There are three things I believe you must first grasp when it comes to beginner investing are these stock trading basics. In fact if you don’t take these concepts and apply them I believe it will be almost impossible to become a master stock trader.

1)Be a Contrarian Who Takes Money from the Crowd

You can tell from my earlier discussions that I believe you must be a contrarian to make money in the market. That’s because most people – and this includes institutional investors, even the famous ones you see on TV – fail to beat the market averages over time and in down years many get destroyed by the stock market.

That means that it just doesn’t make sense to do what everyone else is doing in the market if most people are not succeeding in it. In fact statistics show that 50% of the people in the stock market that have brokerage accounts actually lose money in the market even in an up year. Out of the remaining people another 25% make money, but less than the market as a whole, so less than 25% of all investors beat the market over the long run.
In the end most of the money that is made in the market goes to 5% of the market participants. The people I’ve been calling lions.

Well, to be a contrarian though you can’t just simply do or think the opposite of everyone just because most people are wrong. They are – but the times they are wrong are at key market turning points. They can actually be right most of the time, but they are wrong when it really counts.

You have to be able to identify key market turning points and have the faith in your analysis to ignore the crowd when they go to phone in their buy orders at a market top or have the courage to buy when they sell in a panic at a bottom.

In other words you have to remain as unbiased as possible and accept what the market is telling you no matter what the people on TV tell you, your broker may tell you, or even your wife. At important market turning points everyone will tell you that you are wrong or they will be too scared to act. Will you be able to act on what you know is right when everyone is telling you that you are wrong or are frozen in fear?

2)Know How to Read Market Trends

You need to know how to read market trends when you trade stocks online and be able to identify when a real change in trend is taking place. This may sound complicated, but it is actually very easy to identify whether a market or a stock is in a bear or bull market. As you get more experienced with the markets you will be able to tell when a trend is changing with increasingly accuracy, but the most important thing you need to do is to simply be able to look at a chart and tell what the current trend is – and then adapt to it.

If you like the baby on etrade just imagine that this is what the baby is doing – simply looking at charts and knowing what is happening. That is all there is too it. It is so basic to stock trading.

But this also means being more cautious in a bear market then you would in a bull market. Simply doing that one thing will put you way ahead of everyone else. Most people lose lots of money in bear markets by repeatedly thinking the market has bottomed every time it has a bounce. By adding on as a market drops they compound their losses.

All they need to do is sit back and take an objective look at the market’s big trends. Doing this one thing can make all of the difference for you. I break the market up into four trends – bull market, topping, bear market, and sideways consolidation. One glance at a chart and looking at whether prices have been falling or declining for a period of time and the price in relationship to its 150 or 200-day moving average tells me exactly what the big trend is.

In bull markets I try to buy dips. In bear markets I stay away. When one market goes into a bear market usually another market goes into a bull market so there is always money to be made somewhere. There is no reason to hold and hope when things drop on you. By doing that you are missing out on a better return somewhere else.

Remember I said you need to take control of your money. That’s how you do it – by simply looking at a chart and identifying the trend and to act accordingly when it changes.

3)Properly Use Effective Money Management

Have you ever bought a stock thinking it made a bottom only to see it fall further?

If you did - and I bet you have because everyone in the stock market has experienced this at one time or another - did it cause you a lot of anxiety?
Did it stress you out?

Make you feel like an idiot?

Or make you feel like a stock market loser?

Where you even embarrassed to tell your wife about it?

Well, I have bought stocks lots of times thinking they bottomed only to see them go higher for a few days and then fall below where I got in at and collapse.

And guess what - it doesn't bother me when this happens!

Not at all.

And there is no reason it should ever bother you again either.

You should never be made to feel anxious by the stock market ever again. As you go through future material with me in a few weeks at some point you will start to feel confident about the market. You’ll come up with a game plan that will work for you and you’ll see how fun all of this is.

You see the reason why I never get anxious when stocks fall below where I think they bottom at and then fall further is because I sell them before they collapse.

Whenever I buy a stock thinking it has bottomed I decide instantly where I will get out if the stock doesn't do what I think it will do. If I think it has bottomed and it goes up and then falls below what I think is a key support level I cut my losses and get out. I do this for two reasons, first it means that the reason I bought has turned out to be wrong and secondly when this happens stocks can fall much further than you imagine as you know.

I have a simple game plan when I take a position on where I will cut my losses before I enter it and I stick to it.

The thing is most people don't do this and that is why most people lose money in the stock market. Not only that - by having a plan and trusting in it I don't get anxious about the stock market.

Instead I find it fun, because by cutting losses I let my winners more than make up for them and thereby make consistent returns over time. And if you aren't having fun in the market now all you need to do is make some small changes and you will.

I'm able to make big returns, because I'm in effect taking money away from those people who don't have game plans. You see the stock market doesn't create wealth, it simply transfers wealth from one person to another. In other words it takes money from people who don't know what they are doing or don't stick to a game plan and rewards people who do.

Of course this all sounds like common sense and it is. But people don't apply it. I don't know what the reason is. Many people simply seem to be lazy and unwilling to do the little bit of work it takes to learn about the stock market and think before they buy. Or for some reason they just like to be gamblers and throw money at the market like they are in a casino. It’s nuts.

When it comes down to it people just don't apply common sense to the market. They just sit there and let the market rule them and when they do that they suffer.
It’s all about having a game plan.

That’s what we are going to work on together. In future emails I will touch on these topics in much more detail with you and apply them to what is going on in the market right now. My goal for you is to become a better educated and more profitable investor. It’s going to be a lot of fun. You’re going to find in a few weeks that you’ll have people coming to you to learn about the stock market or to ask you for your opinions on it. – Mike Swanson