If you want to be a technical trader you will need to know the basics and develop your skills so that you trade on auto pilot. Many top traders, when interviewed, admit to working without thinking. Their skills and instincts have been primed to the highest extent. Let's introduce a few terms that maybe new to you. These will help us better explain some short term trading concepts.
Taking a LONG position - buying into a market hoping to profit from rising prices
Taking a SHORT position - selling short into a market hoping to profit from falling prices
Risk/Reward - an assessment of the amount of risk we are taking versus the likely reward on offer
Price Action - the price movements in the market we are analysing
Entry Price - price at which we intend to buy or sell the market we are looking at trading
Stop Loss - a price position at which we want to cut our losses and run
Target Price - a price at which we intend to take our profits if the trade moves in our favour
The first concept that you must master, in any form of trading, is risk control. This is the difference between professional and amateurs, this is the difference between winning and losing and this is the secret of trading. If you cannot assess your risk exposure and control it you will ultimately fail. Amateur traders often expose themselves to too much risk and over trader their accounts. Eventually an unexpected market move catches them unaware and wipes out their account. You MUST master risk control.
The second concept to master is probability. Financial markets have two directions of travel - they move higher or lower (they seldom stay the same). You will be attempting to profit by predicting which way prices will move, in the short term. With a 50/50 chance of predicting the next price move (not taking into account how far price might move) we would expect random guesses to be right half the time (over a large number of guesses). Technical traders improve their chances of predicting the next price move by using chart signals. They also use charts to make an assessment of how far prices are likely to move (to set our Target Price) and where we will jump ship, if things don't work out as planned (our Stop Loss) and in making these assessments you will also need to calculate the risk/reward ratio of the trade and reject opportunities that do not present a good return.
The third concept is psychology. Once a trade is open many traders will suffer from psychological pressures that will influence their behaviour. The biggest problem here is being unable to manage trades that are in profit. Once paper profits accumulate some traders chalk up these profits as real and switch into defensive mode. Temporary intraday price movements against their positions are often met by position closure. The problem here is the amount of profit these trades make. To be ultimately successful a trader must be able to overcome inevitable losses by profit from their winning trades. We need to be able to run our winners for big wins.
An example of a short term trading strategy is the trading of a trend. Markets enter into long periods when the price of the market will run in the same direction - up (up trends) or down (down trends). If a trader can spot trending markets they can take advantages of the prevailing conditions for profit.
Trading an Up Trend
When prices are on the move higher the majority of traders will simply buy at any price because they are fearful of missing a large move up. Trading a trend relies on the ability to enter at the right point in the trend, not buying too high and also assessing that the trend is still in progress. At all times the trader most control risks and be able to monitor market momentum - hopefully leading to a profitable exit from the trade. A technical trader makes trades in both up and down trends. In the case of the latter the trader shorts the market and profits from falling prices.
Trading a Down Trend
This is only one trading strategy, other common tactics are the trading of reversals (i.e. spotting the end of a trend) or the break out from price consolidation areas (often prices trade sideways rather than moving in a trend, when these sideways moves come to an end traders can profit from the next major price movement).
In summary:
Learn the basics of charting to give our trades a better than 50:50 chance of working out
Learn to control risk exposure - make sure that losses are small when they inevitably come along
Learn to overcome psychological trading barriers and run up winning trades
Use a trading strategy appropriate for the market conditions in play (e.g. trend trade)
Taking a LONG position - buying into a market hoping to profit from rising prices
Taking a SHORT position - selling short into a market hoping to profit from falling prices
Risk/Reward - an assessment of the amount of risk we are taking versus the likely reward on offer
Price Action - the price movements in the market we are analysing
Entry Price - price at which we intend to buy or sell the market we are looking at trading
Stop Loss - a price position at which we want to cut our losses and run
Target Price - a price at which we intend to take our profits if the trade moves in our favour
The first concept that you must master, in any form of trading, is risk control. This is the difference between professional and amateurs, this is the difference between winning and losing and this is the secret of trading. If you cannot assess your risk exposure and control it you will ultimately fail. Amateur traders often expose themselves to too much risk and over trader their accounts. Eventually an unexpected market move catches them unaware and wipes out their account. You MUST master risk control.
The second concept to master is probability. Financial markets have two directions of travel - they move higher or lower (they seldom stay the same). You will be attempting to profit by predicting which way prices will move, in the short term. With a 50/50 chance of predicting the next price move (not taking into account how far price might move) we would expect random guesses to be right half the time (over a large number of guesses). Technical traders improve their chances of predicting the next price move by using chart signals. They also use charts to make an assessment of how far prices are likely to move (to set our Target Price) and where we will jump ship, if things don't work out as planned (our Stop Loss) and in making these assessments you will also need to calculate the risk/reward ratio of the trade and reject opportunities that do not present a good return.
The third concept is psychology. Once a trade is open many traders will suffer from psychological pressures that will influence their behaviour. The biggest problem here is being unable to manage trades that are in profit. Once paper profits accumulate some traders chalk up these profits as real and switch into defensive mode. Temporary intraday price movements against their positions are often met by position closure. The problem here is the amount of profit these trades make. To be ultimately successful a trader must be able to overcome inevitable losses by profit from their winning trades. We need to be able to run our winners for big wins.
An example of a short term trading strategy is the trading of a trend. Markets enter into long periods when the price of the market will run in the same direction - up (up trends) or down (down trends). If a trader can spot trending markets they can take advantages of the prevailing conditions for profit.
Trading an Up Trend
When prices are on the move higher the majority of traders will simply buy at any price because they are fearful of missing a large move up. Trading a trend relies on the ability to enter at the right point in the trend, not buying too high and also assessing that the trend is still in progress. At all times the trader most control risks and be able to monitor market momentum - hopefully leading to a profitable exit from the trade. A technical trader makes trades in both up and down trends. In the case of the latter the trader shorts the market and profits from falling prices.
Trading a Down Trend
This is only one trading strategy, other common tactics are the trading of reversals (i.e. spotting the end of a trend) or the break out from price consolidation areas (often prices trade sideways rather than moving in a trend, when these sideways moves come to an end traders can profit from the next major price movement).
In summary:
Learn the basics of charting to give our trades a better than 50:50 chance of working out
Learn to control risk exposure - make sure that losses are small when they inevitably come along
Learn to overcome psychological trading barriers and run up winning trades
Use a trading strategy appropriate for the market conditions in play (e.g. trend trade)
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