We continue the series of articles dedicated to the basics of trading. We explain here general terms and common details of the trading process to build a certain level of understanding for beginners and simplify the learning process. These basics are keen to help newbies to avoid common mistakes and increase the profitability of trading in the financial markets on early stages. The articles are supported by real examples from trader’s practice and bits of advice about what steps should be taken in order to start making money by trading online.
Every exchange deal is a contract between the buyer and the seller. This deal could be done in the meeting, on the phone call or via the Internet, with a broker or without him. The buyer wants to buy for the cheapest price, and the seller wants to sell as expensive as possible. Both are whipped up by the crowd of traders around which can intercept an attractive deal at any moment.
An exchange deal happens when the greediest buyer decides to offer a cent more, being afraid to lose a profitable opportunity. It can occur when the most fearful seller will decrease the price for a cent, being afraid that the asset price might decline. It happens that a seller, being frightened by the market gives the good away to a seller with a junk price to a cool-blooded and disciplined buyer who was calmly expecting the perfect moment for such a deal. All of the deals reflect the market crowd’s behaviour which surrounds buyers and sellers. Every price on the quote screen fixates a momentary agreement between buyer and seller about the cost of an asset.
The fundamental cost of companies and goods changes slowly but prices can fluctuate a lot because traders change their mind fast. One of our clients used to say that the price and the cost are related to each other by a rubber band one kilometre long. The market swings on it between overbought and oversold levels.
The typical crowd’s behaviour is to make a fuss. But sometimes the crowd is getting excited and prices plunge or soar. The crowd is always whipped up by rumours and news and it jumps from side to side, leaving tracks on our quote screens. Prices and indicators reflect changes in the psychological conditions of the crowd.
When the market does not give any clear signals nor buy, nor sell, most of the beginners stick to the screens and squint trying to look for a profitable deal. Really valuable signal on the chart catches the eye by himself, screaming about himself - you do not need to squint, it is impossible to miss it! It is much better to wait for the signal rather than trying to get the deal from scratch when the market does not want to give it. Amateurs break the battle while the professionals wait for easy deals. Newbies are getting intoxicated by the game process while experiences exchange traders watch for the signals for deals with the highest winning chances.
The best trading signals come from active markets. A prudent trader makes money when the crowd is captured by emotions. When the market is getting listless, most of the experienced traders abandon the battlefield, leaving it to the gamblers and brokers. As Jesse Livermore used to say, one of the most known stockbrokers of the twentieth century, there is the time to buy, the time to sell and the time to go fishing.