How to Trade The Markets

Want to trade but don’t know where to start? Millions of people try their hand at the market casino each year, but most walk away a little poorer and a lot wiser, never reaching their full potential. The majority of those who fail have one thing in common: they fail to master the basic skills needed to tilt the odds in their favor. Take adequate time to learn these and you will be well on your way to booking short-term profits.
A better path is to learn how to trade the markets with skill and authority, starting with these five basic concepts

1. Know Yourself

Start with a self-examination that takes a close look at your relationship with money. Do you view life as a struggle, with hard effort required to earn each dollar? Do you believe that personal magnetism will attract market wealth to you in the same way it does in other life pursuits? More ominously, have you lost money on a regular basis through other activities and hope the financial markets will treat you more kindly?

Whatever your belief system, the market is likely to reinforce that internal view over and over again through profits and losses. Hard work and charisma both support financial success, but losers in other walks of life are likely to turn into losers in the trading game. Don’t panic if this sounds like you. Instead, take the self-help route and learn about the relationship between money and self-worth. Continue to the next step once you get your head on straight.

2. Get An Education

Read market books and website tutorials, lots of them, but don’t focus too narrowly on one single aspect of the trading game. Instead, study everything market-wise, including ideas and concepts you don’t feel are particularly relevant at this time. Trading launches a journey that often winds up at a destination not anticipated at the starting line. Your broad and detailed market background will come in handy over and over again, even if you think you know exactly where you’re going right now.

Start to follow the market every day in your spare time. Get up early and read about overnight price action on foreign markets. Indian traders didn’t have to monitor world markets a couple of decades ago, but that’s all changed due to the rapid growth of electronic trading and derivative instruments that link equity, forex and bond markets around the world.

3. Learn To Analyze

Study the basics of technical analysis and look at price charts, thousands of them, in all time frames. You may think fundamental analysis offers a better path to profits because it tracks growth curves and revenue streams, but traders live and die by price action that diverges sharply from underlying fundamentals. Do not stop reading company spreadsheets, because they offer a trading edge over those who ignore them. However, they won’t help you survive your first year as a trader.

4. Learn To Predict

Your experience with charts and technical analysis now brings you into the magical realm of price prediction. Theoretically, securities can only go higher or lower, encouraging a long-side trade or a short sale. In reality, prices can do many other things, including chopping sideways for weeks at a time or whipsawing violently in both directions, shaking out buyers and sellers.

The time horizon becomes extremely important at this juncture. Financial markets grind out trends and trading ranges with fractal properties that generate independent price movements at short-term, intermediate- and long-term intervals. This means a security or index can carve out a long-term uptrend, intermediate downtrend and a short-term trading range, all at the same time.

Rather than complicate prediction, most trading opportunities will unfold through interactions between these time intervals. Buying the dip offers a classic example, with traders jumping into a strong uptrend when it sells off in a lower period. The best way to examine this three-dimensional playing field is to look at each security in three time frames, starting with 60-minute, daily and weekly charts.

5. Take Baby Steps

It’s now time to get your feet wet without giving up your trading stake. Paper trading offers a perfect solution, allowing the neophyte to follow real-time market actions, making buying and selling decisions that form the outline of a theoretical performance record. Make lots of trades, using different holding periods and strategies, and then analyze the results for obvious flaws.

Most brokers let clients engage in paper trading with their real money entry systems. This has the added benefit of teaching the software so you don’t hit the wrong buttons when you are playing with family funds. So when do you make the switch and start trading with real money? There’s no perfect answer because simulated trading carries a flaw that’s likely to show up whenever you start to trade for real, even if your paper results look perfect.

Traders need to co-exist peacefully with the twin emotions of greed and fear. Paper trading doesn’t engage these emotions, which can only be experienced by actual profit and loss. In fact, this psychological aspect forces more first-year players out of the game than bad decision-making. Your baby steps forward as a new trader need to recognize this challenge and address remaining issues with money and self-worth.