Trading: basic studies
Financial markets do not forgive one’s mistakes and always forget one’s past achievements. This is why investors should tread carefully when opening a position. Creating a trading plan and sticking to it can be an efficient way to avoid emotional trading and lower the risk of loss associated with it.
Technical analysis, in this sense, could help get a better understanding of the market sentiment, while removing lots of insignificant “noise”. On the other hand, trading based on instincts will most likely lead to hard losses, especially in volatile cryptocurrency markets. Be patient and don’t expect thousands in a few minutes.
Where to begin exactly?
- Learn different buy and sell orders — market orders, time orders, limit orders, stop-loss orders, and so on. Every situation, goal, or circumstance could require a different mechanism. This is an indispensable skill to maximize profits and minimize potential losses.
- Get used to new terminology. There are always two prices in a market: a “bid” price and an “ask” price. The ask price is the supply and the bid price is the demand and the difference between them is called the bid-ask spread. It is usually better to have a smaller spread.
- Choose the right time frame. There is an option to choose different time axes, such as yearly, monthly, daily, hourly, etc. One candle shows the values that were relevant at this time interval. While most traders use 2 time frames, some of them use 3 in various combinations.
- Learn to read transaction history. The ability to read between the lines can be useful in determining whether there are real people behind the transactions, or if these are just bots. The transaction history also helps traders check on their moves and learn from their mistakes.
- Check the pulse of the market. The trading volume gives an investor an idea of the price action and whether they should buy or sell the asset. If a stock surges but the number of shares traded is low, there could be “a cat in the bag”. Remember, low activity = low liquidity -> low liquidity = high risk.
- Consider supply and demand levels. Empirical analysis of Market Depth allows traders to figure out which strategy will be the best, depending on the market condition. This tool works both for traditional assets, such as stocks, and cryptocurrencies.
- Keep in mind trading hours. Unlike the stock market which operates from 9:30 a.m. to 4 p.m. Monday through Friday, the cryptocurrency market, for example, is open 24/7. On top of that, some brokers offer pre-market and post-market trading to their customers.
- Follow macroeconomic events. The focus this week, for example, will be on central bank meetings. Following the Fed, on Thursday the Swiss, UK, and EU regulators will announce their rate decisions. The switch to “dovish” rhetoric will not only support the stock market but also the debt market. To stay tuned, most traders use an economic calendar.
It might sound like a broken record, but try not to put all your eggs in one basket. Separate the portfolio into low risk/low return, medium risk/medium return, and higher risk/higher return subgroups. Making a big bet on one stock could put funds at risk of blowing up.
Last but not least, using high leverage with large positions is a BIG NO-NO, and not only in the case of newbies. Why? Just google the causes of the crash of 1929 and everything will start to make sense. Once you’ve done your homework, you can start operating.
In conclusion, let’s sum up:
- Understand your risk tolerance level
- Do not get emotional when trading
- Learn and improve the basics first
- Diversify your portfolio
- Avoid trading with leverage
As for the fundamental analysis, it is worth paying attention to the company’s sector outlook, quarterly performance, and multiples, as well as the general trend in the market. In short, one should consider many factors before opening a position. Attempts to profit from the news (as a general rule) are not very successful.