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Table of Contents
Success Starts Here
Trading 101: Profiting from Marketing Swings
Mechanics of Trading
Basics of A Stock Trader
Volatility
Trading Psychology
Trends
Shorting
Money Management + Position Sizing = Success
4 Types of Traders
Day Trading
Short Term Trading
Medium Term Trading
Long Term Trading
Trading Techniques
Arbitrage
Momentum Day Trading
Pattern Trading
Scalping
Price Action Trading
Swing Trading
Range Trading
Trading on News
Moving Forward
Volatility
Stock trading works because of volatility. All trading
techniques exploit the price movements of stocks in one way or another. Without volatility, traders
wouldnt have anything to trade. So think of volatility as the lifeblood of a trader, in the same fashion
cash flow is the lifeblood of a business. The more volatility that exists in the market, the greater the
income opportunities of a trader.
Trading Psychology
Without getting too bogged down with the methodologies behind trading
psychology, as a trader wed dont ever trade the markets. We trade our beliefs
about the market. This means each trade you and I make is a result of our
perception of reality, not reality itself. This may seem a little abstract and that's
OK.
To really illustrate this point, lets take a look at the classic question: Is the
glass half full or half empty? You can say its half full, and Id say its half empty. The
trade we execute would be very different based upon our varied believes even
though we are looking at the exact same glass.
Trends
A market trend is a directional movement of prices. So a bull market would mean the market is in
an uptrend, because prices are rising. While a bear market would be a down trend because prices are
generally falling. Trends can occur on a market level and individual stock level.
Shorting
Many brokers allow you to short a stock so that you can profit from a drop in a stocks price in
the same fashion that youd profit from a rise in a stocks price. When a trader shorts a stock, they
borrow stock from the brokerage, and then sell the stock on the open market as if it were their own. If
the price drops, the trader will buy the same number of shares on the open market at a lower price. The
profit is the difference between the initial sale price and the cost of buying the stock back.
4 Types of Traders
Since there are several different types of trading techniques and time frames, we will define
traders by their trade time horizons and then discuss some of the more common trading techniques used
by the following types of traders.
The four most common types of trading are day trading, short-term trading, medium term
trading, and long term trading.
Day Trading
Day trading is buying and selling of shares in the time frame of a day. This means
that all of a day traders positions will be closed at the end of the day. Because all
trading must be completed within a 7 hour period day trading can be fast paced
requiring quick thinking and instantaneous trades.
As a result, fees are high because you have to pay for real time data and more
advanced trading software to be successful. As beginners we should steer clear of
day trading for now.
Trading Techniques
Each of our four trader types will use one or more of these common strategies to profit.
Arbitrage
Arbitrage is when a trader takes advantages of mistakes in the
market place. When prices of a particular stock are different in two
different markets the arbitrageur buys the shares at lower price in
one market and sells it at a higher price in the other market.
Since these types of price mismatches dont last long, this technique
is primarily used by day traders.
Pattern Trading
Some traders believe stocks have definite patterns to their price
movements. Pattern Traders study these patterns and use them to trade when they
believe a particular pattern is forming.
Scalping
This trading technique involves making several small trades. This type of
trading only works when there is a difference between the bid and the asking. This
style of trading is very similar to arbitrage.
The profits are small and the trades have to be very quick because these
types of opportunities rarely last more than a couple of seconds. While this form of trading was once
reserved for highly experienced traders, this type of trading is pretty much non-existent now because
of all of the advancements in trading technology and a growing presence of computer generated
trading.
Swing Trading
Swing Traders look for the beginning of a change or swing, in the price of a stock to initiate a
position. The position gets closed when there is definite indication that the swing is coming to an end.
This is very similar to the how momentum traders operate when they are looking for an up or
down trend. In the case of the swing trader, only two trades are placed, one to open the position and
one to close the position. In contrast to a momentum trader, swing
traders will follow the movement of a stock, opening and closing multiple
positions as the trend continues. Swing traders tend to have a much
longer trade time horizon than momentum traders.
Range Trading
When a trader believes that a stock will be moving within a given
range, the traders will use the range to buy at a lower level and sell at a
higher level and vice versa. The trader will have to studied historical price
movements to identify price support and resistance.
Essentially range trading is based on the concept of standard
deviation. So lets think back to our discussion of volatility, to help us view range trading as a concept of
standard deviation. This concept is what range trading is based upon.
In our example, our mean or stock price was 5 and the standard deviation or volatility was 2. This
meant that the stocks price range was between 3 and 7, based upon our standard deviation of 2. These
two numbers, 3 and 7, make support and resistance, respectively. So the range trader buys at 3 and sells
around 7.
Trading on News
One of the most common methods used by amateur, non-professional traders is news trading.
This isnt really a technique in and of itself; regardless many amateurs make trade decisions based upon
news developments. Normally, news developments are only a part of a complete trading plan. For more
on the multitude of issues with trading the news, you can review
module three of The Stock Market Foundations Course where we
discussed some of the challenges of trading news.
Value Investing
Value investing, the most common form of investing, works on the belief that a company's stock
price doesnt reflect its true worth. Investors look for companies they believe are worth more than their
current price. Keep in mind, investing also includes an analysis of the strength of the company, but we will
get to that concept when we talk about fundamental investing in the next section.
Technical Analysis
Technical Analysis involves assessing the stock market and the price movement of a stock.
Technical analysis is a huge subject with hundreds of analytical tools. However, most of the market
traders use a few major analytical tools such as moving average, trading volume, relative strength index,
moving average convergence divergence, stochastic, regressions, as well as business and market cycles.
All of these tools do one thing; they take historical price data
and compress hundreds of price points into a single, comprehensible
number. These metrics were developed to help traders analyze
thousands of data points in very short periods of times. Think of it as
using the mean or median of a data set to make a decision, as opposed
to looking at all 1,000+ numbers to make a decision. Over a period of
time, traders use these indicators, along with charts indicating the price
movement of a stock, to make informed trading decisions.
This act of combining analytical indicators and market charts
allows traders to make estimates of the future movements of stocks. It
is important to note that these results are only estimates, not a definite
conclusion. This is why it is so important that more emphasis is placed on
fundamental analysis when it comes to stock market analysis.
Fundamental Analysis
If you plan on being an investor, it is crucial you understand the basics of fundamental analysis.
Fundamental analysis is the process of understanding the inner workings of a
company. It breaks down all the facts of the company and brings them under close
scrutiny.
The primary purpose of conducting a fundamental analysis is twofold; first to insure
a company is financially strong and will continue to make money for the foreseeable
future, and second to determine whether a stock is overpriced or underpriced.
Fundamental analysis is done using basic financial information pulled from a
companys financial statements.
Moving Forward
To get a jump start on your trading or investing, I encourage you to head over to
TheWealthTitans.com/financial-secrets for a free copy of The Investors Blueprint. A great compliment to
this course! It outlines a complete investment system that you can put to work immediately to maximize
your investment returns.
To Your Investment Success,