Establishing whether a stock will produce trading profit or a potential loss is one of the most difficult strategies and criteria to figure into your buying decision. Knowing what is going to happen in the future is never a definite science. But, there are things you can do to ensure maximum gains over the life of your investment.
Your goal when investing is always to make a profit with whatever you are investing in. There are several ways to make this possible and should all be considered before buying into a stock position.
When you buy a stock, you purchase a certain amount of shares for a certain price (your investment). Added onto that cost is any fees associated with your brokerage account you made the purchase through.
At this point, your total cost divided by how many share you purchased equals your new cost per share or your breakeven point.
Trading profit is the earnings you expect to make in the future with a particular stock investment.
In order to establish an amount of profit, you need to look into the crystal ball and see what the stock is going to do one day, one week, or even one year from the day you purchased it.
If only it was that easy.
In order to see into the future, you need to know how to read your charts, how to estimate out the price of the stock based on the studies available to you, and research the company thoroughly. This should all be done prior to making the purchase decision.
In order to see out into the future, you have to study the chart, concentrate on all of your studies and signals, and visualize what the stock is going to do next. Using Fibonacci Channels helps estimates, but even they are only as good as past data.
Reading news alone is not the answer. In fact, you can lose a lot of money basing your trading decisions on news articles.
I read an article about a promising company that was researching a method of extracting oil from pockets above where oil was previously drilled. The article talked up the stock saying that it's going to take off. I was new to investing and had $1,500.00 in my trading account. All in. I did a little research, but really didn't hesitate to buy.
It went up from my purchase price of $2.37 per share for about a week, looking great with more trading profit to come. Then it dropped to less than a penny - down from $4.15. My once $1,500.00 investment turned into an investment of 632 shares worth about $4.00. Biggest loss I have to date, so it can't get much worse than that.
Never believe the information you hear in an article without doing a lot more research about the company and check the charts to see what the stock is doing.
You don't lose if you don't sell, right? Well, it never recovered and the company just went away one day and even my $4.00 disappeared after more losses.
Before you ever make a trade, you need to know when you want to sell the stock. An exit point can be a price level that makes you a certain profit or when certain sell criteria are met. But you need to know at what point you want to consider selling your shares, even before you buy them.
If you simply buy some shares in a stock to hold onto it for a while with no end in mind, you will miss your opportunity for trading profit. You need to check the charts daily, watching them closely for significant price shifts. This is where support and resistance lines come in handy on the chart. This may be a good exit point - when the stock price hits the resistance line.
You must also consider what to do if your investment doubles. This would be a good exit point for your personally invested money, then let the gains play out higher if the stock goes higher. If only the money you gained from the trade is in play, you will always be in profit, even if the stock price drops. You will just not have as much gains if this happens, but they will still be considered trading profit.
There are many ways to make a profit from a trade, but you must always do you research and follow what the chart studies is telling you. Draw pictures on your chart to estimate out the price of a stock before you buy it so you can gauge where the price will go after you purchase it. Then track the stock after purchase to make sure it is following your estimate. This will ensure your trading profit is at its maximum potential.