In last week’s blog, which you can read here, we covered building a framework for your trades using support and resistance lines. By marking lines of support on a candlestick chart, we are identifying price points which the stock historically will not drop below, and by marking lines of resistance, we are identifying price points which the stock historically will not rise above. Once you have located and marked these historical positions of support and resistance, you can plan your next step, which is placing a trade.
There are three directions in which a stock can move: up, down, and sideways. If a stock goes up, we will want to place a bullish or long trade, if a stock goes down, we will want to place a bearish or short trade, and if a stock trends sideways, it is best to wait until a clear direction emerges before placing a trade.
When a company’s stock is trending upward, we want to buy into a long position. Essentially this means money from our trading account is paid out, and shares of the company in question come into our account. We open the trade with a buy order and close the trade with a sell order. Once we have the shares in our account, we can hold them for as long or as little as we want. When the stock trends up and hits our target price point, we execute a sell order to close out the trade. When that happens, the stock leaves our trading account, and the capital from the closing the trade comes into our account.
On April the 6th, we opened this long trade of 50 shares of Etsy at $41.27 per share. The stock trended up, and we exited the trade at $42.96 with a net gain of $84.25.
On the flip side, when a company’s stock is trending downward, we want to sell into a short position. We open the trade with a sell order and close the trade with a buy order. Since we have sold shares of a company, money has moved into our trading account, and now we need to purchase the shares of stock to close out the trade. Once we have sold the shares, we can keep the trade open for as long or as little as we want. When the stock trends down and hits our target price point, we execute a buy order to close out the trade. When that happens, the capital from opening the trade leaves our account, and the difference of the opening and closing price point is our profit.
On March the 12th, we opened this short trade of 10 shares of Disney at $104.87 per share. The stock dropped, and we closed the trade at $94.82 with a net gain of $100.50.
It should be noted, as a stock trader, we want the stock to move. Regardless of the direction, the point where we enter a stock trade and the point where we exit a trade is our profit. The more a stock moves up or down, the more profit we generate. So, whether you are looking for a stock to go up or down, find your entry point, your exit point, and your stop point. Once you have those locations, you are ready to go.
Please note, we strongly suggest using a virtual account or paper trading platform, such as TradingView, which you can learn on before trading any real money. And, if you wish to learn more regarding this topic, please consider signing up for our Foundations of Stocks and Options class, which you can do here.