As tempting as it is to just dive into trading, it’s important to know a few things first. Knowing these “rules of the game” ensure you’re going in with sufficient knowledge to profit more often than you lose on a trade.
With just three simple numbers, however, you can get most of the knowledge you need to know if a trade is worth making or not.
If you’re trading on a fundamental basis, for instance, you should look at a company’s PE ratio. That’s a simple calculation of showing a company’s current price, divided by its last 12 months of earnings.
While PE ratios can vary across companies and industries, it can give a quick “gut check” to determine if there’s a value worth buying or not. You can also compare the PE ratio to the stock market as a whole.
That’s a valuation-based trade. Traders looking for faster profits or to make more leveraged options trades have other numbers that can give them a better idea of where a stock is heading in the short-term.
A company’s relative strength index, or RSI, is a great tool there. The RSI can tell a trader if a stock is going up or down, and whether other traders are continuing to buy or not. With an RSI, you can also get a quick gauge as to whether a company is overbought or oversold—making for a quick indicator of when to get out of a winning trade before it becomes a loser.
Finally, swing traders can find opportunities looking at companies making new 52-week highs or lows. Value investors can focus on the lows, and momentum investors can make trades on companies making new highs on the logic that the trend will continue.
Combining these numbers, as well as some of the more complex numbers the market throws your way.
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