How to Not Be Worried About Drops in the Stock Market

As we discussed in Part 1 of this series, by now you should have a determined trends for the stocks you are watching. Now we will start to examine the waves of its price action. Regardless of whether the trend of a stock is going up or down, it will always move in waves. It will always swing up and down on a short term basis. And it is this back and forth motion that will help us hone in on when is the most advantageous time to make our move.Course, while it is good practice, you should not rely totally on your eyes when it comes to nailing down what the price wave is precisely doing at on given time.

It should be quantified by using an indicator. This is where a good oscillator comes in handy. Oscillators measure the swing motions that all stocks exhibit. They are generally placed at the bottom of your price chart and have a little chart of their own that depicts the back and forth price motion.By viewing the chart of the oscillator, you will get an idea of when to consider jumping into a stock position. The stochastic is one very popular oscillator that actually has two different lines on its chart.

Stock Market Trading Systems

These are known as the fast and slow stochastic lines. It bases its signal on price action over a certain number of trading days known as periods. You will have to enter the period you wish to use.Most traders use a period of 14 and follow the slow stochastic line.When the slow line falls below 20, the stock is considered to be oversold and represents potential buying opportunity. When slow line rises above 80, it indicates an overbought situation and you should be looking to sell.Here is a word of caution when using the stochastic line.

If you want to add a degree of safety, you wait for the line to turn back up or down before buying or selling. In other words, do not buy because the slow line fell below 20. Instead, wait for it to turn back up or even to cross above 20 again before buying. The reason for this is that these lines can move sideways for prolonged periods of time.

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Stock Trading Rules

There are a number of stocks trading rules that investors have to keep in mind in order to make rational investment decisions and avoid losses. One important rule for investors is to trade with capital they can afford to lose. It is highly advisable not to deal out more than 5% of the trading capital to make a single trade and to keep losses at the sleeping level.

Developing a game plan or a trading system is also a stock trading rule. This trading plan should cover how investors make their investment decision, and they have to implement the trading plan with risk management such as when to cut losses. Testing the strategy before risking funds is an important rule.

Investors must paper trade with the indicators/trading system they are using with daily data. It is very essential for investors to keep their trading system easy and master only one of two investment methodologies or strategies.

Another stock trading rule is to analyze the markets when they are closed. Investors are advised to only study the markets after trading hours and determine their plan before the market opens.One very essential stock trading rule for investors is to take time off when they experience sharp losses.

They should not let the urge to win the money back take control over them and throw more money into the bad trade as this can double up losses and create more trouble. It is also extremely necessary to get a good mentor who is currently doing what investors want to do and they are in fact good at it.

One stock trading rule to be kept in mind is that greedy use of margin can double losses in place of doubling profit. Investors have to remember that they are in the stock market to trade for money. If the investment decision made by traders are wrong, they are advised to cut lose and not trade further.

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