What does trading consist of? When talking about easy money, they forget to mention that this is a rather laborious process of analysis and trading, which is divided according to the psycho-types of the trader. Strategies that are good for one will not work for another. We will discuss what trading consists of.
If you’ve ever seen the charts of the dynamics of financial instruments for trading (currency pairs, stocks, futures, etc.), then you asked yourself: “How can you make money on this?” Briefly answer this question, then: “Buy when the price begins to rise and sell when it begins to decline.” It would seem that everything is easy and simple!
But then the question arises: “How to understand that the price has started to rise or fall?”. And this, in fact, is one of the most important issues in trading.
Thanks to scientific and technological progress, a modern trader has a rather solid arsenal of methods and technical devices for the operational analysis of the market situation. But if all computers or supercomputers are pushed into the background, then the trader-investor himself, his personal vision of the current situation and the need to make informed decisions on opened transactions remain the bottom line. But do all traders make decisions based on analysis of events, macroeconomic indicators, and charts? No, not all.
A certain part of traders can be called such only conditionally for the reason that their approach to trading in financial markets is more like gambling in a casino. Their actions are based on emotional impulses: the desire to play and win, greed, the expectation of justification of one’s hopes and the desire for quick enrichment. Thus, a logical question arises: “Can this approach be called trading?”. Obviously, for them, this is just another kind of gambling with elements of trading.
How is a Forex currency pair formed? Comments of experts.
WHAT IS TRADING?
If you do not go into detail, then this term can be called the process of making transactions for the purchase and sale of financial markets in order to make a profit. In fact, it all comes down to choosing the most likely direction of market movement. By pressing the “Buy” button, you select the buyer’s position and expect the instrument to rise in price, and when you click the “Sell” button, you become a seller expecting a decrease in the price of the instrument. But trading is a “multi-layer cake.”
In addition to technical actions with buttons, the remaining 99.9% of the entire trading process falls on
- tool selection for trading,
- consideration of the current market situation,
- analysis of related factors taking place around the trading instrument, taking into account long-term and short-term price dynamics,
- determination of the tactics of opening a transaction and target levels for the exit with the profit or to limit losses,
- as well as banal waiting.
If there is nothing complicated with pressing buttons and waiting for moments to enter and exit a transaction, then a lot of questions can arise with developing a trading idea. Next, we will consider the most popular methods of analysis, tactics, risk and money management systems that are used by traders in their daily work. In order for beginners to understand the general picture of the world of trading, we structure a number of its individual components.
What is Money Management and why is it needed? In detail and in simple words
TYPES OF TRADERS: PREDICTORS, STOCHASTICS, TREND TRADERS
All traders can be divided into 2 separate camps: predictive traders (“stochastics”) and trend traders.
Forecaster traders are traders who use various subjective methods to evaluate and calculate future price movements. Their excessive self-confidence in many situations makes it wishful thinking. This feature often plays a cruel joke with them, preventing them from completing a losing trade on time, and also preventing them from freeing themselves from their own “status quo”.
But be that as it may, stochastic traders make up the majority in the trading world, because they are surrounded by a halo of mystery as if endowed with the gift of foresight of market movements. The main secret of skilled stochastic traders lies in the ability to work correctly with the tools and indicators of statistical analysis and forecasting, honed by years of practice, but by no means a gift from above.
Trend indicators and stochastics for market forecasting. Choose for yourself
A practically opposite picture is observed with trend traders – this is the name for traders who open deals within the framework of dominant trends and accompany them until the end of the intra-trend impulse. They are not inclined to resort to careful forecasting, trying to move around the market along with the price and giving the opportunity for profit to grow. The successes of their activities are little known because they are not shrouded in myths, legends or mysterious phenomena. Their work may seem a boring monotonous routine, but this is only in the eyes of a simple layman. In fact, their skill is sometimes so perfect that one can involuntarily doubt the tremendous effect that they achieve with it.
In addition to these categories, traders can also be divided by the models of temporary trading, that is, by the duration of the transactions they conduct. There is a division into traders-speculators and traders-investors.
- The term “trader-speculator” usually means a trader who plans and holds transactions in the market lasting from several minutes to several weeks.
- Investor traders, in turn, place their transactions in the market for a period of one to two months to several years.
Such a parameter as the time of holding transactions in the market can indicate the trader’s psychotype, his attitude to risks, and the ability to plan his trading activity. Speculators can be divided into scalpers, day traders and medium-term traders.
- Scalper traders prefer to conclude a large number of transactions in a short trading period in order to profit on small (from 1 to 10 points) impulsive price movements.
- Day traders usually work exclusively within 1 trading day and make from one to several transactions in such a way that they are not transferred to the next trading session.
- Medium-term traders can open simultaneously from one to several transactions, keeping them in the market from several days to several weeks.
The time spent by an open transaction in the market does not have a significant impact on the performance of the trader since the effectiveness of such a trading strategy depends more on the practical skills and skills of the trader.
TYPES AND TECHNIQUES OF MARKET ANALYSIS
Many will first of all say that the analysis of the market situation, analytical thoughts, interpretation of data and conclusions made on their basis. The main popular methods of market research are fundamental analysis and technical analysis.
Fundamental analysis is a method for predicting the further development of the price dynamics of a particular asset in the market by examining the micro- and macro-economic indicators associated with the asset. They are levels of GDP, industrial production, inflation, unemployment, business activity indices, and others. This method of analysis is mainly used by medium-term traders and investors, as it allows you to work more efficiently in the long-term time frame. In the short term, this method is most often used by day traders who engage in news trading. They track the publication of important economic statistics, trading on volatile movements of quotes at the time of publication of important data. Other traders can also sometimes use some elements of fundamental analysis, but usually, it comes down to tracking news and economic events. The main shortcomings of the fundamental analysis, many traders call the high subjectivity in the evaluation and interpretation of data, as well as the low predictability of market reactions to news in the short term.
Fundamental analysis for novice traders is more detailed.
As for technical analysis, many traders consider it a more convenient and efficient way to systematize the market (price) data. Many traders work based solely on technical analysis methods. Technical analysis refers to the method of forecasting price dynamics, based on the study of price movements in the past. Thus, we can say that both technical and fundamental analyses are based on the statistical laws of repetitive market movements.
Today, the direction of technical analysis has a lot of branches. Its most popular varieties are graphic, computer, Elliott wave, analysis of the “Trade Chaos” system. The latter allows not only to determine the dominant trend of the long-term or short-term plan but can also suggest a price level favorable for transactions on a purchase or sale. Computer or indicator analysis can boast of being the basis for a huge number of trading strategies – certain algorithms of actions performed by traders in the market. But it should also be noted that a trading strategy can be based not only on fundamental or technical analysis, but also on mathematical methods of trading, so it is worth distinguishing between market analysis methods and trading methods.
WHAT CAN A TRADING STRATEGY CONSIST OF?
A trading strategy should determine the moment, price and circumstances for a transaction. It also determines the target areas for exiting a profitable transaction and the way out of a losing trade. Moreover, the strategy may provide for conditions for maximizing the profit on investment in transactions, including optimization of risks for each individual transaction or the entire aggregate position. We can say that the main elements of a trading strategy that ensure the effectiveness of trading are the systems of money and risk management.
Trading strategies for every taste. Big selection.
Perhaps many of you reading these lines have heard of such a thing as Martingale. Martingale is a model of mathematical management of trading positions, which came into the sphere of trading from gambling establishments. It involves doubling the size of the transaction after closing the previous one at a loss. Many traders use this approach, following the “player psychology”. In our opinion, it is wrong to use methods from gambling to work in financial markets without adapting to the conditions of a non-linear market environment.
But if you have already developed the skill of analyzing the market situation, you have studied all technical indicators, mastered many trading strategies and developed your own system for managing trading tools and risks, then the only thing you need for good work in the market is discipline. Perhaps this special element lies the main factor in the success of the trader.
Among other things, automatic trading using mechanical trading systems is actively developing. This trading method eliminates the negative impact of the human factor on conducting trading operations. But this is not the “holy grail” in the world of trading, although many trusts in it. One of the most effective areas in auto trading is high-frequency trading, which involves the execution of a huge number of trading operations with the help of a trading super-robot, which is able to pre-close transactions with the highest possible profit at the moment and minimal losses. Perhaps such a trading model is the ideal of tomorrow, but we should understand that all the algorithms for the robots are set by the traders themselves with the help of programs. Therefore, each trader is obliged to work daily to understand the market and himself in the market.