There are a million different stock trading systems out there that you can read about or purchase. Many of these systems are very effective, but that's not the general idea of this article. It is my opinion that a person who trades in the stock market should at least have a basic understanding of how things work and why certain trades are more likely to be profitable than others. There is a difference between stock trading and stock investing. Stock investing is a long term strategy in which you don't really care about the near term ups and downs of the stock you are buying. Stock trading is based on trading in a shorter time frame and using the variance of the market to make a profit. When you are a stock trader you really don't care about the long term outlook for a certain company, all you care about is determining the direction the stock price is going to go.
If you have decided to make some shorter term trades, you really need to develop a stock trading system. It is very difficult to keep your emotions out of the equation when you are trading with your hard earned money. That's probably the single most important reason to have a trading system in place. If you can make your trades without ever second guessing yourself you will be way ahead of the curve. Many of the most common mistakes traders make derive from the fact that they don't really have a plan when they start trading. If you have a plan, and can detach yourself from the idea of making a mistake, you have taken the first step to becoming a successful stock trader.
So how do you trade stocks using a system? It boils down to a simple idea: know when you want to enter a trade, and know when you want to exit. Sounds pretty simple, right? In theory it is, in practice it is a bit more difficult. There are tons of technical indicators that can give you an idea of where the stock price is going to go. Everything from Bollinger bands to moving averages to candlestick patterns can help predict the future price of a stock. Determining which set of indicators you are going to use is beyond the scope of this article, but you must choose a certain condition that you determine to be a good entry point. This is the first step in creating your stock trading system.
You will basically do the same process for determining an exit strategy for the trade. The exit of the trade is slightly more complex however because you will need to set up two conditions for ending the trade. One will be when your profit goal has been met, the other is when the trade goes against you and you have to cut your losses. That second part may be the single most important piece of a positve stock trading method. You will have trades that lose money, everyone does. The real failure is to let a bad trade run it's course in the hopes that it will "get back to even". This is a huge reason to set up your own stock trading system that works for you... it takes the stress out of the trades.