How To Make Money Trading Stocks

When you own shares of stocks, you own a piece of the company that issued it. That's why it's called an equity security. This means that if the company does well and grows, the value of your shares will grow too. But if the company does poorly and goes out of business, your shares become worthless.

As part owners in the company, shareholders are paid dividends out of the firm's profits. The portion of profits not paid out (retained earnings) is reinvested back into the company. A company's shareholders theoretically control the company by electing its board of directors. The board, in turn, selects upper-level management and makes major decisions for the company.

Dividends are not guaranteed to be paid, and can be changed by the board of directors at any time. Equity shares fluctuate in value on a daily basis and can be quite volatile. A person who invests in these needs to plan on holding them for the long term, usually 5-10 years or more. This way, short-term fluctuations in the stocks price don't really matter to the long term investor.

One great thing is you can buy these in small increments of as little as one share. Commissions paid to your broker who buys it for you are now getting low enough to make it very easy and affordable to build a diversified stock portfolio with a small amount of money. Many people own shares indirectly through mutual funds, 401K plans, pension plans, etc.

That's enough of stock 101, lets talk about TRADING them!!

Let's cover some of the basics of technical analysis or charting. Charting is used to assess the market's mood toward a specific security. Charting follows the basic premise that security prices follow trends. Chartists believe that securities have a degree of momentum. That is, a stock's price is expected to continue along in its current direction until some new force changes it.

While not bullet proof, charting is effectively used to help investors identify good times to buy and sell stocks.

Here are a few of our favorite technical analysis indicators that you may find helpful in your market investing:

Ultimate Oscillator Developed by Larry Williams, the Ultimate Oscillator uses weighted sums of three oscillators, each of which has a different time period, in an attempt to 'smooth out' the fluctuations that generally make oscillators hard to interpret. The ultimate oscillator tries to put you in a trade on the basis of a divergence (and breakout) in the oscillator's trend. Typically, traders buy when there is a bullish divergence (the stock's price makes a lower low but the Oscillator does not). During a bullish divergence, the ultimate Oscillator's value will usually fall below 30, then rises back above the highest point reached during the bullish divergence so signaling a 'buy'.

Here is a 1 year chart of Bank of America

A "Sell" or "Sell short" signal comes when the ultimate oscillator first rises above 50 and then falls below 45, or the oscillator rises above 70.

The "Sell" or "Sell short" condition is when a bearish divergence occurs (the price makes a higher high but the oscillator doesn't). During this bearish divergence, the ultimate oscillator will usually rise above 50 then will fall below the lowest point reached during the bearish divergence. These short positions are closed when either the conditions are met to buy long as explained above, or the ultimate oscillator rises above 65, or the oscillator falls below 30. Day trading with this indicator is difficult as it is normally used in longer term trading activities.

Now let's look at the same chart above, but focus on some "selling" signals that happened earlier this year. See how in October the Bank of America price hit a previous high point, but the ultimate oscillator hit a much lower high than the month before? That is a strong selling signal that should not be ignored.

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