101 Stock Trading: 10 Things You Need to Know to Make Better Stock Market Returns

Consistency is Critical. Let's Help You with That.

Many investors struggle to generate consistent returns in the stock market. This is often because they lack knowledge of active trading strategies to capitalize on short-term opportunities. They need a process that they can understand and can adhere to.

By leveraging these strategies, active investors can boost their overall returns while managing risk. Let's be clear, active trading is not for all investors, as it requires continuous research, discipline and engagement. But for those willing to put in the effort, active trading provides a path to exceed passive buy-and-hold returns. This article is here to give you an actionable playbook to start profiting from short-term market moves.

What are Active Investing and Passive Investing

There are two main investing approaches - passive long-term investing and active short-term trading.

Passive investors take a buy-and-hold approach, purchasing assets like stocks or funds and holding them for many years while compounding returns. This requires little effort beyond the initial investment, making it ideal for hands-off investors with a long horizon. However, it provides minimal influence over returns.

Active trading aims to time the ups and downs of asset prices by buying low and selling high over weeks or months. This increases influence over returns but requires continuous research and monitoring. While riskier, active trading allows investors to profit from short-term swings through proven strategies. It is important to balance active and passive strategies. You should note that active trading is best done through tax-advantaged accounts like IRAs.

Overall, investors must align their approach to their goals, time horizon and risk tolerance.

Active Trading example:

• Bob is an active trader looking to profit from short-term price movements in the stock market.
• He closely monitors stock charts, news, and filings to identify potential trading opportunities.
• Bob notices the technology sector has been outperforming the broader market lately. He decided to buy an ETF that tracks the tech sector.
• After buying the tech ETF, Bob sets a stop loss order at 3% below the purchase price to control potential losses.
• Two weeks later, Bob sees the tech sector is looking overextended on the charts while the healthcare sector is starting to outperform.
• He sells the tech ETF for a 4% profit and immediately uses the proceeds to buy a healthcare sector ETF, again setting a stop loss.
• Bob continues actively managing positions, booking gains regularly while limiting losses through stop orders and quick exits.

Passive Investing:

• Jim is a passive long-term investor focused on steady growth over decades.
• He invests in a diversified portfolio of mutual funds tracking the overall stock market, bonds, international stocks, etc.
• Jim aims to hold his investments for 30+ years, mainly adding more money over time.
• He does not try to time short-term market moves. Mark stays invested through the ups and downs.
• By not actively trading, Jim saves significantly on transaction fees and taxes.
• Over decades, his buy-and-hold approach compounds into substantial wealth through long-term growth.
• Passive investing requires minimal effort from Jim beyond occasional rebalancing. He lets the funds do the work.

Creating a Trading Plan

It is important to build a robust trading plan before actively trading. A strong plan establishes financial goals, sets risk limits, defines strategies, outlines research processes, and implements risk controls like stop-losses. Planning improves discipline, conviction and mental preparedness during turbulent markets. It is essential to assess total capital, existing assets, income needs, time horizon and risk appetite when devising a plan. Continuously learning through books, courses and experience also helps refine strategies over time. An indicator of a good plan is when trades feel routine and emotionless. Even seasoned traders should reevaluate their plans annually as markets evolve. With a carefully constructed roadmap, active traders are positioned to maximize returns.

• Assess your financial goals - What are you investing for? Retirement? Home purchase? Set concrete targets.
• Determine your risk tolerance - How much risk and volatility can you handle? This guides what assets you can invest in.
• Research trading strategies - Match strategies to your goals. Short-term trading vs long-term investing. Active vs passive.
• Choose a brokerage firm - Pick a reputable broker with fees, tools and services that align with your needs.
• Implement risk controls - Use stop losses, diversification, position sizing and other prudent risk measures.
• Develop research process - Outline how you will research trades using fundamental, technical, and quantitative analysis.
• Document trading rules - Record guidelines on when to buy, sell, take profits, and cut losses based on your strategy.
• Specify position sizes - Given your total capital, determine the maximum sizes of positions.
• Schedule reviews - Set times to review your plan's effectiveness and refine it as needed.

The key is devising a detailed roadmap tailored to your specific financial situation and goals. Follow the plan consistently while reviewing and updating it periodically. This promotes discipline and informed decision-making.

Technical Analysis

Technical analysis allows investors to identify trading opportunities and involves using price charts and technical indicators like moving averages, volatility, volume, momentum and more to spot trends, reversals, support/resistance levels, and ideal entry/exit points. Endris provides an overview of key chart patterns and indicators, explaining how to interpret signals like crossovers, divergences and breakouts. For example, a break above a resistance level may signal a stock is overbought and due for a pullback. Endris provides annotated charts as examples and recommends charting resources. He advocates combining common sense, experience and quantitative data when technically analyzing assets. Technical analysis requires practice but ultimately helps active traders enter and exit trades at optimal prices.

Here are some good resources for learning technical analysis:

• Books - Classics like "Technical Analysis of the Financial Markets" by John Murphy or "Japanese Candlestick Charting Techniques" by Steve Nison are great
• overviews.
• Online courses - Many investing websites like Investopedia, Udemy, and Skillshare offer technical analysis courses from basic to advanced levels. These provide structured learning.
• Trading platforms - Brokers like TD Ameritrade, E*Trade, and Thinkorswim have extensive technical analysis education in their knowledge bases and communities.
• Charting sites - Platforms like TradingView and StockCharts provide a wealth of technical analysis resources, guides, and detailed chart examples.
• Investing websites - Sites like The Balance, Motley Fool, and The Street have introductory technical analysis content to start learning concepts.
• YouTube videos - There are many channels dedicated specifically to explaining technical analysis strategies step-by-step like Rayner Teo and Trading Rush.
• Online forums - Subreddits like r/technicalanalysis have discussions on using various indicators and chart patterns.
• Local workshops - Many brokerages and investing education companies offer in-person seminars on technical analysis.

The best approach is combining multiple resources to get well-rounded training. Practice through paper trading is also essential to gain proficiency. Technical analysis requires a hands-on application.

Fundamental Analysis

While technical analysis focuses on price data, Chapter 4 covers analyzing business fundamentals like financial statements, competitors, news, and filings to identify mispriced assets. Assessing fundamentals like revenue growth, debt levels, management changes and addressable market enables comparing a stock's price to its intrinsic value. Monitoring fundamentals can surface oversold companies worth buying or overbought companies worth shorting. Interpreting financial statements and filings will help to evaluate a company's health. While technical factors drive short-term price movements, understanding fundamentals is key for maximizing long-term returns. It is best to combine both technical and fundamental analysis to make informed trades.

Here are some good resources for learning fundamental analysis:

• Company investor relations sites - Review financial statements, earnings calls, SEC filings like 10Ks and 10Qs directly from the company.
• Financial websites - Sites like Morningstar, Seeking Alpha, and Yahoo Finance provide fundamental data on companies.
• Research reports - Brokerages like Charles Schwab and Fidelity produce reports analyzing company fundamentals.
• Stock screener tools - Screeners from sites like Zacks and FinViz allow filtering stocks based on valuation, growth, profitability, and other fundamental factors.
• Books - Titles like "The Intelligent Investor" by Benjamin Graham provide a framework for fundamentals-based investing.
• Fundamental analysis courses - Many investing websites like Wall Street Prep offer courses on analyzing financial statements.
• Equity research reports - Reports from investment banks provide detailed fundamental analysis on companies. Obtain from brokers.
• Financial statements - Read annual reports, 10Ks, 10Qs from the SEC website to analyze unfiltered financial data.
• Earnings call transcripts - Review call transcripts on sites like Seeking Alpha to hear management's commentary on financial results.
• Stock research forums - Subreddits like r/securityanalysis have insightful discussions on evaluating company fundamentals.

The best practice is to synthesize data from multiple sources to gain a comprehensive understanding of a company's financial health and growth prospects.

Sector Analysis

Stocks within stronger sectors tend to outperform, while weaker sectors see stocks decline. Resources like the S&P 500 sectors make comparing sector performance fast and easy. Rotating between stronger and weaker sectors allows capitalizing on cyclical shifts in leadership. Metrics like year-over-year performance can help to quickly identify stronger sectors with upside. Try examining the holdings within strong sector ETFs to find compelling stocks. Proper sector analysis provides a trading edge.

Here are some recommendations for learning sector analysis:

• Read sector-focused news sites like Biospace for biotech, CleanTechnica for clean energy, and Finimize for fintech to understand industry trends.
• Use ETFdb.com to research sector-based ETFs and compare historical performance between sectors.
• Check sector classifications on finance sites like Finviz to see which stocks are grouped under each sector.
• Use screeners on sites like Zacks and StockRover to filter stocks by specific sectors and analyze valuation metrics.
• Study annual global sector outlook reports from research firms like Deloitte to identify top-performing sectors.
• Obtain sector analyst reports from brokerages like Credit Suisse and Goldman Sachs for professional insights.
• Read books focused on specific sectors like "Healthcare Investing" by Bill Paul for deep dives into industry drivers.
• Use Morningstar's Sector Matrix tool to analyze valuations and fundamentals by sector.
• Follow sector experts on Twitter and LinkedIn to get opinions on outlooks.
• Listen to sector-focused podcasts like The Economist's Money Talks for high-level discussions.

The key is consuming information from multiple specialized sources to gain a well-rounded understanding of the macro dynamics driving different sectors.

The Importance of Diversification

Concentrating positions in just a few stocks, sectors or geographies exposes investors to uncompensated risks. Spreading capital across different assets insulates from market shocks. Investors can define their own portfolios based on age and risk tolerance as guides for diversification. Holding varied market caps, sectors, countries, asset classes and industries. Diversification smoothes volatility while enhancing risk-adjusted returns. Periodic rebalancing to maintain target allocations as prices fluctuate. While requiring more upfront work, diversification pays dividends over time through improved returns and reduced volatility.

Here are some reasons why diversification is important when creating an investment portfolio:

• Reduces risk - Diversifying across asset classes, sectors, and stocks lowers exposure to volatility in any one area.
• Smooths returns - Different assets often have alternating cycles of outperformance, smoothing overall returns.
• Limits losses - Weakness in one asset class is offset by strength in others, containing downside.
• Improves risk-adjusted returns - Blend non-correlated assets to maximize returns per unit of risk taken.
• Provides stability - Portfolio fluctuation is constrained across market environments when properly diversified.
• Requires less monitoring - Diversified passive portfolios do not need constant adjustment compared to concentrated stock-picking.

The core benefit of diversification is reducing portfolio volatility while improving returns. Blending assets with low correlations optimizes the risk-return profile.

Managing Risk

Risk is imperative for long-term success. Techniques like stop orders, trailing stops, diversification, position sizing and risk-reward ratios to control losses and protect capital. Determining maximum loss tolerance on each trade guides where to set stops. Letting winners run while quickly exiting losers improves results. Hedging strategies using instruments, like options, is also important. You can employ several risk management strategies across different trades. The key takeaway is that limiting and mitigating risks allows trading through volatility without getting wiped out. Mastering risk management separates successful traders from amateurs.

Here are some key strategies investors can use to manage risk:

• Diversification - Spread capital across different assets and markets to minimize exposure to individual risks.
• Asset Allocation - Strategically allocate portfolio across asset classes based on goals, time horizon, and risk tolerance.
• Position Sizing - Size positions to limit the maximum loss on any single investment. Generally 2-5% of portfolio per position.
• Stop Losses - Set stop loss orders on purchases to automatically sell and limit the downside if the price drops to a defined level.
• Hedging - Use instruments like options to hedge and offset losses on other positions in the portfolio.
• Cash Reserves - Maintain a portion of the portfolio in cash/cash equivalents to weather volatility and purchase assets at low prices.
• Limited Leverage - Use conservative leverage strategically to maximize returns while strictly controlling increased risk levels.
• Loss Harvesting - Realize losses strategically for tax purposes to offset capital gains.

Employing a mix of these strategies customized to investment objectives helps maximize returns for a given risk profile.

Order Types

Basic market orders execute trades immediately at the current market price versus limit orders which set a target price to enter or exit positions. When buying, limit orders execute when the price drops to the target level, while selling limit orders execute as the price rises to the target. Stop orders become market orders when a defined trigger price is breached. Trailing stops follow price movements to lock in gains. Think about using bracket and conditional orders that allow automating multi-leg strategies. Overall, utilizing advanced orders increases precision in entries and exits.

Here is an overview of key order types and how they can be used to suit different investing strategies:

Market Order - A market order executes a trade immediately at the current market price. These are best for investors seeking speed and certainty rather than a target price. Useful for trading news events or technical breakouts when prices are rapidly changing. Not ideal for penny stocks with wide spreads.

Limit Order - Investors specify a maximum price to buy or a minimum price to sell. The order executes only when the price is met. Useful for buying on dips or selling into rallies. Can miss execution if the price moves hastily. Requires price forecasting ability.

Stop Order - The stop price serves as a trigger to initiate a market order. Buy stops trigger when the price trades above the stop level. Sell stops trigger on drops below the stop. Locks in profits and limits losses. Requires identifying accurate stop levels.

Stop Limit Order - Functions as a limit order after a stop price is hit. This controls slippage on fast-moving stocks while still providing downside protection. Combines the benefits of stop and limit orders. Requires more precision.

Trailing Stop Order - The stop price trails the market price by a set amount. The stop adjusts automatically with upside price movements. Locks in profits on extended runs. Can be whipsawed out on volatility. Requires constant monitoring.

Bracket Order - Combine a limit order to open a position with a take profit limit order and stop loss order. This automates locking in gains and limiting losses. Useful for disciplined traders. Requires proper entry and exit forecasting.

By understanding the use cases and tradeoffs of each order type, active investors can employ the optimal orders for their strategy and risk tolerance. The more precise the orders, the more potential control over trade execution.

Managing Open Positions

It is important to set profit targets and stop losses upon entering trades. Taking partial profits along the way helps avoid leaving money on the table. Trailing stops also allow riding trends. Knowing exit strategies ahead of time minimizes emotional decisions. Portfolio rebalancing is also demonstrated to maintain sector and asset class balance amid price distortions. Constantly assess positions using technical and fundamental analysis to determine if initial reasons for entry remain valid. If not, exiting quickly preserves capital for better opportunities. Continuously managing open trades leads to superior returns.

Here is an overview of strategies for managing open positions:

Setting Profit Targets - Determine upside price targets based on technical analysis or fundamentals. Close positions incrementally to lock in partial profits as price hits targets. Helps avoid greed and regret.

Using Stop Losses - Establish stop loss orders on all positions to automatically sell and limit losses at a defined downside price. Move stops up to lock in gains as the price appreciates.

Trailing Stops - Use trailing stops that follow the market price to protect against reversals. Tighter trails lock in smaller profits while looser trails allow bigger gains. Requires balancing.

Monitoring Sentiment - Assess overall market and sector sentiment. Unwind positions going against overall sentiment even if fundamentally sound as these face headwinds.

Tracking Catalysts - Understand catalysts that influenced opening positions. If catalysts change or pass, consider closing positions earlier than planned.

Ongoing Research - Regularly revisit analysis to ensure the logic for entering positions remains valid. Exit quickly if the thesis is disproved.

Rebalancing - Rebalance portfolio allocation periodically as prices fluctuate. Trim outperformers to buy laggards and maintain target allocation.

Hedging - Hedge positions using instruments like options to offset potential losses. Ideal for protecting against events like earnings misses.

The key is continuously monitoring open positions using advanced orders and risk management strategies. Discipline and decisiveness in closing positions is required to maximize profits.

Top Active Trading Tips

• Have a well-defined trading plan aligned to goals and risk tolerance
• Maintain continuous market and sector research to spot opportunities
• Use technical and fundamental analysis to validate trade ideas
• Implement diversity across assets to lower risk
• Strictly adhere to stop losses on every trade
• Balance portfolio across sectors, geographies and asset classes
• Rebalance positions periodically to maintain balance
• Let winning positions keep running while quickly exiting losers
• Continuously hone strategies and improve knowledge through practice

Active trading requires discipline, commitment and risk management. But for those willing to learn and evolve, active strategies provide a path to exceeding passive returns. This book equips investors with proven models to profit in the financial markets.