run 3x longer than our losers. This gives us a payout ratio of 3:1. If we
do the calculation and look at the table our risk ruin is 0.80%. This
means you have less than 1% of going completely broke on your
account. These are pretty good odds in my opinion.

Understand the process of how risk ruin works. You can use it to your
advantage to write things in your journal and track your percentage of
wins and the payoff ratio. It is useful to know since these are the things
that create and drive profits.

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

The 2% Rule
Some people have adopted the 2% rule for their money management
strategies in the stock market. The 2% rule is simply a cap that you
impose on yourself for any one given trade. We talked about this briefly
before in the trade size section.

For example, if you have a $100,000 account 2% would be $2,000 for

any one given trade. If you are trading a smaller account such as
$10,000 then 2% may not seem that big as it is only $200 especially if
you want to trade stocks that are $100 or more. Bummer!

Now the great thing about the 2% rule is that it does keep your risk
lower. If you never risk more than 2% on your account it would take
you ten losses in a row to only hit a 20% loss on your capital. However
the downside of the 2% rule is that it will slow down your profit growth.

So why is the 20% so critical? It is often said that we humans can take
up to a 20% loss without being over-whelmed or overstressed. If your
losses exceed 20% then a wave of emotions hits you and there are many
mind games that your brain starts to play internally making it difficult
to find a calm state of mind.

SCALING IN AND OUT

Scaling in and scaling out are probably my favorite topics to talk about
when it comes to money management. I would say I love talking about
it because many get it wrong including the major big financial gurus
(I’m talking about the money managers and financial planners who
give you advice, but don’t trade themselves in the market).

The Wrong Way to Scale

Here’s what the typical financial guru will tell you about stocks
regarding scaling. The smarter financial gurus will tell you to avoid
trading and buy a life cycle fund.

However, this applies only to people who do not want to be a trader or

want to make mediocre returns. If you want to trade, want to be active

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in the market, and want to take care of your own financial future then
this is what most financial gurus tell you regarding scaling and the
stock market.

If a company starts to head lower just purchase more shares because

eventually when the company heads higher you will have a better
position and you will make more on your investment.

The initial concept behind this is not a bad idea. If you understand
what you are doing and building a position based on consolidation
patterns, then purchasing more shares at a lower price is a smart
decision.

However if youre new to trading and you don’t have a few years of
experience under your belt then you may want to avoid this advice.
Here is what can happen if you follow this principle.

For example, when you get into a stock initially at $50 per share this
may seem like a good investment if you’re buying from company XYZ.
Now if the stock continues lower to $40 a share you would continue to
buy more shares. The reason for this is you are aiming and hoping that
the stock will run up eventually so you purchase more shares at a lower
price.

As it continues lower to $30 a share, you still continue purchasing more

company shares. Over the next few years the company goes to $20 per
share and then $10 per share and you still continue to purchase more
companies shares.

Unfortunately at this time this leaves you with no profit whatsoever

and a huge negative position in your account. You basically purchased
a ton of shares of a bad company.

Of course you may think companies like Apple or Netflix will never
have this happen to them, but over the years I have seen a few major
companies that tanked and even got delisted off the stock market such
as Enron and General Motors. Luckily for General Motors the
government put money into the company to save them, but what if they
didn’t? I can think of a few other companies that have been at the highs
and now have been at the lows for years!

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All I am saying is don’t leave your money to chance. Continuing to

invest in a negative position is a horrible idea. If anyone is giving you
this kind of financial advice on your investments or stocks, run from
them quickly because they probably have a different agenda in mind
or they just don’t understand stock market investing.

The Right Way to Use Scaling

The right way to use scaling when it comes to creating your position is
based on the consolidation pattern that I mentioned before. You always
want to watch a specific level that is your stock. Let’s take our example
earlier of purchasing company XYZ at $50 per share. We purchase 500
shares and we set our stop at $45 — giving it a $5 stop. A little more of
a stop than I normally like to do for stocks around $50 per share, but
at least we have a stop and we know our exit point.

We also need to know our maximum amount of shares that we are

willing to purchase. This means that I purchased lighter than what I
normally would purchase. If my max share amount I set for myself for
this trade is 800 shares then after purchasing 500 shares I have 300
shares that I can purchase later.

Review: Stop at $45, max shares allowed: 800

e Purchased 500 shares at $50

e Available shares to purchase: 300

Since our stop is at $45 this means that if the stock hits $45 we are out!
No questions, ifs, ands, or buts! So as the stock moves and wiggles
down to $47 we can continue to add until we run out of the max shares
we allowed for this trade. So let’s say we add 100 shares at $47.

Think of it as you are building a base at a certain level. If the stock hits
your stop — you get out, regardless of how many shares you have.

Review: Stop at $45, max shares allowed: 800

e Purchased 500 shares at $50

e Bought 100 shares at $47
e Available shares you can buy: 200

If the stock continues to $43 you would get OUT! This is because it hits

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

your predetermined stop. If the stock on the other hand heads higher
from $47 then you can sell some shares into strength like the 100
shares you added earlier. This helps you stay profitable and reduces
your risk and that is why it’s one of my favorite types of ways to scale,
manage money, and reduce risk.

This is the better way to scale into a stock. Rather than to always add
when a stock dips or goes lower because you never know how low a
stock can go.

Scaling Out for Profitability

One of my favorite ways to use scaling is still to scale out of positions
quickly after I have entered them. Here is how this concept works. Let’s
say you are interested in stock XYZ and it is $25 per share. You enter
your trade with 500 shares and set $23 as your stop.

When the stock starts heading higher to $27 you sell 100 shares. Since
it was a $2 stop earlier, I sold when the stock went up $2. You can take
profits sooner or later, just remember to take profits!

So what does this do for you? Well now you are at 400 shares rather
than 500. This reduces your risk. If the stock pulls back to your original
entry point at $25 per share you are still profitable by $200! ($2.00 gain
with 100 shares = $200).

This means you can lower your stop if you choose (although I don’t
recommend it) or in general you have more wiggle room as your stock
continues to head higher. Let’s say it goes to $29 and you sell another
100 shares. You took more profits and reduced your risk yet again.

So here is what we did so far:

e Bought 500 shares at $25

e Sold 100 shares at $27 ($200 profit)
e Sold 100 shares at $29 ($400 profit since it’s a $4 run from
$29 - $25 and we sold 100 shares)
e Profit of $600 collected already
e We have 300 shares remaining

If your stock gets back to your entry price you are still at $600 profit!

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If it gets to your stop at $23 you would break even since you would be
taking a hit on 300 shares at $2 each.

In reality I would continue to raise my stop. So after I took profits the

first time I would raise my stop to entry. The second time you take
profits you raise it a few bucks below that. This way you can continue
to stay profitable and reduce or limit your risk as much as possible.
Here is an example if the trade continued all the way through.

e Buy 500 shares at $25. Stop at $23. ($1,000 risk)

Sell 100 shares at $27
o Profit $200
o Stop raised to entry at $25
o 400 shares remain
e Sell 100 shares at $29
o Profit $400 (Total profit $600)
o Stop raised to $27
o 3800 shares remain
e Sell 100 shares at $31
o Profit $600 (Total profit $1,200)
o Stop raised to $29
o 200 shares remain
e Sell 200 shares at $29 as stock hit the stop.
o Profit $800 ($29-$25 is $4 profit on 200 shares)
o Total profit $2,000

You can see the power of this system as you become profitable so long
as you continue to take profits into strength and continue to raise your
stop. I didn’t add anything to my position. I kept things simple. You
don’t have to make things complex to make them work.

The main problem during this system is that if you hit your stop
initially taking a $1,000 loss can be problematic. This is where your
biggest risk is. If you enter properly and take profits quickly to reduce
your risk, you can reduce this risk even a few hours after you place the
trade.

One way to counteract this problem is to start light on your initial

entry. Rather than going in with 500 shares you can go in with 200
shares. Then as the stock heads in your favor you add 100 shares. Of
course you still continue to raise your stop, but unfortunately this will

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 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

slow down your profitability. There is always a trade off in the market.
Here is an example of how scaling in would apply similarly to the above
example.

e Buy 200 shares at $25. Stop at $23 ($400 risk).

e Buy 200 shares at $27. Stop at $25 ($400 risk) Explanation:
you would break even on your original 200 shares and then a
$2 loss per share on the $200 you just bought.
e Buy 100 shares at $28. (Adding at a $1 gain since I’m adding
only 100 shares rather than 200 shares). Stop at $26 would
give us a:
o $1 profit on the first 200 shares = $200
o $1 loss on the second 200 shares = (-$200)
o $2 oss on 100 shares we just bought = (-$200)
o Total loss at the stop would be (-$400)
You can see that your risk is the same here as your original 200 shares.
Your profitability or time to take profits would start maybe at $30
rather than at $27 like with the first example. Although this may be a
bit “safer” and less risk averse — it will slow down your profitability.
You have to run the numbers and scenario to see which method would
work best for you.

One thing to remember is never continue to add to a losing position or

trade. This is a recipe for disaster! I can’t believe I hear some
financial gurus giving this kind of advice!

TAKING MONEY OUT OR PUTTING MONEY IN

When it comes to money management you need to always take profits
and put money into your bank account to stay profitable, live off of your
investments, and have a life. If you don’t take money and put it into
your bank account from your trading account then it will just sit there
as investment or trading income.

This is not a bad strategy to have if you plan to use your trading
account as a retirement account. However in order to live off of your
income you need to have withdrawal increments. In addition I believe
that if you withdraw money especially after large wins it allows you to

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keep yourself more humble and in check almost as if you didn’t make
that money.

So here are a few things to think about regarding taking money out or
putting money into your trading account. First off let’s discuss putting
money in.

Adding Money to Your Account

Depending on your current financial status in life you may be hesitant
to put in $500, $5,000, $10,000, $50,000, etc. What you need to think
about is that everybody starts at the bottom. You won't be a
professional trader on your first trade. This is why I recommend you
start trading with a smaller account balance even if you can afford a
larger account balance.

Let’s say for example you can potentially invest up to $50,000 to trade.
For some people this may be an extreme amount and for other people
this might be chump change. Rather than putting all that money in
immediately and start trading, it is far better to put in $5,000 in your
trading account than your full $50,000.

The reason for this is because you don’t want to get carried away with
your trades as the risk is against you and in the markets favor. If you
blow up your account by doing the wrong things, you don’t want to blow
your full investment capital. If it does happen, this is more likely to
happen in your early years of trading since you may get feelings of
wanting to add to losing positions, allowing a stock to blow past your
stops, hitting the wrong order entries, and so forth. There are many
different mistakes that beginners make and you want to minimize
those mistakes as much as you can.

As the next year progresses and depending on the skills you've

developed if you’ve been profitable you can add another $5,000 or
$10,000 if you feel comfortable. This will allow you to make more
money since you were already profitable last year. The following year
youll have more money to trade with and make a larger profit.
However, you still didn’t put in your full $50,000.

The reason you still slow things down for the second year is because

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you might not have experienced a bad market year. Sometimes it takes
multiple years to experience a bad market. Since markets go in cycles
you may have a few years of a great market and then a few years of a
bad market.

The important lesson to learn from the second and third year is to learn
how to trade in bad market conditions that are not in your favor. You
may decide that you don’t or won't even trade during bad market
conditions because you can’t handle the volatility or the craziness — so
instead you will have to learn how and when to sit out. It will test your
patience!

Taking Money Out

In addition to having a plan for adding money to your account, you
should have a plan for taking money out of your account. You may want
to do this in order to have a certain lifestyle and have money to live off
of. Or it may be a method to keep your risk level lower.

Taking money out is a great psychological way to make you humble.

Human behavior is irrational and erratic. If you just had a major win
you may have an emotional high and this can be dangerous because
you may be overconfident. With overconfidence you may over leverage
your next position and take a huge loss!

By withdrawing money after you have a big win, your brain will
recognize that the money is not there anymore. If the money is not
there then again you will be more humble and focused on the risk
rather than on the profits you just made.

You will have to do some studying of yourself and your own personal
emotions. It’s a tough subject to master. It’s for this reason I have
created my inner game course for trading called “Trader
Transformation.” This course focuses specifically on inner mentality
and psychology. Nevertheless you need to read how you are feeling and
then make adjustments.

One of the best ways to do this is to video tape yourself for the whole
day. It may be 8 to 12 hours of footage, but once you play back the tape
and study exactly your feelings, your actions, and how your body
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

language looks on film then you may be able to evaluate yourself when
you are feeling more calm as you watch the tape.

So how do you play with this concept of taking money out to make
adjustments? Well you just had a major win, a win that is huge for you,
or brought you a great emotional high and happiness then you could
withdraw all the winnings. If you wanted to continue to compound, you
could withdraw just 50% of the winnings.

Even if you withdraw just 10% of your winnings and let 90% sit and
ride in your account, it is better because the psychology and action of
you withdrawing money will put you back into the state of “Hey, I need
to be careful here — this is a risky business and I always need to have
the risks in the front of my mind (not the back of my mind).” So by
doing the action it will jolt you to be in a better mental state.

Regarding other points to withdraw money if you like you can also do
it on a monthly basis to have money to live off of every single month.
For some people they may do it weekly to keep them in a reality check.
If you are a long-term investor you may only do it once a year or once
every five years depending on your outlook on your investments.
Whatever your strategy is to select a plan, remember that you should
withdraw your money at some point and if you don’t know when, then
you have no plan.

So have a plan and create one of when you will withdraw funds,
whether that’s from a profitable trade and based on when you make
money from the market, or that’s a time based constraint such as every
month — you get to decide. However, if things aren’t working well with
your withdrawal system then you need to make adjustments quickly
and change it up. Don’t be scared to change things if it’s for the better.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Chapter 10:
IDEAS FOR VARIOUS
ACCOUNT SIZES

A Little Heads Up Before We Talk About Some Ideas for

Various Accounts
I think it’s important to understand where you are currently starting
in your financial life. Whether you're in debt or you have an account of
more than six figures to trade with, we all start at the same place and
that is at the bottom.

That is because the market doesn’t care how much money you have. If
you are a novice or a crappy trader with a huge account it just means
youll burn through more money faster. Remember that the approach
to investing should always be done cautiously especially at the
beginning.

Build a little systematic approach to evolving your trading career or

business. Start small, by trading a handful of shares. Again I
understand that you will probably lose money on the commissions, but
it’s a way for you to build confidence and experience how the markets
work.

Once you are comfortable and gain some experience you can always
push a few extra buttons on the keyboard to trade larger quantities of
shares.

Remember that my advice below on different account sizes is relative

to what I believe you could do if you are an average person looking to
be successful in the stock market and are active in the markets.

This means that if you don’t want to put that much effort into trading,

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you don’t want to watch your positions, and you don’t want to do your
homework then you should avoid the market altogether.

If you are someone who does not want to do a lot of homework and put
the effort behind studying the stocks that you plan on trading then you
should probably put your money into a lifecycle fund.

With a lifecycle fund your money will adjust over the next few years
depending on the lifecycle that you put it in. For example, if you have
a lifecycle fund that’s 30 years long, the first 10 years the lifecycle fund
may put your investments into aggressive stocks and companies. As
time moves forward, the lifecycle fund will automatically adjust to less
risky investments and less risky equities.

So if you are not interested in managing your trades, stocks, or

positions then invest in a lifecycle fund. This is the typical “set it and
forget it” method to investing. At least thats my personal
recommendation if you want to have exposure to the markets without
doing too much.

If you don’t want to do your homework or put the effort into watching
your positions and managing them — then don’t trade stocks as you will
get burned!

However if on the other hand you are interested in putting the time
and effort into managing your money then I do want to share with you
some tips and ideas depending on the account size that you have.

Remember that these tips may apply to various categories that I will
be discussing. You have to take a look at your specific situation as well
as how motivated, dedicated, experienced, and risk tolerant you are to
truly figure out which tips and ideas will apply to you.

For example some of the tips that I mentioned for people that have over
$100,000 to invest may apply to people that have less than $10,000
because their risk tolerance is different.

You may even see that someone with over $100,000 investment capital
can be more cautious with their investments because they have more
flexibility. Typically if you have less than $10,000 to invest then you
may want to be more aggressive since you are looking to build up a nest

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egg. However, if your risk tolerance is low you may want to do the same
thing that the people that have $100,000 in their account do which is
stay picky about your investments.

So again I reiterate that you need to take other factors into account
when reading these ideas and concepts for the different account levels.
Everybody situation is different since we all have different goals, risk
tolerance, experience, and so forth.

Under $25,000 Account

Account sizes that are under $25,000 are a bit more difficult to manage.
The reason is because you have regulations going against you. First off
you have the general stockbroker regulations where you have certain
account minimum requirements.

Certain brokers won't even allow you to open up an account unless you
have $5,000. Other brokers have a minimum of $10,000 in which case
if you have only $2,000 you will not be able to open an account with
them. Nowadays brokers have been getting better where there are only
$500 or a $1,000 minimums, but some premium brokers require
multiple thousands of dollars to open an account.

The second thing that you have to battle is the pattern day trade rule.
If you are planning to day trade with an account that’s less than
$25,000 you have to deal with the pattern day trade rule. This means
you can’t execute more than four day trades within five business days.

Not to mention you won't be able to purchase that many shares when
trading account of this size.

I typically find that people who have less than $25,000 in their trading
account get sucked into day trading. The reason for this is they are
trying to compound their money quickly. Although this is a good idea
or concept in theory, it’s a bad concept to training your trading muscles
and mentality to always settle for day trading.

On one hand it’s kind of like teaching your dog to bark at the dinner
table and constantly giving it food. From one side it keeps the dog quiet
when you give it food, on the other hand they will constantly bug you
for food at the dinner table.

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The issue with only focusing on day trading with an account size this
low is that you will have to be patient and more picky with your trades
because of the pattern day trade rule.

In the future when you decide that you want to swing trade positions
as your account grows you will not have experience. For example it’s
very tough to purchase $200,000 worth of stock that doesn’t have a lot
of volume. These types of trades are better to swing trade and build up
a position over time.

Idea 1: One idea for you if you have a small account is to add some
extra study time to your arsenal. Learn a little bit more about options
and how to set up spreads to where you can collect premium as time
moves forward.

This will allow you to collect money whether the stock moves or doesn’t
and allows you to risk less. On one hand it slightly risky because it is
more complicated and you do have the time factor working against you.
On the other hand you don’t need to trade a bunch of shares in order
to have a nice position with options.

I would go with learning about vertical spreads, calendar spreads,

butterfly spreads, and iron condors (these are just the names of the
option strategies) if you choose to take the options route or you can get
my Options Foundation course to give you a leg up.

Idea 2: You can still continue to purchase stock or swing trade large
stocks that move $20 or $50 even if you can’t purchase a large position
in the company.

This will allow you to still learn about swing trading, get exposure to
expensive stocks, and learn how the market moves.

For example, recently CMG (Chipotle Mexican Grill) had a $75 run in
just under a month. If you had just 15 shares you would have made
$1,500.

Remember it’s not about purchasing a large quantity of shares, but

buying the right stocks at the right time and letting them run.

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$25,000 to $100,000 Account

Once you have over $25,000 in your trading account, I find that most
people become more relieved. The reason for this is you know you are
more serious in the business just from the sheer fact of having this
money in your account.

Not to say that a $10,000 loss couldn’t hurt you, but having this capital
in your account allows you to be more conservative with your trades.
In essence you are risking less in terms of your total percentage of your
account in order to make enough money to sustain some basic living
expenses.

For example, if you wanted to day trade and you had over $25,000 in
your account the pattern day trade rule does not apply anymore.

All you have to do is sign a form that says you are a pattern day trader,
your broker will flag you as a pattern day trader, and so long as you
keep over $25,000 in your account you are not limited to the number of
trades that you do.

So even if you executed one trade a week and you only risk $15,000,
but you make $900 a week on average (which is not a huge number in
terms of trading) you're able to cover most of your basic expenses the
first week if you live conservatively. The next week you would cover
your rent and other expenses. Then the final two weeks of the month
would be money that goes into your pocket or to add back into your
trading account.

The point I’m trying to make here is that you don’t have to risk a lot
more to make enough money to live off of when you have $25,000 in
your account or $75,000 in your account, especially if you have a
conservative lifestyle. This usually gives people a sense of relief.

My personal recommendation when you have $25,000 to $100,000 is to

always have some money in cash. So if you have $100,000 in your
account then you may only want to use $50,000 at the most on trades
and investments.

This would allow you to add to future positions, hedge, or give you room
to make additional investments if you desire. Even though getting in

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and out of the market is usually easy and liquid compared to real
estate, you still want to leave money for cash in those “just in case”
moments. Not to mention you don’t want to over risk your full account.
It is one of the reasons that people discuss the 2% rule as I mentioned
earlier.

Another thing that you could do with your account is to have a few
long-term investments. These could be investments that you keep for
2-5 years. You could have this in stock or you could have it in long-term
option leaps depending on how comfortable you are with options.

If you have it with stocks you can mix stocks and options and sell
covered calls on your stocks. If you don’t understand the strategy, you
may want to learn more about options. Again it’s basically selling
insurance premium every month for the stock that you own.

Once you have a few long-term positions then you could have some
trades as swing trades. These are trades you would hold for maybe a
handful of days to a few months.

Finally, if you want to do some day trading you can leave a small
fraction of that money allocated for day trading: Day trading is fast and
quick. If you plan on day trading then you should be very comfortable
with your computer system and knowledge of using your trading
software.

$100,000 to $1,000,000 Account

In this section I’d rather talk about capital preservation rather than
making more on your investments. The reason is many people at this
level burn money in the stock market or they blow up their account.

So I would like to give you some tips on how to properly preserve your
money as well as continue to make more money from your investments
when you have over $100,000 in your trading portfolio.

Once you have over $100,000 in your account I would imagine you’ve
been trading for some time or you did a few smart things in life with
your money. If you are new to trading and your putting in over
$100,000 into your account need to be extremely cautious.

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§ Guide to Trading on the Stock Market

I’ve met, heard of, and seen people who earned hundreds of thousands
of dollars through their businesses only to put it into the stock market
and lose it all very quickly! One of my mentors told me he blew through
$400,000 his first year, then he put in another $500,000 the next year
and blew through that as well!

It’s crazy how emotions take over once you start dealing with these
large sums of money. If you’ve achieved the hundred thousand dollar
mark by working through it with trading then you probably know the
discipline you need to have.

If on the other hand you are starting out with a large account then you
want to trade extremely lightly and be more humble about the stock
market because it can wipe you very quickly! Start trading just a
handful of shares until you build experience.

If you’re interested to diversify some of your investments it may be wise

to buy a few mutual funds, some treasury bonds, some commodities
like gold, and spread these trades out over a few months. Don’t just
buy everything all in one day.

Then leave some cash for yourself to trade with or learn with if you
have interests in other areas. Again start trading lightly and build up
the experience slowly.

However if you are one of the successful people that made it to the
$100,000 dollar mark on your own by trading from a few thousand
dollars in your account then you are one of the few that survived and
probably know what you are doing.

The game at the $100,000+ dollar mark is different than it is when you
have less capital. For example you can’t put all of your money into one
stock all in one day. Especially if the stock is trading on limited volume.
This is because you can move the stock too much.

The same is true when trading penny stocks. Usually when you have a
large portfolio I don’t recommend purchasing $500,000 of a stock that
costs $0.95 cents and trades only 300,000 shares a day.

This is because you would trade all of that stock’s daily volume in one
trade and then some. This would move the stock too much, not to

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mention make it extremely difficult for you to get out of it or sell your
position in the future. In other words you would become an operator
and your money could be frozen up if you couldn’t sell your shares!

Always be mindful and cautious when you have a larger portfolio.

Although it does give you more room and flexibility you need to
understand what's happening in the market and you usually can’t
trade stocks the same way that you could with a $20,000 account.

You may need to do multiple purchases throughout the day to build up

a position so that you can swing trade a stock. In addition, you may
have to have multiple days of selling to get out of the position so that
you don’t push or run the stock down too far.

FREE 30 DAY TRIAL TO THE CRITICAL CHARTS

If you want to study and see the stock charts
that I am watching — stocks that may break out
higher during current market conditions then
visit www.tradersfly.com and get access to my
critical charts membership.

as — DS I typically post a few times a month to show you

stocks that are moving, support or resistance lines to watch, or stocks
that may breakout or breakdown. It is a great resource to see hot stocks
or just a place where you can practice your chart reading skills.

If you have never signed up to the critical charts before, you are
welcome to join me and try the critical chart service for 30 days
absolutely free by visiting the following link in your browser window:

http://www.bit.ly/chartfreebies
Once you are there, click the “sign up” button and register for the
service. You will get a free 30 day trial to the critical charts. If you
choose to continue receiving access to the critical charts, you do not
have to do anything and you will be billed $12 per month, but if you
decide not to keep the service you can cancel anytime.

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CONCLUSION AND WRAP UP

Thank you so much for joining me and I appreciate you sticking with
me. I know that some of the things I mentioned in this book could have
you scratching your head as the concepts may be new, different, or just
theories you are not used to.

Remember that this is just the start and the beginning of your stock
market journey so long as you care to further enhance your education.
The journey can be a difficult one if you’re trying to be a full-time stock
trader. Nevertheless if you have the patience, determination, and
willingness to make changes in your personal actions then I know you
can be successful!

Success in this business doesn’t happen overnight or even over a one

year period. It takes multiple years to understand how the market
works and how to put all the pieces together of this business.

Just like it takes four years to get a degree at a college until you are
able to work at a particular job, expect the same type of concept in the
stock market. However there won’t be anyone nagging you to take any
classes or courses. You have to be self-disciplined to do studying and
homework on your own.

The more studying and effort you put in, the quicker you will learn this
business. Unfortunately, if you don’t have the self-discipline to evolve
your education and do your own homework then you just won’t
understand the business. It will take you a very long time to put things
together, and more than likely you won't be successful.

Some people will never learn how the stock market works or how to
make money with stocks because they study the wrong material or
because they aren’t willing to do what’s necessary to evolve their craft
or themselves.

Always be mindful and patient in this business. It takes time to get it

just like anything else, but when you do, it makes it all worth it!
Remember to constantly improve your education and invest in yourself.
Investing in yourself should be your biggest focus!

aoe
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

So where should you go next with your education? I highly recommend

that you take a look at some of my stock market educational video
courses if you haven't already.

Stock Trading Foundation (the green courses) is a great course to

continue your education. It’s over three hours long and includes a study
guide with charts of looking at healthy price movements in a stock. It
even shows you when to get in and out of stocks. The course is a bit
more technical and focuses on charts, stock movement, and volume,
but I know you can handle it!

Continue to push yourself to be better. Don’t wish that things were

easier for you: instead wish that you were better and constantly work
to improve.

Before I sign off, I want to share some helpful resources to help you
evolve your trading. Thanks again for sticking with me and reading my
book. Always remember that there is more to life than trading.

Do what you love, contribute to others, and most importantly live life
abundantly!

ae
Sasha Evdakov

eS.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

APPENDIX:

Resources
Website Education
Tradersfly.com: My personal stock trading website. Signup for the
newsletter and get my rapid recap videos to see the stocks I am
watching

Tradersfly.com/resources/ : Get a bunch of great stock market

resources from FAQ’s, to broker reviews, tools, trading tips, etc.

Twitter.com/tradersfly/ : Follow me on Twitter to see real-time charts

of the stocks I am watching along with some little advice on trading for
that day.

Rise2Learn.com : My primary company where you can see all the

courses and material I offer from stock trading to business education.

SashaEvdakov.com : My personal website. Get news on various courses

I have coming or read my personal blog and get some business tips.

Stock Charting Resources

Stockcharts.com: Special thanks to stockcharts.com for allowing me to
use their charts throughout my book.

Freestockcharts.com (TC2000): I love their charting program for

scanning and finding trade opportunities.

Tradingview.com : Another great charting website.

Finviz.com : Great website for screening stocks as well.

 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

Frequently Asked Questions

Do you need to go to school or have a college degree to become a stock
trader?

No you don’t. That’s one of the beauties behind trading on the stock
market. Everyone is technically an equal in terms of degrees of
education.

Of course you can gain more experience and proper guidance by having
a trading coach just the same way that professional athletes may have
a coach. However it’s not required to become a professional. You can do
it on your own, but it does make it more difficult.

How long does it take to become a profitable trader?

The length of time for you to become a professional trader will vary
from person to person. For some people they will never become a
professional because they never will get out of their comfort zone and
make changes to improve their trading.

Normally these people stay where they are once they start trading.
When they see mistakes happening they are in denial and they never
get better.

For other people that continuously improve their game. It may take
them a few years of study time as well as experience to get to an
acceptable and proficient level.

Trading is not a business or career that you will learn overnight. Just
like you don’t become a doctor in a weekend, you will not become a
professional trader either.

However if you continue to study and make improvements to not only

your knowledge but also your actions when it comes to trading then
there is no reason to say that you won't be successful. The only thing
that’s stopping you or slowing you down is yourself.

Remember that you are trading with the best of the best. It takes years
to become a great doctor and it will take years for you to become a great

woo
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

trader. Just keep evolving your crafts and you will get to your desired
outcome.

Where should I begin to learn stock trading?

I highly encourage you to start with reading a handful of books to get

you started. This is a good initial point, but it will only take you so far.

I often find that people learn better visually if they can see exactly
what’s happening. For this reason I believe learning from videos,
DVDs, or seminars are the better route to take.

This is one reason why I have so many video courses about trading
because the information digests better.

Mentorship programs are one of the best ways to learn stock trading,
unfortunately these programs may cost thousands of dollars for just a
few months of coaching since any good trader who enjoys trading would
probably rather be trading than wasting their time on teaching people
who may or may not be motivated.

Is a trading mentor necessary to become a successful trader?

I don’t believe a trading mentor is necessary to become a successful

trader. At least not a direct mentor. I do think that it would be much
more helpful and would accelerate the learning curve if you can find a
mentor, but it can be more expensive than most people would want to
pay.

For example in my mentorship program I offer thousands of dollars of

course material that I have created with my mentorship program in
addition to multiple weekly conversations and calls.

Having access to all this information, knowledge, and having someone

look over your shoulder is invaluable. The only thing you have to
ensure that you do is to make adjustments to your trading and your
actions.

How much stress do you have when trading stocks?

You shouldn't have too much stress when you're trading stocks. If you
have a lot of stress while putting on a trade or taking off the trade, that

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means you are probably trading more money than you are comfortable
with.

You need to find a comfortable account balance to trade with or build

your confidence level enough to the point where you are relax and
understand what’s happening with the market or your stocks while you
have a position on.

If you stressed then you need to trade less capital or stop trading.

How do you find a comfortable account balance to start with?

I always like a systematic approach when determining a comfortable

account balance. If you are brand-new to trading start with trading five
or ten shares of a stock. You may lose some money on commissions
because you're trading such a low dollar amount, but just negate this
at the beginning or multiply your ten shares times 1,000 shares.

Every month that you are successful or profitable, increase your

trading amount. Increase it to 20 shares or 50 shares.

If you don't like the share approach then use a dollar amount per trade.
Such as no more than $500 on any stock the first month, then after a
few profitable months you may increase this limit to $2,000.

Continue to increase and improve your game until you feel

uncomfortable. When you feel uncomfortable then go back to the
previous lower level and become exceptionally comfortable until you
are ready to move forward.

I’m stuck and not progressing. How can I improve my trading?

I find that often times people who are stuck and not progressing either
lack in the outer game which is learning the material or learning about
trading in general. Or the second issue, which is typically more likely,
is they are not willing to make changes to the trading system, their
style, or trying new things as they are emotionally invested.

This may mean that they are headstrong or have an ego. When this
happens you are less inclined to try new things because you think you
are always right. Unfortunately this limits you from trying new ways
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

and concepts of making more money.

Can a stock price increase without volume?

Yes stock can increase in price without heavy volume or a rise in

volume. Unfortunately usually a move like this is unsustainable and
eventually the stock will fall. When the pullback happens it is usually
more violent since there is not enough volume or people holding the
shares to support the stock.

How should I trade when the market opens?

It depends on the type of trader that you are. I normally tell beginning
traders to sit out the first half hour of trading. This is because we are
in the jungle in the first half hour after the opening bell and the market
can be very chaotic, switching directions multiple times.

Wait for breaks or look for a direction about 30 minutes after the
market opens. I know that it may be exciting to try and jump on a trade
very early from the beginning. Unfortunately, this usually results in
losing trades if you are new to trading.

Once you are more experienced in spotting the trends, understanding

the markets, and reading the momentum in the behavior, then you
may jump in on a trade from the beginning — until then just be patient
and wait until that jungle chaos calms down.

How long should I spend analyzing a stock chart?

When you first get into technical analysis it may take you 30 minutes
to look at a chart and understand what’s going on. This is because you
have to take into account many different time perspectives.

You may take a look at the monthly, weekly, daily, and even the
intraday chart. In addition it just takes longer when you are first
learning about the markets.

As you get better and gain experience you may only spend about 5 to
10 minutes on a chart. If you are familiar with the stock and its action
then it may take you less than a minute to understand what happened
with today’s action.
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

How do you deal with boredom or loneliness?

Sometimes there is nothing that’s happening in the markets. There

may be weeks where stocks or the market is consolidating and there is
not much to do. If you are good at playing sideways markets then you
can still trade.

If on the other hand you are forcing trades just for the sheer fact of
boredom or loneliness than it might be better for you to step back from
the screens.

It is in these situations where a hobby or an activity is very helpful to

have. For me personally, some activities that I enjoyed are blogging,
creating videos, and teaching. Luckily for me it is something that
complements my business, but it also helps me take a step back from
trading and take a break whether that’s for a week or a whole month.

Whatever activity or hobby you choose to do is up to you. Just

remember that you need some balance in your life to step back from
the screens from time to time. If you find yourself feeling bored at the
monitors and you are forcing trades then shut everything off and step
back.

Go to the beach or the mountains, do some reading, study more stock

market material if you want, go play a sport, but whatever you do don’t
make a trade just because you are bored - it will only burn you later.

How do you setup the morning for your day?

I always think you should have a morning ritual that you go through
especially if you are a trader. This helps keep your mind always
consistent and at ease.

If you don’t have a morning ritual or systematic approach after you

wake up then every day can seem like a roller coaster.

This may be fun if you are a person who likes to live moment to
moment, however it would be very difficult for you to be aware of any
differences in your emotions or actions when trading if you have a very
volatile or wild morning ritual.

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Stay consistent when you go through your morning ritual. You may
want to write one out and build one from scratch and follow it as much
as possible the first few weeks. After you do it for a bit of time it will
be ingrained within you. Here’s an example of a basic morning ritual
that you can modify to your liking.

e 6:30 am — wake up (drink bottle of water)

e 6:35 am — morning smoothie and breakfast
e 6:55 am — light workout and cardio (physical)
e 7:30 am — shower and hygiene (teeth)
e 7:45 am — reading and studying (something for the mind)
e 8:10 am — meditation and/or stretching
e 8:30 am — review stock market setups from previous night
e 8:45 am — scan for new setups
e 9:10 am — break

When is the best time to trade in the stock market?

Typically the stock market has the best run from Thanksgiving to
January. This is usually a season when many people receive bonuses
or are just more euphoric into putting money into the market.

As people are more happy or inclined to invest their money this makes
the market go up. This season isn’t always the best for the market
however more often than not it’s during November until January
where the market makes some great moves — so always keep an eye on
it during these months.

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Common ETF’s
20 Most Heavily Traded ETF’s
Ticker ETF Name Avg. Volume

SPY SPDR S&P 500 109, 164,984 F

iShares MSCI [Emerging Markets ETF 65,532,496

SSiptesioe
$iM ee iShares F
Russell 2000 ETF

oo QQQ ee
ZL oy canned Select Sector SPDR
iShares MSCI Japan ETF ae
VXX “S&P 5
500 VIX Short:Term Futures ETN
= Market Vectors TR Gold Miners 220M.
FXL iShares (
China Large: Cap ETF ce
: mg

-EWZ iShares MSCI Brazil Capped ETF

EFA iShares MSCIEAFEETF oes
Emerging Markets
) ETF a hd ie
_ 8x Inverse Natural Gas ETN
en
15,489,789
Utilities Select Sector SPDR __ 12,582,311
_ UltraShort S&P500 BU aad
Daily Inverse VIX Short: Term ETN an = 10,648,198
_ Industrial Select Sector SPDR 10,183,355
iShares U.S. RealEstateETF 10,055,374
Energy Select Sector SPDR 9, 977, 118

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10 Large Cap ETF’s

Ticker ETF Name
SEDs SPDR S&P 500 ETF
“EVV. iShares Core S&P 500 ETF _
EFA iShares MSCI EAFE Index Fund_
7 QQQ sini PowerShares QQQ Trust, Series 1
IWF he iShares Russell 1000 Growth Index Fund |
‘VEA ‘Vanguard MSCI EAFE ETF ;
IWD — iShares Russell 1000 Value Index Fund
: VIG id Vanguard Dividend Appreciation ETE
voo : Vanguard S&P 500 Tr
“VUG . Vanguard Growth Index Fund

10 Mid Cap ETF’s

Ticker ETF Name
.“MDY
IJH ntheSPDR
iSharesMidCap
Core S&P
ceMid-Cap ETF TS
ae Tee a Teer,

IWR. ae iShares Russell Midcap Index Fund

Any leeks Vanguard Mid- Cap ETF
IWS : iShares Russell Midcap Value Index Fund
; IWP “ iShares Russell Midcap Growth Index E und.
IJK iShares S&P MidCap 400 Growth Index Fund
IJJ ‘iShares S&P MidCap 400 Value Index Fund
VXF Vanguard Extended Market ETF ==
VOE Vanguard Mid-Cap Value ETF

10 Small Cap ETF’s

Ticker ETF Name
IWM
ee _iShares
eeRussell 2000
S&P Index Fund
Small-Cap err PE re eT. TRER Se AE bo,Bete
mk are, Smallce ETF peter he race ea beet Oa

IWN aan iShares Russell 2000 Value Index Fund ee ee

WO.) 5 iShares Russell 2000 Growth Index Fund oN,
VBR Vanguard Small-Cap Value ETF

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SCZ iShares MSCIBAFE Small CapIndexFund

VBK n _ Vanguard §Small- Cap Growth ETF
“id;ietielial ' _ iShares §S&P SmallCap 600 Value Index Fard’
IJT iShates S&P emeiiCap 600 Growth Index Fund

20 Commodity ETF’s
Ticker ETF Name

GLD SPDR Gold Trust

TAU___ iShares Gold Trust _
m Oy <r ey oeee ae = ee
DBC. PowerShares DB Commodity Index Tracking Fund
DIP iPath Exchange Traded Notes Dow Jones -AIG Commodity
peer er Index Total Return Medium-Term Notes SeriesA
. DBA _PowerShares
DB Agriculture Fund
GSG iShares GSCI Commodity-Indexed Trust
‘ SGOL ee ETFS Physical Swiss Gold Shares
“ELEMENTS IExchange ‘Traded Notes Rogers International
, _..... Commodity Index- Total Return ©
PPLT ETFS Physical Platinum Shares "
UNG _ UnitedStates
S Natural Gas Fund, LP :
‘USCI : United States Commodity Index Fund
‘USO _—United States OilFund, LP
“PALL | _ETFSPPhysical Palladium Shares .
AGQ. _—" ProShares Ultra Silver Pies.

‘SCO _ProShares UltraShort DJ-UBS Crude Oil

‘SIVR _ETFSSilver Trust
GCC Bau GreenHaven |
Continuous Commodity Index Fund

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Currency ETF’s
Ticker ETF Name
UUP PowerShares DB US Dollar Index Bullish Fund — ae
EUO. . ProShares UltraShort Euro
YCS” 7 ProShares L
UltraShort Yen Soha
FXA 7 CurrencyShares Australian Dollar Trust CA inaS
FXC. ‘ CurrencyShares Canadian Dollar Trust eer. 148
| FXF ee CurrencyShares Swiss Franc: Trust . |
FXE *. CurrencyShares Euro Trust . ;
CYB pu ‘WisdomTree Chinese Yuan Fund
DBV 5° PowerShares DB G10 Currency Harvest Fund
CEW 34 WisdomTree Emerging Currency Fund
FXY CurrencyShares JJapanese Yen Trust
-FXB an CurrencyShares British Pound Sterling Trust
| UDN fi PowerShares DB US Dollar Bearish Fund
. USDU Wisdom'Tree Bloomberg
B U.S.Dollar Bullish Fund |sensenine
> cee : CurrencyShares Swedish Krona Trust
“CNY. a "Market \
Vectors Chinese Renminbi/USD ETN
“DRR- ae ‘Market VVectors Double Short Euro ETN
BZF ;“e WisdomTree Brazillian
B Real Fund 2 hindi

ICN WisdomTree Indian Rupee Fund

-FORX _ PIMCO Foreign Currency Strategy Exchange-Traded Fund
CROC ProShares
“BUFK UltraShort
ProShares Short Euro Australian
cay Dollar”
sea SD Seeeig Mw lh i, wot oe

CCX ___ WisdomTree C

Commodity Currency Fund timitot Ope
_FXCH _ CurrencyShares Chinese Renminbi Trust Mee || le
FXSG . CurrencyShares Singapore Dollar Trust

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25 Bond Type ETF’s

Ticker ETF Name

_BND os Vanguard |Total Bond Market ETF

LQD iShares iBoxx $Investment Grade Corporate Bond Fund |
_AGG aw iShares Core Total U.S. Bond Market ETF
BSV Vanguard Short- Term Bond ETF
HYG iShares iBoxx $ High Yield Corporate Bond Fund
CSJ _ iShares Barclays 1-3 Year Credit Bond Fund
Reis an iShares Barclays Treasury Inflation Protected Securities Fund
: TEE cau. iShares ]Barclays fife10 Year Treasury Bond Fund
JNK hon SPDR Barclays Capital High Yield Bond ETF
VCSH Vanguard Short: Term Corporate Bond ETF
; SHY fa iShares Barclays I 3 Year Treasury Bond Fund
BKLN | PowerShares Senior Loan Portfolio (Fund) ee
CIU a iShares Barclays Intermediate Credit Bond Fund |oe ary
MBB © ae iShares Barclays MBS Fixed: Rate Bond Fund
- PIMCO 0-5 Year US High Yield Corporate ‘BondIndex
__ Exchange-Traded Fund _
3 EMB iShares JPMorgan USD Emerging Markets Bond Fund |aM ‘7%
TBT ProShares UltraShort 20 Year Treasury 2
‘SJNK — SPDR Barclays Capital Short Term High Yield Bond
PME 2 te iShares Barclays 20 YearTreasuryBond Fund an
MINT _ PIMCO Enhanced Short Maturity Exchange-Traded Fund
BIV _ Vanguard Intermediate-Term Bond Index Fund
VEIT, Vanguard Intermediate- Term Corporate Bond Index Fund a
FLOT iShares Floating Rate Note Fund
SCPB FSPDR Barclays Capital Short Term Corporate Bond ”
_BOND _ PIMCO Total Return ETF
 Start Trading Stocks: Beginners Guide to Trading on the Stock Market

10 Consumer Discretionary ETF’s

Ticker | ETF Name
XLY Consumer Discretionary Select Sector SPDR F und —
me: ER | Vanguard Consumer Discretionary Index Fund ne, =
FXD a First Trust Consumer Discretionary AlphaDEX Fund —
XRT _ SPDR S&P Retail ETF 4
| IYC | iShares Dow Jones US Consumer Services Sector Index Fund
RXI — iShares S&P Global Consumer Discretionary Index Fund — 4 a
PBS ‘ “PowerShares LDynamic Media Portfolio a
PEJ iio. PowerShares I
Dynamic Leisure & Entertainment Portfolio
‘CHIQ GlobalXChina Consumer ETF
PSCD Poperenuees S&P SmallCap Constinier Discretionary Portfolio

10 Consumer Staples ETF’s

Ticker ETF Name
XLP a
ees Consumer
eeStaplesee
Select ae
Sector oe
SPDRAserehe
Fund TSU

. ECON _ Dow Jones Emerging Markets Consumer Titans Index Fund _

| FXG ae "First Trust
1 Consumer Staples AlphaDEX Fund a
KXI F iShares S&P Global Consumer Staples Index Fund i
IYK 7 iShares Dow Jones U. S. Consumer Goods Sector Index Fund |P
PBJ % PowerShares Dynamic Food & Beverage Portfolio
RHS ‘ Guggenheim S&P 500 Equal Weight Consumer Staples ETF
IPS | SPDR S&P International Consumer Staples Sector ETF .
PSL PowerShares DWA Consumer Staples Momentum Portfolio a

10 Energy ETF’s
Ticker ETF Name
XLE ee _Energy SSelect Sector SPDR Fund
AMLPAlerian MLP Err tae tte Wietah hen enAe SRO a ES SG

AMJ eo JP Morgan Alerian MLP Index ETN” ae te ae

She vip HS Fund et em Ore ce

IYE et. iShares Dow Jones US Energy Sector Todex Fond» A an

MLPI UBS E-TRACS Alerian MLP Infrastructure Index

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OIH Market Vectors OilServicesETF

TN ee _ iShares S&P Global Energy Sector Index Fund |
XOP SPDR S&P Oil & Gas Exploration & Production ETF.
MLPN Credit Suisse Equal Weight MLP Index Exchange

10 Financial ETF’s
Ticker ETF Name

XLF “a ‘SPDRI
KBE SPDR FFinancial
KBW Bank Select
ETF Sector Fund ‘+1, Minette SitotacaCe Site eememrnees OIE
; KRE ~~ SpDRKKBW Rican! | Banking ETF
E OR OR «Ee AL TR I
‘FH os Vers Financials ee eel Fat ot yo EN 6 AO, See EE

IYF iShares Dow Jones us Financial Sector Index Fund |ir

FAS _ Direxion F
FEinancial Bull 3X Shares
FXO ihec:
First Trust Financial AlphaDEX Fund |
UYG ; Prochares Ultra Financials
PSP ae PowerShares Global
G Listed PrivateEquity Portfolio ademas “ated
TYG iShares Dow Toned US Pasancial Semices Index Bund. oo somone

10 Healthcare ETF’s
Ticker ETF Name
XLV SPDR Health Care Select Sector Fund
“IBB iShares Nasdaq Biotechnology Index Fund sare ag
‘VHT - ‘Vanguard |Health Care Index Fund aie
TYH iShares Dow Jones US Healthcare Sector Index Fund _
-FXH First Trust Health Care ‘AlphaDEX Fund _
‘IXJ iShares S&P Global Healthcare Sector Index Fund ie oe
‘FBT ‘First Trust AMEX Biotechnology Index Fund 2°. 2, casa
“PJP PowerShares |Dynamic Pharmaceuticals Portfolio ror
TLR Aner ay grey Sn ca mea a Sila Reatieee |
ee on rae tee

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10 Industrials ETF’s
Ticker ETF Name
SS a ES

XLI SPDR Industrial Select Sector Fund ©

VIS i. Vanguard Industrials Index Fund
PHO : PowerShares Water Resources Portfolio -
IYT eke iShares Dow Jones Transportation Average Index Fund
IYJ ; iShares Dow Jones US Industrial Sector Index Fund
FXR- 4 First Trust Industrials AlphaDEX Fund
ITA - iShares Dow Jones US Aerospace & Defense Index Fund |
CGW _ Guggenhiem S&P Global Water Index ETF 7
EXI * iShares S&P Global Industrials Index Fund
| PIO 9 PowerShares Global Water Resources Portfolio

10 Materials ETF’s
Ticker ETF Name

GDX a Market Vectors Gold Miners ETF ile

XLB =): SPDR Materials Select Sector Fund |.
MOO 4: Market Vectors Agribusiness ETF ae
GUNR FlexShares 1Morningstar Global Upstream Natural Resources|
_ Index ETF Index Fund
IGE ; iShares S&P GSSI Natural Resources Index Fund “
GDXJ Market Vectors Junior Gold Miners Fund
XHB SPDR S&P Homebuilders ETF
ITB iShares Dow Jones US Home Construction Index Fund
VAW Vanguard Materials ETF
IYM iShares Dow Jones US Baste Materials Savior indee Fund,

10 Real Estate ETF’s

Ticker ETF Name
SS SS a ee eS

VNQ qi Vanguard REIT

R ETF
IYR — iShares LDow Jones US Real Estate Index Fund are
_RWX ie SPDR Dow Jones International Real Estate BT.
ICF iShares Cohen & Steers Realty Majors Index Fund
RWR - SPDR Dow Jones REIT ETF
VNQI Vanguard Global ex-U.S. Real Estate ETF

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REM__iShares FTSE NAREIT Mortgage REITs IndexFund

i ia SPDR Dow Jones Global Real Estate ETF_
ial patie Schwab U.S. REIT ETF
iShares FTSE EPRA/NAREIT Global Real Estate ex-US Index
Fund

10 Technology ETF’s
Ticker ETF Name
_XLK oe SPDR Technology Select Sector Fund
mabe eae. Vanguard I
Information Technology Index Fund * aun.
TYW aie iShares [Dow Jones us Technology Sector Index Fund —_— os
_FDN = First Trae Dow Jones Internet Index Pagd

_FXL Viere Trust Technology AlphaDEX Fund

IXN eo iShares S&P Global Technology Sector Indes Fund

IGM iShares S&P GSTI Technology Index Fund

_TDIV _ First Trust NASDAQ Technology DividendIndexFund
RYT Guggenheim S&P 500 Equal Weight Technology ETF

10 Telecom ETF’s
Ticker ETF Name

VOX Vanguard Telecommunication Services ETF

TYZ iShares Dow Jones US Telecommunications Sector Index
1 Fund a

SPDR S&P International Telecommunications ector 24M I cco

“F COM Fidelity MSCI
¥ Telecommunication Services Index ETF IA. : ooh
XTL SPDR S&P Telecom ETF
FONE First Trust NASDAQ CEASmartphone
IndexFund
ETL ProShares Ultra Telecommunications
“TGEM EGShares Telecommunications GEMS Exchange raded Fund
“iShares MSCI ACWI ex US Telecommunication Services Sector _
Index Fund

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10 Utilities ETF’s
Ticker ETF Name
XLU SPDR Utilities Select Sector Fund
VPU_ cs Vanguard Utilities ETF .
IGF | iShares S&P Global Infrastructure Index Fund olf :
“IDU | iShares Dow Jones US Utilities
1 Sector Index Fund ari ved OF
JXI , iShares S&P Global Utilities Index Fund — ‘.
-FXU _ First Trust Utilities AlphaDEX Fund —
GIL SPDR FTSE/Macquarie Global Infrastructure 100 ETF
EMIF iShares S&P Emerging Markets Infrastructure Index Fund
; RYU. | Guggenheim S&P 500Equal Weight Utilities Ne
‘TIPU ay SPDR <S&P International Utilities Sector ETF

Inverse ETF’s
Ticker ETF Name
_DGAZ 3x Inverse Natural
‘Daz . pes GasShort
DB Gold ETN ETN” ee ee
Saae a, TEN nae eae eee Neder ath RO oe

ae - " VelocityShares 3
3x Inverse Silver ETN linked to S&P GSCI Silver
ne _ Inverse Index _
DT... _ PowerShares LDB Crude Oil Double Short ETN
; DTYS iPath US Treasury 10- year Bear ETN" as? | Se
DWI | 98x Inverse Crude ETN
DZZ PowerShares DB Gold Double Short ETN
_FAZ Direxion Financial Bear 3X Shares .
GLL ‘ProShares 1
UltraShort Gold rie
JGBD PowerShares DB 3x Inverse diapanese Govt Bond Future -
KOLD | _ProShares UltraShort DJ-UBS Natural Gas ;
PST ProShares UltraShort 7-10 Year Treasury a
‘QTD
ers om _ Sea
ProShares UltraShort
U
ot 200 maeneaeromieins
Reueeel12000 eo ey ee Sytem

Aer ~ PowerShares DB 3x Short 25 Year Treasury Bond Exchange ome:

~ ‘Traded Notes _
SCO
‘SDS
ProShares UltraShort DJ‘UBSCrudeOil—™S
ProShares UltraShort S&P 500° 2 sl i

SH _ ProShares Short S&P500 ia

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_SPXU _ProSharesUltraPro Short S&P 500 —

SQQQ_ ProSharesUltraPro Short @QQ Fund

TBT " Brocharee UltraShort 20Year Treasury

-TBX _ProShares Short 7-10 Year Treasury

TMV -Direxion Daily 20-“Year Treasury Bear 3X
ToT: | ProShares UltraPro Short 20 Year Treasury
. TWM | ‘ProShares UltraShort
U Russell 2000
TYO 7 Direxion Daily T-10 Year ‘Treasury Bear 3X.
_TZA _Direxion Small Cap Bear 3X Shares 2013} Russell 2000.
2
ZSL ProShares UltraShort Silver

251
 |
||||Mh | Made in the USA
48207064R00142 San Bernardino, CA
19 April 2017
a
q

7
START TRADING STOCKS
Investing and trading stocks on the stock market is one of the best ways to build and secure
your future. Whether you are interested in trading to make it your living, build your
retirement, or make some extra cash each month - having a solid foundation when you are
first getting started is one of the best ways to be a profitable and winning trader.

This book focuses on giving you the proper foundation to trade stocks in the stock market
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How you should approach your stock market journey so that you have a higher
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How money is made in the markets and what return you can expect.
Who are the players in the game of Wall Street and what hype you need to avoid so you
don't get burnt!
Ui imvetecpetiiehieetlreshiiicpleseesii-#-\sebele <n -avell eee <n
What tools you need before you start trading.
How psychology plays a huge role in your succes & why you need to create a trading
system.
What is fundamental analysis and technical analysis and which one matters most!
Bis tivecdupeceriemeeseoeedieltieleirlpeb-leetimcoesslie-|b-latl\ete- eles lamellae
like volume, support and resistance, gaps, and how to find chart patterns.
Money management ideas for various account sizes regardless of your account
balance!
And much more!

PN =)@)08 By N~) ANA BYN CO)Y

Sasha Evdakov is an educational entrepreneur who focuses on
teaching people about business, marketing, and finance through
his books, video courses, and websites. He has spoken at various
schools and universities sharing his knowledge, wisdom, and
inspiring people across the world.

Visit his website at www.sashaevdakov.com to get free lessons

& trainings.