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How Stock Trading is done

Everybody knows the phrase stock trading but truth is not many comprehend the happenings that take place during the actual process of trading. The exchange of securities usually happens physically so as to reduce risks.

Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual, composed of a network of computers where trades are made electronically.

The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. Just imagine how difficult it would be to sell shares if you had to call around the neighborhood trying to find a buyer. Really, a stock market is nothing more than a super-sophisticated farmers' market linking buyers and sellers.

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There is a lot of action on the trading floor. Prices fluctuate in a matter of seconds and this due to a number or reasons. It could be investor sentiment, economic factors, company or industry performance.

Industry performance

Often, the stock price of the companies in the same industry will move in tandem with each other. This is because market conditions generally affect the companies in the same industry the same way. But sometimes, the stock price of a company will benefit from a piece of bad news for its competitor if the companies are competing for the same market.

Investor sentiment

Investor sentiment or confidence can cause the market to go up or down, which can cause stock prices to rise or fall. The general direction that the stock market takes can affect the value of a stock:

Bull market – a strong stock market where stock prices are rising and investor confidence is growing. It's often tied to economic recovery or an economic boom, as well as investor optimism.

Bear market – a weak market where stock prices are falling and investor confidence is fading. It often happens when an economy is in recession and unemployment is high, with rising prices.

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There are two kinds of markets on the trading floor. There is the bear market and the bullish market. With a bullish market the prices go up while a bearish market is the opposite.

What is a Bull Market?

Bull markets happen when the market is goes up aggressively over a period of time. As the market starts to rise, there becomes more and more greed in the stock market. You see more and more people thinking, “Oh yeah let’s put money into the market because it’s going up.”

What is a Bear Market?

The bear market definition is exactly the opposite of a bull market. It’s a market where quarter after quarter and the market is moving down about 20 percent. That signals a bear market, and when that happens people start to get really scared about putting money into the stock market. That’s because they don’t know how to invest Rule #1 style.

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It calls for a trader to be well informed in the midst of these two extreme market sides. They should not be caught unawares and that calls for trading tips that will help them get there.

Rule 1: Only buy stocks above their 200-day moving average.

This rule, more than any other, is the reason why people who use it have done well this year. If you go back to 1995 and look at every stock’s 5-day performance above their 200-day moving average versus below, you will see edges on the stocks that were above the 200-day (this is on a sample size of over 8 million trades). What the statistics don’t truly reflect though, is the wreckage many stocks below the 200-day moving average cause. Go look at the charts of Bear Sterns, Countrywide, Lehman, Wachovia, the mortgage companies, the home builders and many more and see what happened after they broke under the 200-day moving average. Nearly every money manager in the world could have protected their investors from this one simple rule. And you can too by simply avoiding stocks below the 200-day.

Rule 2: Buy stocks above their 200-day on pullbacks.

There’s an entire generation of traders who like to buy breakouts and some are successful at it. But if you look at the average short-term returns on stocks making 10 day lows above their 200-day moving averages versus 10 day highs, you’ll see significant differences. Stocks making 10 day lows have far outperformed stocks making 10 day highs. And again, this has been seen in testing millions of trades for over a decade’s period of time.

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