This series of articles is dedicated to beginners in the exciting world of financial markets. It will help them to know everything they need for successful trading. Topics include psychology of trading, common crowd psychology, technical indicators and trading strategies, risk-control and placing the stop-orders. The author is a real trader and some of these tips are written from his personal trading experience which makes this information suitable for any beginner from the practical point of view. This approach is set to support a trader in his decision-making process and also to avoid general mistakes which newbies are keen to make in their initial stage of the trading career.
Every beginner who comes into the financial markets is facing three different paths. All of them lead to a bush full of danger and treasures. The first way is for investors and it goes through glades. Most of the people chosen this path come to finish if not reach but at least alive. The second path is for traders and it comes through the real thick of the forest. Some people get lost there but those who are able to get out of it look like successful people. The third way is for gamblers and it leads straight to the bog. Talking about the instruments to trade, we should mention currencies, binary options, managed accounts investments and stocks trading. All of the types of trading are different and have their pros and cons.
What is the right path to choose? Any beginner should think well not to get into the crowd of gamblers, especially as their way often comes together with investors and traders. We will come back to these topics in articles related to the psychology of trading.
Investors make money thanks to an ability to recognize a new tendency in the economy and to get into a perspective asset before most of the people are waking up to move in the same direction. A discerning investor is able to get ultra-high profits just holding several positions without any huge activity.
One of the traders has bought shares of KinderCare in the 1970’s. This company was developing a network of kinder gardens with the main strategic target to create their entities as reliable and equal to hamburgers in McDonald’s restaurants. KinderCare has understood the need of baby boomers generation who were multiplying actively during that time. Most of the women were pregnant. Major shifts were happening in the social sphere of the United States: more women were going for a job instead of sitting at home. Families with both parents working had to place their children somewhere. KinderCare shares surged on that wave.
It has been a long time while AT&T telecommunications company was holding a monopoly for the intercity phone connection. But a small competitor MCI at the end of 1970’s had achieved the right to compete with AT&T by gathering a strong team of lawyers and going to the court. The United States came into an epoch of government deregulation when it came to the economy and MCI was one of the first companies reached that hole. MCI shares soared from $3 per share and that was a brilliant opportunity to fly high on that wave as well.
Two traders were coming back to New York from the Carribean several years ago. One of them, a trader George was making huge money buying Dell shares for $30000. It was not a well-know company at that time and George sold these shares three years later for incredible $2.3 million using technical analysis indicators. He was working on analytical bulletins while settling in a comfortable first-class seat and looking how to trade in the perspective internet technology niche. His analysis was right and Internet companies surged three years later.
This is the main attractiveness of the investment. If you would be able to buy shares for one dollar and sell them for 80 dollars in few years, then you can afford yourself to spend a week in a spa instead of sitting behind the monitor watching every single quote tick.
What are the difficulties in investing? It requires a huge patience and a strong self-confidence. Before purchasing Chrysler shares when the company has just avoided the bankruptcy, or an Internet search engine shares when nobody knows even the meaning of these words, you need to be absolutely confident in your ability to identify and follow new tendencies in the economy and society. We all are strong with the back mind but not so many people are able to anticipate events. Moreover, just very few people are strong enough to invest a significant amount of their funds after making their own forecast, and keep waiting patiently. People who can make it from time to time in successful manners, like Warren Buffet or Peter Lynch, they are celebrities of the investment world.
Traders make money on short-term fluctuations of prices. Their target is to buy shares or other assets when an upside movement starts on the chart and to sell when the trend slows down. Otherwise, they can trade on lowering the price of an asset, they can sell when the analysis shows a downside trend and then buy the same asset back when a bottom is starting to form on the chart. It is a rather simple idea but it is not so easy to realize it.
It is hard to become a good analyst but it is even harder to become a good trader. Beginners think that they can get rich thanks to an acumen, computer intelligence and previous businesses success. You can buy a powerful computer or even purchase a trading system which was tested on historical data, but betting on these technical miracles is like sitting on a stool which has two legs broke out of three. These lacking supports are the psychological readiness and capital control.
Psychological training is important no less than the market analysis. Your emotions have a huge impact on the way you comprehend everything in fact which makes it the main success or fail factor. A smart capital control will allow you to survive inevitable loss periods and also to create long-term success conditions. Psychology, market analysis and capital management - these are three necessary success factors.
There are two ways of getting a benefit from the crowd’s behaviour. The first one is fast or dynamic (momentum trading): we buy when the crowd start shifting upwards and we sell when its acceleration slows down. It is not an easy task to identify a new potential trade on an early stage. As long as the trend accelerates and the crowd is getting more active, glad dilettants become more confident in their judgements. Professionals keep calm and watch the price change momentum. Once they see that the crowd is coming back to the sleepy condition, they take the profit without waiting for the trend to reverse.
The second method is to trade against the trend. We open positions here when the price is going far away from its average rate, betting on the market normal come back. Traders who work against the trend open their short positions when the upside momentum slows down and they close their positions when the descending action slows down. Beginners often like to trade against the trend (Let me sell it, they will never go further!), but most of them get into a trap with a price peak which continues to go up. People who like to piss against the wind, should not complain that they have to wash trousers so often. Professionals make money against the trend only thanks to the readiness to run away with slight preliminary signs of a danger. Before betting on the trend reversal, you need to know exactly what are the conditions of that bet and what are the conditions when you give up on this position.
Momentum-trading fans as well as people who like to trade against the trend, they both make money on two different opposite aspects of the crowd’s behaviour. Before opening any position, you should be confident about what exactly are you going to do, whether this would be an investment, fast trading or betting against the trend. You should get out of the deal according to the strict and tight plan, you should not change the deal conditions.
Beginners chose what assets to buy while professionals spend a lot of time deciding where to exit the market with the current positions they already have in play. Moreover, professionals spend a lot of time for the money management rules, they calculate a maximum volume level affordable for every position, they decide whether it is worth enlarging the volume, they choose the best moment to take a partial profit and so on. They also spend a lot of time on the accounting of the transactions.