Forex Trading Romania

  • What Are Stocks And How Does It Work

Who is this course for?

If you are someone who is totally new to the financial markets and you want to learn more, then this course is for you.

If you’re a trader who trades Forex and Crypto but no idea what a stock is, then this course is for you.

Perhaps you’re someone who wants to use the stock markets to help you generate a source of income to help you beat inflation or to just grow your wealth over time…

Then this course is for you as well.

Before I get started…

Who am I?

My name is Rayner.

I am the founder of tradingwithrayner

I suggest you subscribe to my youtube channel, this way, whenever I publish a new video…

You’ll always stay up to date and never miss another training from me.

Sounds good?

Then let’s begin…

What is a stock?

Have a look at this…

This is apple with a $731 billion market capitalization.

The stock market goes up and down, so the data shown may be outdated as you read this.

So what does it mean to buy a share of Apple?

Whatever company it is, buying a stock/share of a company means that you’re a part owner of the company.

Ownership in a company

You might be thinking, “What? I’m an owner?!”

Yes!

You’re an owner but just a very small or a minor owner.

Let me explain further…

If you go to Finviz right now, Apple’s market cap is around $793.46 Billion…

Again, the market capitalization is the value of Apple itself, and right now,  the price is about $165.25 per share…

If you wish to buy 1 share of Apple, then you have to fork out $165.25, right?

So if you buy 1 share of Apple and divide it into its market cap (which is in billions)

Then you’ll realize just how small your stake is in Apple.

Does it make sense?

But let’s say you’re a really rich individual that wants to buy $7.93 billion dollars’ worth of shares in Apple…

Right now you own 10% of Apple shares.

That’s what I mean by being a part owner of the company as you buy a stock.

You can check out Finviz for other financial data, but for now, let’s move on…

A stock is traded on an exchange

There are multiple stock exchanges in the world where you can buy stocks:

  • New York Stock Exchange (NYSE)
  • Singapore Exchange (SGX)
  • Philippine Stock Exchange (PSE)
  • And so on…

Depending on where you’re from…

Usually, your own country would have an exchange dedicated to trading stocks.

Next…

Different Types of Stock (Sector)

So one thing to note is that there are many types of stocks out there.

There are stocks that focus on…

  • Energy
  • Materials
  • Industrials
  • Consumer discretionary
  • Consumer staples
  • Health care
  • Financials
  • Information technology
  • Telecommunication
  • Utilities
  • Real estate

As you can see, there are about 11 different sectors that you can look at when trading stocks.

But within the sectors, you can still further break up the different types of stocks which of course we will not go in depth with it

What you just need to know is that stocks are traded across the different sectors.

Now…

This isn’t the only way how you can classify stocks because you can also break them down according

to their market capitalization…

Different Types of Stock (Market Capitalization)

You can rank stocks according to how much they are worth as you can see below…

  • Mega Cap = Over $300 Billion
  • Large Cap = Over $10 Billion
  • Mid Cap = $2 Billion to $10 Billion
  • Small Cap = $300 Million to $2 Billion
  • Micro Cap = $50 Million to $300 Million
  • Nano Cap = Below $50 Million

A while ago, you saw that Apple has a $700 billion dollar market cap.

Which means, that Apple is a mega cap.

There’s another type of stock that I did not edit here.

It’s called a penny stock, which is a stock trading below $5 a share as they are usually Nano to small-cap stocks.

Now, the question is…

Why do you want to trade stocks?

There are many reasons why you may want to trade stocks:

  • You want to beat inflation
  • You want to grow your wealth
  • Earn a second income

Where I’m from, Singapore’s inflation is about 3% to 4% a year.

And if I earn more than 4% a year trading stocks, then hey, I’m beating inflation!

I’m protecting and growing my wealth!

And if you are trading stocks on a shorter-term timeframe, you could be making anywhere from 2% – 5% a month, so it’s also possible to trade stocks for a living.

There are many reasons why you want to trade stocks.

But you really have to ask yourself what is the purpose of trading stocks before you dive deeper.

Because as you study later in the course…

You’ll realize that there are different methods to trade stocks, and different methods have their own pros and cons to it.

But we’ll get to that later.

Moving on…

How to buy a stock

As mentioned a while ago, stocks are traded on an exchange.

It’s not like Forex where it’s over-the-counter or forwards where you and the broker are trading within one another.

When you trade or buy stocks, you go through your broker, and your broker will then link to an exchange as shown here…

So, whenever you want to buy a stock, it goes to your broker and your broker routes your order to the exchange.

Within a few seconds, the exchange will know let you know whether your order is filled or not.

Once the order is confirmed, the exchange sends the message back to your broker and then your broker will instantaneously notify you on your trading platform that your trade is filled…

Now, there are many different brokers and participants around the world.

Such as a lot of brokers, and a lot of retail and institutional traders and investors…

This little mind map could expand endlessly, and that’s how the stock market works.

Of course, there are times where certain people have the privilege to get their order into the exchange directly.

But most of you reading this lesson right now, it’s unlikely that you know you will fall under the category as that’s usually for the institution.

With that said, let’s do a quick summary…

Summary

  • A stock represents ownership in a company
  • A stock is traded on an exchange
  • There are different types of stocks (by sector and market cap)
  • You can buy stocks through a broker
  • How To Calculate Stock Returns

How to profit from a stock

There are two ways to do it:

  • Buy low sell high
  • Buy high sell higher

Buy low sell high

This is something that you probably have heard many times.

But here’s a quick example in Apple (AAPL) wherein you bought one stock at $155 per share, and sold it at $175…

The difference between your selling price and your buy price is $20!

Which means, you made a profit of $20 per share on Apple.

Another way that you can profit from stock trading is this…

Buy high sell higher

This is a concept that’s hardly talked about.

Everybody talks about you know buying low and selling high.

But this is an even more important concept if you ask me.

Let me give you an example on Apple (AAPL) where you buy on the break out of $185 and moved all the way up to $200 per share…

What’s your profit?

Just take your selling price minus your buying price, and you have a profit of $15.

If you had a thousand shares, you would have a profit of $15,000.

But this time, you are actually buying high and this could be psychologically different from most people.

You might be saying, “Oh man! you are buying at such a high price when the market is about to reverse!”

Here’s the thing…

You never know how high or how low a stock can go.

That’s why there’s another way to profit which is to buy high and sell higher.

Don’t worry about the precise entries or techniques or when to sell, we’ll cover all of that later in the course.

But for now, I just want you to understand the concepts behind profiting in the stock market.

Moving on…

How do you actually calculate your stock trading returns?

There are three ways to do it…

  • Dollar
  • Percent
  • R Multiple

Let me explain again…

Dollar

This approach is something that I’ve briefly covered earlier.

So what you’ll do is just to calculate the difference between your selling price and buying price.

If you bought a stock at $150 and sell it at $200 per share…

Your profit on a stock is $50 per share.

If you bought 1,000 shares on a stock that’s $150 per share…

Once you sell it at $200 your profits would be $50,000

Next…

Percentage Return

This one is a little bit different but really simple.

Let’s say you buy Apple (APPL) selling $100 a share.

And let’s say you sell it at $150 dollars.

What is your percentage return?

Just calculate your profit divided by the initial share price that you bought.

In this case, you can see that the profit is $50 per share divided by the initial price that you bought which is $100, then…

You get a profit of 50%

Simple?

The last one is what I call…

R Multiple

This is actually my favorite approach to calculate returns whether you’re trading Forex, Options or whatever.

Why is that?

Because when you calculate returns based on dollar or percentage, it does not calculate or determine the amount of risk that you’re taking to achieve those returns.

I’ll explain.

Trader A

So let’s say trader A plans to buy Apple shares at $100 per share and plans to sell it at $150.

However, for this particular trade of Apple, you’re either going big or going home.

Trader A tells himself, “If Apple drops to $0, I’ll still hold it!”

You can see that trader A’s entire risk on this trade is a full $100 and the profit in his trade would be $50.

Now, divide the potential risk ($100/$100) and the potential profit ($50/$100) and you can see that trader A is actually risking $1 to make $0.5

From a risk to reward standpoint, this is not too attractive if you ask me…

Risk: $1

Reward: $0.5

Now, let’s compare this to another trader who bought Apple shares at $100 and sold it at $110.

Trader B

The potential profits are much smaller but this trader now has a stop loss or a predetermined exit price.

Let’s say that trader B’s exit price is $95.

Now ask yourself…

What is this percent risk per trade?

Subtract $100 (entry price) from $95 (stop loss price), and you get -$5 risk of the trade.

How about the reward per trade?

Subtract $100 (entry price) to $110 (take profit price) and you get a potential +$10 reward of the trade.

Now, you can see that he’s risking $5 to make $10!

Risk: $5

Reward: $10

And if you just keep things simple, you’ll realize that trader B is actually risking $1 to make $2

Compared to the trader earlier who has a bigger potential profit of $50, but has a bigger risk of $100, basically risking $1 to make $0.5

Which is a better trader?

If you ask me, from an R multiple standpoint, trader B did a better trade.

You can look at trader B in two ways:

  • Risking $1 to make $2
  • Multiple of 2R

Another example is that if someone made a profit of 10R…

This means that he risks $1 to make $10

So these are the three different ways to calculate your stock returns.

But I find that the R multiple is the most objective measure to calculate your stock returns.

With that said, let’s do a quick summary…

Summary

  • To profit from stocks, you can either buy low or sell high or buy high and sell higher
  • To calculate stock returns, you can use a dollar-based approach, percentage approach, or the R multiple approaches
  • Stock Market Terminology Every Trader Must Know

Common trading terminologies

Here are the terminologies we will discuss…

  • Long/Short
  • Bid & Ask
  • Spread

First thing’s first…

Long/Short

When you hear traders say that, “Hey, I’m long on this stock!” or Hey, I’m short on this stock!”

It simply means the direction of the trade that they are taking.

Long

When someone says they’re long it means that he will make a profit when the stock price goes up.

For example, I say I’m long Apple shares $100.

It means that I bought Apple shared at $100, and if Apple shares go up to $120, I make a profit of $20.

Short

On the other hand, when a trader is short, a trader will profit if the stock price goes down.

How does this work?

What actually happens is that he will borrow shares from the broker so that a trader can profit when a stock price goes down.

So let’s say, I’m short on Apple at $100 and I have borrowed $100 worth of shares from my broker.

If Apple per share drops down to $90 and exit my trade, what happens is that I “buy back: $100 and collect the difference/profit of $10

This is how short-selling works.

But if the stock price goes up, then it will move against you and you will experience a loss.

Also, stocks usually go up in the long-run and could go up forever from $5 per share to $1000 per share and beyond.

Which means, your losses are technically unlimited if you short a market.

Let’s move on…

Bid and Ask

When you are dealing in stock trading or futures trading, you will see that there’s no one price in the market.

There are always two prices.

But basically, there are two key prices that you’ve to pay attention to, the bid and ask.

Bid = the price you can sell at

Ask = the price you can buy at

Which means, if you want to buy a stock, you have to look at the Ask price.

But if you want to short/sell a stock, you would have to look at the Bid price.

This is what we mean by the Bid and Ask.

Now, what is the spread?

Spread

It simply means the difference between the Bid and Ask.

So if Apple has an Asking price of $100.20 and a Bidding price of $100.10

The spread of Apple would be $0.10 and that, to you my friend, is a transaction cost you have to incur.

And this is not even taking into consideration your Commissions and fees to the exchange.

One thing to note is that…

Large-cap stocks are more liquid (tighter bid-ask spread)

And…

Small cap stocks are less liquid (larger bid-ask spread)

Depending on what stock you trade, it will eat up into your stock returns.

So this is something that you must know.

With that said, let’s do a quick summary…

Summary

  • Long/Short basically means what your trading direction is
  • The Bid is the price that you can sell it, the Ask is the price that you can buy it
  • The spread is the difference between the Bid and Ask
  • Large-cap stocks tend to have a tighter spread
  • Small cap stocks/less liquid stocks tend to have a wider spread
  • What Are The Different Stock Order Types

The different types of orders

When you are trading stocks there are different types of orders that you can use in the market.

And I just want to share with you some of the most common ones:

  • Market order
  • Limit order
  • Stop order
  • Stop loss order

There is more to these four that I’m about to share with you, but I’m not going to cover all of them.

But these are the four most popular ones that I feel you should know.

Now, let me explain…

Market order

What is it?

It is simply an order that sends and executes to the market right immediately.

Whatever the prevailing ask price is, you will buy right now.

Pros:

The good thing about market orders is that, for sure that you’ll be in the trade.

Just hit the market order and the broker would send the order to the exchange and get you the best possible price.

Cons:

The downside to it is that you have to pay a premium because you are willing to pay whatever the current prevailing price is.

So if the stock is moving pretty fast, you might have to pay a slightly higher premium.

Next is what we call the…

Limit Order

You only enter the market if the price comes to your desired level.

Let’s say, the market is trading higher.

You don’t want to go long at the current price.

You think it’s too overbought, it’s too high.

So instead, you want to buy at a lower price!

What you can do is you can put in a limit order at a lower or desired price.

If the market does come back lower and hit your lower price level, you will be filled on your trade.

This is what I mean by entering only if the market comes to your desired level, so you are trading with pullbacks.

The pros are that you will be entering your trade at a cheaper price and this would naturally improve your risk to reward.

The downside to this is that you might miss the move because the market doesn’t necessarily have to come to the level that you are waiting for and you might miss the move!

The second thing is that you are trading against the current momentum.

What this means is that if the market is trading higher, you place a limit order, it comes back down.

You’re basically entering the current momentum that is against you.

Of course, there are ways to circumvent this…

You could wait for a reversal candlestick pattern before the market does a higher close and then you enter the trade.

Here are the Pros and Cons:

Pros: Enter at a “cheaper” price.

Cons: Might miss the move and trading against current momentum.

Keep reading…

Stop Order

This simply means that you only enter the trade if the market moves in your favor.

For example, the market could be in a range.

You want to trade the breakout of the range.

What you can do is that you can put a buy stop order at the breakout price (above current price).

So that if the market trades and hit this level, only then will you be filled on the trade to go long.

Here are the Pros and Cons:

Pros: Enter trades with momentum.

Cons: It might be a false breakout.

And finally…

Stop Loss Order

This type of order is slightly different from the earlier orders.

Because the earlier three orders are orders to get you into a trade, an entry.

Whereas a stop-loss order is to get you out of the trade.

It’s an exit.

Let’s say, you buy at support in anticipation the market will to continue trading higher and you have a stop loss order below support.

But what happens is that the market collapses lower.

If it hits your stop-loss level, you will be out of the trade for a loss.

This limits your downside.

Imagine if the market collapses all the way lower and you don’t have a stop loss.

Your initial loss could have been bigger.

So, a stop loss order is simply a defensive mechanism to protect your capital if the market goes against you.

Cutting your losses means that you live to fight another day.

You don’t blow up your entire trading account, and like I’ve said, it’s a defensive measure.

The bad side is that the market could reverse back in your intended direction.

But I would rather get stopped out of my trade and get a small ant bite than get a big crocodile bite.

Here are the Pros and Cons:

Pros: Cut your losses by not blowing your entire account.

Cons: The market could reverse back in your direction.

With that said, let’s do quick summary…

Summary

  • A market order is where you enter the trade right now
  • A limit order is where you want to enter at a cheaper price
  • A Stop order is where you want to enter at a higher price (breakouts)
  • A Stop-Loss order gets you out of your losing trade and protects your capital
  • How To Analyze Stocks (Fundamental Analysis)

How to analyze a stock

There are two main ways on how to analyze a stock…

  • Fundamental Analysis
  • Technical Analysis

You can think of it as this…

Fundamental analysis tells you what to buy.

Technical analysis tells you when to buy.

For now, we are focusing on the Fundamental aspect.

Don’t worry, we will discuss technical analysis in the later videos but for now, let’s begin with Fundamentals.

Shall we?

How to analyze a stock (Fundamental Analysis)

When you talk about Fundamental analysis, it can be broken down into two categories…

  • Qualitative Fundamentals
  • Quantitative Fundamentals

Here’s the thing about Fundamentals…

What you’re trying to do is to gather insights or information about the economy or financial states from the company to derive intrinsic value.

This is what Fundamental analysis tries to do!

If the stock price drops below the intrinsic value, you buy.

If the stock price is above the intrinsic value, you sell.

That pretty much sums up the role of someone trying to use Fundamental analysis in your investment or in their trading.

As mentioned, there are two broad ways to do Fundamental analysis.

Qualitative, and Quantitative Fundamental analysis.

So let’s have a look at them in more detail…

Qualitative Analysis

These are Fundamentals or other information that can’t be quantified…

  • Technology Disruption
  • Economic Moat
  • Management

Let me explain…

Technology Disruption

Let’s say I have an oil company and I’m in profit now as I send my guys to dig up oil from the earth.

But let’s say that there is this new rare commodity that can replace the oil that’s less hazardous and cheaper.

So when this new commodity comes to the market, you can see that my business is going to suffer because nobody needs oil anymore!

My stock price is going to collapse!

So, how do you actually quantify this?

You can’t.

Right?

This qualitative analysis is an insight that someone can glean from and realize that this would be disruptive to the oil stock companies.

Another one could be…

Economic Moat

This is a term that I think Warren Buffett came up with.

For example, coca-cola has a strong economic moat, they sell Cola.

But if you want to challenge against them, it can be pretty damn difficult, because they have the brand and the reputation which they’ve been in business for a long time.

You can’t really quantify what this economic moat is and that’s another way of looking at the qualitative analysis.

Management

Qualitative analysis can also be involved with analyzing the management.

It can be where the management and CEO are good that continues to improve operations and reduce expenses.

So these are things that cannot be quantified in numbers.

Now, here are the Pros and Cons of using Qualitative analysis

Pros:

  • You can digest information and make sense of what’s going on in the world and in the company
  • You can gain insight that not many traders or investors will see
  • You can make a profit because you can actually buy a stock below its intrinsic value

Cons:

  • It could be difficult as there is so much information out there
  • Identifying what is relevant or not may give you an analysis paralysis

Moving on, we have something that we call…

Quantitative analysis

These are Fundamentals that can be quantified like…

  • Assets
  • Liabilities
  • Revenue, Earnings, Cash flow, etc.
  • Ratios (P/E, PB, P/CF, etc.)

Now, here are the Pros and Cons of using Quantitative analysis

Pros:

  • You can actually use quantified data and backtest to see whether that data yields you a market-beating return in the long run

Cons:

  • There could be too much information and that it could be very hard to filter out what is the stuff that matters and what doesn’t

With that said, let’s do a quick summary…

Quick Summary

There are two types of analysis in the stock market:

  • Qualitative Analysis
  • Quantitative Analysis

If you ask me, Qualitative or Quantitative?

I won’t say one is better than the other or one is wrong.

But I do know that quantitative Fundamental analysis can be backtested and is worth paying attention to.

Now…

What are some of the Fundamental metrics that you should pay attention to?

Which Fundamental Metrics to Look at?

Based on studying momentum stock traders and also if you’ve read the book “How to make money in Stocks” by William J. O’Neil…

Stock traders like to focus on earnings and net income.

Why is that?

Because most stock traders don’t have the skill to analyze the company.

They use a shortcut or a so-called “screening process” by looking at earnings and net income.

Why?

If you think about this…

If a company would disrupt a sector just like the oil example I gave a while ago wherein a new element that can replace oil is discovered…

You can be sure that people will flock to whichever company that’s producing the new element.

And this company will make money and earnings will increase naturally which will reflect on a company’s statement.

Another example could be that a company has been in decline and has lost its competitive edge in the markets.

Then, new management comes in that starts to shake things up as they improve the company by focusing on the stuff that is bringing in revenue.

From a qualitative perspective, it can be quite difficult to determine whether the new management is able to turn things around.

But one thing that doesn’t lie is the earnings and net income report.

When it starts to improve yearly and quarter-on-quarter…

You can be sure that management is doing something good.

I’m not guaranteeing this because there are many cases of fraud.

But chances are is that the Fundamentals of the company is doing well!

So this something that you want to pay attention to.

  • How To Analyze Stocks (Technical Analysis)

Technical Analysis

When you are dealing with Technical analysis there are 3 broad categories that I want you to know…

  • Trend
  • Area of Value
  • Entry Trigger

Let’s analyze them in detail…

Trend

You’ve probably already heard of a trend.

On your chart, it simply looks like…

Higher Highs and Higher Lows (Uptrend)

When a stock is in an uptrend, we want to be a buyer.

Lower Highs and Lower Lows (Downtrend)

When a stock is in a downtrend, we want to be a seller.

One important thing to note is that you don’t want to buy stocks in a downtrend and sell stocks in an uptrend.

This is not investing where you’re going to hold on for years as you are trading and exit the markets in an out depending on your timeframe.

One thing to share with you that to define a trend…

You can use the 200-period moving average.

200-Period Moving Average

It is an indicator you can get on most chatting platforms.

I’ve applied this to the daily timeframe on Amazon (AMZN)…

You can see that the price of Amazon right now is above the 200 MA.

So when you see prices above the 200 MA…

It systematically gives you a bias that you want to be buying only in this market because the market is in an uptrend!

Vice-versa for downtrends if the price is below the 200 MA.

You either want to be selling or holding on to cash.

Of course, there are exceptions especially traders who are more advanced in their trading methodologies.

But if you are still new to trading, then this rule will keep you on the side of the markets more often than not.

This is foolproof but it will keep you on the right side of the markets more often than not.

Next…

Area of value

Just because the 200 MA tells you whether the stock is moving higher or lower doesn’t mean you buy immediately.

Just because you see oranges in a supermarket that’s selling right now, you don’t buy the oranges immediately.

Why?

Because maybe the oranges are overpriced because it’s not the right season or because you can buy even more oranges during a sale.

So you want to wait when the price is at an area of value for your oranges, and this is the same for trading.

You want to the price of the stock to come to an area of value before you consider buying.

How do you define what the area of value in trading is?

These are a few techniques that you can use…

  • Support and Resistance
  • Trend Line
  • Moving Average

There are more, but I find that these 3 are pretty easy to understand and use.

So let me explain…

Support and Resistance

You can think of Support levels like a floor…

Support is where the price has difficulty breaking lower.

I want you to think of this floor as a wooden floor.

It can provide some support to push the price higher, but it’s made of wood.

Wood can also break!

So don’t think just because the price is coming to an area of support, it will definitely bounce.

Also, you can see that support is an area and not a fine line on your chart.

The second thing that I want to share is the trend line…

Trend Line

The trend line is like support and resistance, but the difference is that this is a diagonal trend line support…

You can see that it’s an area of support as well.

The last thing to share is a moving average…

Moving Average

You know that there are many types of moving averages out there.

Like for example the 200-period moving average and how it can help you define the long term trend.

However, you know that’s not the only moving average you can use.

You can use the 20, 50, or 100 moving averages as well.

It could have different purposes just like the 50 MA which acts as dynamic support…

If the trend is very strong, it may not retrace back towards the 50 MA but might just bounce off the 10 MA or 20 MA.

Now the question is…

When do you enter the trade?

Let’s say the market is in an uptrend and it’s in an area of value.

Do you just buy immediately?

No.

Because you need something that I call an entry trigger to time your entries.

Entry Trigger

I find that candlestick patterns are very useful for this purpose.

You can use reversal candlestick patterns like…

  • Shooting Star
  • Hammer
  • Bullish Engulfing
  • Bearish Engulfing

If you don’t understand, I’m just going to run you through quickly on candlestick how to read a candlestick…

As you can see, there are two types of candles.

It’s green and red.

If the candle is green, the price opens lower and the price closes higher.

If it’s red, the price opens higher and the price closes lower.

The upper and lower shadows (wick) represents the price’s highest high and the lowest low of the candle before it closes.

Moving on, there are many different types of candlestick patterns out there.

But I find these candlestick patterns are worth knowing…

Hammer

A Hammer candlestick looks something like this:

Let me walk you through how it works.

Basically, for a Hammer candlestick pattern, the price opens at a high level.

Then the sellers quickly came in and took control and you can see that the price is being pushed all the way down lower.

What happens is that the buyers (the bulls) came in and has taken control back from the sellers, pushing price all the way back up higher.

And finally, closing near the highs of the day.

This candlestick pattern is essentially telling you that there is a tug of war between the bulls and the bears.

And eventually the bulls have won, right?

So, essentially this candlestick pattern is a bullish reversal pattern.

Buyers are momentarily in control.

Ideally, the length of the wick is at least two times the body!

The longer the wick, the greater the price rejection.

So, how you want to define Hammer is that the body is small.

Let me point out to you few a Hammers that you can see on this chart over here:

One thing to clarify is that you might have come across in works or materials online that says that If you spot a Hammer in the uptrend…

It’s a sign of weakness, that sellers are stepping in.

For this, I can’t agree…

Because when you see a Hammer in an uptrend, to me that is a sign of strength.

Because it tells you that there are sellers coming in.

But, eventually the sellers are overrun by the buyers, and prices now close bullishly higher.

On the other hand…

Shooting star

So, the Shooting Star looks something like this:

It’s basically the opposite of a hammer.

You can see that the buyers came in and pushed price all the way higher.

And then the sellers came in and reversed all the gains made by the buyers eventually closing near the lows.

Based on the visualization that you’ve seen…

It’s quite straightforward to know that this Candlestick pattern is a bearish reversal pattern.

Sellers are momentarily in control.

The length of the wick, ideally, is at least two times the length of the body.

And the longer the wick, the greater the price rejection.

So, in this example, let me share with you what a Shooting Star looks like:

Another thing to note is that when you see a downtrend.

And then you spot somewhat of a Shooting star.

This only serves to reinforce that the sellers are still in control!

Don’t think that it is a bullish pattern in a downtrend just because you see a long wick where it shows that the buyers have stepped in previously.

Because eventually, the buyers will exhaust themselves and the sellers came in and took control.

Another couple of candlestick patterns that you should know is what we call the bullish engulfing and bearish engulfing.

Bullish Engulfing

Let me share with you what it looks like:

Let me explain to you the concept behind it.

You can see that when the first candle opens, the sellers came in and took control and pushed price all the way down lower, closing near the lows.

What happened next, is that the subsequent candle opened near the lows.

The buyers stepped in and pushed price all the way back higher.

Even higher than the previous day highs.

And then finally closing near the highs.

You can see that this a Bullish Engulfing pattern.

Because it has “engulfed” the previous candle.

This is a bullish reversal pattern, a bullish engulfing pattern.

One thing to note is that, the larger the bullish engulfing pattern, the more significant it is!

Right now…

I’m just going to walk you through and share with you an example:

You can see over here, this is the EUR/USD Chart.

You can see that the candle opened near the lows, and then closed above the previous candle open.

To me, my definition of a bullish engulfing is that the candle has to be larger than the body of the previous candle.

I hope you have an idea of how it is.

Remember, never ever trade candlestick patterns in isolation.

This means that if you see a bullish engulfing pattern on your chart, don’t just blindly go long.

This is not enough.

It doesn’t give you an edge in the markets.

On the other hand…

Bearish engulfing

Here’s what it looks like:

In the first candle, you can see that price has opened near the lows.

The buyers stepped in and pushed prices all the way up and closed towards the highs.

Then, the subsequent candle that has opened where it closed previously…

The sellers came in and took price all the way down lower.

Finally closing near the lows!

This is a bearish engulfing pattern because the second candle has engulfed the previous green candle.

What it means is that it’s a bearish reversal pattern.

The sellers are momentarily in control.

The key word is “momentary,” I didn’t say permanently.

The larger it is the more significant the pattern is.

Just to walk you through a few examples:

You can see that there are three bearish engulfing, where it opened and then closes near the lows.

Then the body of the subsequent candle is definitely larger and overcome the body of the previous candle.

So, by now I hope you have a good idea of what a bearish engulfing pattern looks like!

Again, just because you see a bearish engulfing doesn’t mean you short immediately.

You want to use a few Technical tools together to increase the odds of your trade working out which is what we’re going to discuss now.

So I want to introduce to you what I call the T.A.E framework…

The T.A.E. Framework

This is a framework that I came up with.

So we’re just going to combine what you’ve learned so far.

Here’s how it works…

Trend – Trade in the direction of the trend

Area of value – Trade from an area of value

Entry trigger – Identify an entry trigger

Let me explain…

1. Trade in the direction of the trend

If you trade in the direction of the trend, you increase the odds of your trade working out.

You might be thinking:

“How do I define the trend?”

Well, you can use a Moving Average Indicator to help you.

Here’s how…

  • If the price is above the 200MA, then have a long bias
  • If the price is below the 200MA, then have a short bias

Next…

2. Trade from an area of value (AOV)

AOV is an area on your chart where buying/selling pressure is lurking around (E.g. Support & Resistance, Trendline, Channel, etc.).

The key thing is to enter your trades close to an AOV.

Here’s why…

  • A favorable risk to reward (as your stops are tighter)
  • Potential buying/selling pressure to push the price in your favor
  • Stop loss harder to get triggered it’s “protected” by market structure

3. Identify an entry trigger

The purpose of an entry trigger is to identify a repeatable pattern that gets you into a trade.

So, once the conditions of your trading setup are met, you’ll look for an entry trigger to enter a trade.

It can be a Hammer candlestick or any other bullish reversal candlestick patterns.

Now, this is important…

You don’t want to trade entry triggers in isolation.

It’s only AFTER the conditions of your trading setup are met, then you look for an entry trigger.

Does it make sense?

Great!

Now let’s look at a few examples to see the T.A.E Formula in action…

T.A.E. on Google 4-hour timeframe:

You can see that the price is above the 200 MA, so you should be buying.

At the same time, you can see the Area of Value on the Area of Support where previous Resistance turned Support

As for the Entry Trigger, you can see a bullish engulfing pattern at Support.

You can enter on the next candle’s open and your stop loss could go a distance below the lows.

We’re not going to discuss too much about where to take profits and stuff like that.

Because this is really just an introduction to stock trading.

But I hope I gave you a good understanding of knowing when to buy a stock.

Here’s another example…

T.A.E. on Amazon Daily timeframe:

Again, the price is above the 200 MA, price is on an area of value of Trend line Support, and you can see a hammer candlestick pattern as an entry trigger.

Now, these are cherry picked charts.

I’ve purposely picked those charts that show see you winning trades because I find it it’s easier to explain the concept.

But when you’re trading in the live market, trust me, there will be losers no matter how good the Fundamentals or Technicals are.

So I want you to prepare for it.

With that said, here’s what you’ve learned so far…

Summary

  • We discussed Trends. You want to be buying in an uptrend and selling in a downtrend
  • We also discussed the Area of value. It can be in a form of Support and Resistance, Moving Averages, and Trendline
  • You can use Candlestick Patterns as Entry Triggers
  • You can use the T.A.E. framework to find trading opportunities in the stock market
  • Stock Risk Management: How To Calculate Your Position Size

Why Risk Management is Paramount to Your Success

Let’s assume that there is this trading system that wins 50% of the time with an average of 1:2 risk to reward ratio.

And let’s say that there are two traders, John and Sally.

These two traders trade the same system with a 50% win rate and a 1:2 risk to reward ratio.

And the next 10 trades look something like this:

L   L   L   L   L   W   W   L   W   W

4 winners and 6 losers, a 40% win rate.

Even though there are 4 winners and 6 losers, it does not mean that the system has a 40% win rate because the results are random in the short term.

It’s only in the next 100 to 1,000 trades we get to see the 50% win rate.

John

John is the type of trader that likes to “go big or go home”

He risks 20% of his account on each trade and encountered these series of trades:

L   L   L   L   L  W   W   L   W   W

Now, John’s account would look something like this:

-20% -20% -20% -20% = -100%

Clearly, before he can reach his 6th winning trade, he would already be wiped out.

He would blow up his trading account.

On the other hand…

Sally

Sally is a conservative trader.

She’s more careful and applies proper risk management.

She plays good defense so she would only risk 1% on each trade.

So, Sally’s account would look something like this:

-1%  -1% -1% -1% +2% +2% -1% +2% +2% = +2%

You can see That Sally had a positive outcome of 2% with a 1:2 risk to reward ratio.

Can you see the difference over here?

John is an aggressive trader who blew up his trading account with 20% risk per trade

Sally, on the other hand, risked only 1% on each trade and ended up with a net profit of +2%

Can you see the lesson I’m trying to bring across on how risk management would keep you through the tough times?

Risk management is what will help you survive your losing streak.

Risk management is what will make you still stand strong right even though the market conditions are unfavorable to you.

Because as I’ve just shared with you…

A profitable trading system without proper risk management will still cause you to lose in the long run.

Now the question is…

How do you put on your trades in such a way that when the trade hits your stop loss, you lose not more than 1% of your trading account?

Here’s the answer…

How to position size your trades for stocks

This is a spreadsheet that I have developed myself…

You can simply just Google “stock trading position sizing calculator” and you probably can find something similar or even better than this.

So what you’d do is to fill in the following columns in order…

  1. Your trading capital ($100,000)
  2. Your risk per trade (1%)
  3. Your buying price on the stock ($100.00)
  4. Your stop loss price ($1,000)

Your Risk $ column is already calculated based on your capital and the risk column.

Now…

If you take your Risk $ and divide it by your stop loss level ($80.00) minus your buy/entry price ($100), you get 50 shares…

What this means is that if you put on the trade, set your entry price ($100) and set your stop loss price ($80) at eighty dollars…

You would need to buy 50 shares so that if the trade hits your stop loss, you won’t lose more than $1,000 on the trade (which is 1% of your trading capital).

One thing to point out is that the number of shares you buy is never fixed.

It’s dependent on the distance of your stop loss to your entry.

Why?

The tighter the stop loss, the higher the number of shares you can buy.

While if you increase the distance of your stop loss relative to your entry, the fewer shares you can buy while still keeping your risk constant.

Needless to say, if you increase your risk like John, which is 50%, you can buy more shares.

At the same time, you risk losing 50% of your account in this case if the trade does not go your way.

With that said, let’s do a quick summary, shall we?

Summary

  • Risk not more than 1% of your trading capital
  • The tighter your stop loss, the larger your position size
  • The larger your stop loss, the smaller your position size
  • Learn How To Trade Stocks (Step By Step Guide)

We’ve covered the basics of stock trading, and what is a stock.

We also talked about Fundamental analysis, Technical analysis, and Risk management.

I know there’s a lot to swallow at this point in time.

So I just want to piece the puzzles together so that you can see the big picture of what we are trying to accomplish over here.

Let me just do it showing with you a trick example where I simulate a trade.

This is the chart of Coca-Cola…

Also, let’s assume that Coca-Cola is a fundamentally strong company.

Earnings are improving, revenue is beating analysts’ estimate year-on-year.

That’s all the good stuff coming out of Coca-Cola!

So that is a stock we want to focus on.

Next thing we look at is the Technical aspect of the stock.

What is the trend?

We notice that this market is in an uptrend as the price is above the 200 MA…

Recall, if the price is above the 200 MA, it’s a long-term uptrend and we want to say long.

If the price is below the 200 MA, it’s a long-term downtrend and we want to stay short or in cash.

Just because the price is in an uptrend, it doesn’t mean that we buy immediately.

Why is that?

Because the second thing that we look for is the area of value…

What is the area of value?

We want to buy when the price is at an area of value.

And in this case, the price bounced off the 200 MA twice and recently rejected for the 3rd time…

Not only that!

If you notice from a market structure perspective, it recently rejected from an area of Support as well…

Whenever price breaks above resistance, it tends to retest previous resistance which will turn into new support.

And if price breaks below Support, that area of support will become resistance.

Clearly…

Coca-Cola is also at an area of value.

The third thing we need to look for is the entry trigger…

What is the Entry trigger?

Do we have an entry trigger that tells us that the buyers are stepping in and about to push price higher?

If you look carefully, we have a bullish reversal piercing candlestick pattern…

This is a sign of strength from the buyers.

So we have four things in-line with this stock:

  • Good fundamentals
  • Trend is up
  • The price is at an area of value
  • A strong bullish reversal pattern as an entry trigger

What’s missing?

If you recall earlier, risk management is important.

Because you can have a profitable trading system or strategy, but without proper risk management…

You could still lose in the long run.

Now the question is…

How many shares do you buy?

How many shares of Coca-Cola do you buy in such a way you only lose 1% of your trading capital?

Before we can answer that question, we have to ask ourselves where is our entry point and stop loss price…

Entry: $47

Stop loss: $45

With that in mind, just pull out your position sizing calculator…

Let’s say you have a capital of $100,000.

Just fill in the blanks as demonstrated in the previous lesson and in this case…

You can buy 500 shares of Coca-Cola.

If the price hits your $45 stop loss, you will lose not more than $1000 which is 1% of your trading account.

So this is how you kind of piece the puzzles together.

One aspect that I’ve not really covered is your exits.

Where do you exit your trade?

This is a very broad topic, but generally, if you’re a swing trader and you just want to capture one swing in the market…

What you want to do is to exit your trade where there is a potential selling pressure or where sellers could come in and push the price lower.

And if you look at the Coca-Cola chart, there could be a potential selling pressure at this level…

This is how you can go about exiting your trades.

Of course, this is just one approach from a swing trading perspective.

You can adopt a trend following approach as well where you try to ride trends in the market.

But again, it’s not within the scope of this lesson to cover it.

  • What Are The Different Types of Trading Style

Day Trading

With Day Trading, you’re usually trading below the 1-hour timeframe.

Possibly even 5 or 15-minute timeframe.

And your goal as a day trader is to capture the intraday volatility.

Most stocks pretty much move about 1% to 3% a day.

So as a day trader, you are trying to capture this intraday move of the stock and exit your positions by the end of the day.

Pros:

The pros of a day trader are that you can actually be profitable on most months if you’re good at it.

Cons:

The downside is that Day Trading is stressful as it requires a lot of screen time, and the opportunity cost is really high because if you have a bad day…

You could possibly be better off working elsewhere full-time job elsewhere with a fixed income.

Moving on…

Swing Trading

Typically, you would be operating between the 1-hour and the Daily timeframe.

As a swing trader, you buy near the lows of the range exit before the price hits resistance if the market is ranging.

Similarly, if the market is trending, you just have to capture that one wave.

Pros:

It’s less stressful and you don’t need much screen time because you are trading off the higher time frames.

Cons:

But the downside to it is that swing trading has a less frequency of trades.

Which means, you won’t make money on most months.

If you’re good, you can make money in most quarters.

Another downside is that you will not be able to ride trends because as a swing trader, you’re just capturing one move in the market.

And finally…

Position Trading

Position Trading is the longest form of trading.

This is where you are trading off the daily and the weekly timeframe.

Your goal as a position trader is to ride trends in the market or to capture the “meat” of the trend as you can see here…

Pros:

It is the least stressful and does not require much screen time because you’re trading the higher timeframes.

Cons:

You need patience.

In fact, you need a lot of patience, because it takes time to see results.

Position Trading would have the least number of trades because trading opportunities don’t always come.

So with that said, let’s do a quick summary…

Summary

  • For Day Trading, you’re looking to capture the intraday trend, operating below the 1-hour time frame.
  • For swing trading, you operate between the 1-hour and the daily timeframe. Your trades usually last a few days to a few weeks
  • For Position Trading, you operate on a daily timeframe and higher. Your trades will last usually from weeks to even years.
  • Stock Trading Tips That Work

Stock trading tips

The first thing that I have for you is…

Don’t “chase” the markets

It doesn’t matter whether you’re trading Stocks, Forex, or Futures.

As a new trader, there is always this “urge” to chase the market where the market breaks up higher and the candle is so big and bullish that you can’t resist to buy it.

Because you’re thinking, “Man, this is going to go up forever, if only I can just catch a piece of the move!”

That’s what you are probably thinking.

But trust me…

Whenever you see this type of price action where the market or the candle is hugely bullish…

That’s usually the worst time to enter the trade.

That’s what I mean by not trying to chase the markets.

If you want me to give you a visual, illustration it would be something like this…

The market is in a range and breaks out higher as you’re tempted to buy the highs.

And when you buy at the highs, that’s usually when the market collapses…

The second thing that I have for you is to…

Start Small

If you have $50,000 to speculate in the markets…

My suggestion is to not risk that whole $50,000.

There are many brokers already out there that’s letting you buy 1 or 2 shares (beyond the usual minimum board lot) and lets you trade commission free!

So you can start small like $10,000 or even just $5000 at the moment.

Because as a starting trader, you’ll make a ton of mistakes.

So start really small and make as many mistakes as possible which is totally fine.

Why do you want to you know pay for example $10,000 for a painful trading lesson when you can actually learn that same lesson for a $300 or $400 account?

So start small so your tuition fees are kept small as well.

Later on, you can scale up your account when you’re confident and when you’re ready.

Third thing…

Risk Management First

As you start in your training journey, you will be overwhelmed.

I’d be lying to you if I say that trading is simple.

No.

You will be overwhelmed.

There is a lot of information out there and you’ll probably hop from one trading system to the next.

Maybe you have already tried swing trading, position trading, mean reversion trading, trend-following, momentum and so on.

But the one thing that you must not neglect is your risk management.

If you think about this right…

If you have proper risk management in place and no matter what trading strategies you trade…

Even if flops or fails, you will not blow up your trading account.

Because each trade that you risk is only 1% or smaller, it’s not something that would destroy you.

So feel free to explore other methods but never ever forget your risk management.

The last thing on the share is…

Look at what the index is doing

For example, if you are trading stocks in the S&P 500…

Then it would make sense to track what is the trend on the S&P 500 to kind of to serve as a trend filter for to know whether you should be buying or you should be staying in cash.

If the stock index is in an uptrend, chances are stocks will be in an uptrend.

If the stock index is in a downtrend or is in a recession, more often than not, more stocks will be in a downtrend.

One way to improve your trading is to trade along the path of least resistance.

One tip that I have for you is…

  • If the S&P 500 is above the 200-day moving average, then look to be a buyer
  • If the S&P 500 is below the 200-day moving average, then you stay on cash or don’t buy stocks at all

So these are the four of the most important ones that I hope you can take away from this entire stock trading course.

I wish you good luck and good trading and I’ll talk to you soon.

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