Education

What is trading?

Trading is by far one of the most lucrative and high-paying skills that someone can learn. It’s the skill that literally allows you to take advantage of the opportunities around the world to be more specific trading allows you to either buy or sell different assets and benefit from the fluctuation of the price. The price of an asset can either go up or down in size and they are usually influenced by changes in demand and supply or even by governmental fiscal policies changes

Types of analysis

• Fundamental Analysis
• Sentimental Analysis
• Technical Analysis

There are different types of analysis that you can apply in order to identify an opportunity in the market; Fundamental, technical and sentimental.

Fundamental analysis

Fundamental analysis is the analysis of gathering news from the market to try to foresee what type of movement will be in the markets.

Fundamental analysis is considered to be for long-term investments and to show what could potentially happen according to the news - this could be anything from geopolitical discussions, changes in fiscal policies, and media trends that can influence the demand and supply of an asset. Simply said applying fundamental analysis is trading according to what is happening to the world.

First of all, you need to diversify the sources of where you are gathering your information, you need to look for patterns in the market, meaning different types and sources of information that indicate that the trend of the market is pointing in the same direction and are not contradicting each other.

This way you improve your success rate and minimize the risk of receiving misleading information. The more sources indicating the same direction; the lower the risk to make the wrong decision.

With the fundamental analysis, you need to understand that even the most accurate sources and signals only show the general direction and not the volatility that happens in between. With that said, trading with only fundamental even though your general direction might be correct you might sustain minuses in the short term.

When trading only with fundamentals you must be aware of the potential of the long term and the minuses of the short term. It is wise to focus your decision on multiple types of analysis and never focus only on one. You never want to expose yourself to only one type of analysis and that’s why you want to diversify; this way you increase your chances of succeeding and minimizing your risks

The Economic Calendar is a great tool to keep track of the financial reports that are released from each country on a daily, weekly, and monthly basis. When you follow the reports, they can vary by the impact that they can have on specific assets and regions.

The majority of the reports that you receive on a daily basis have a temporary impact. The impact usually is in the short term and usually the market recovers after a small period of time and the market tends to return to the original course.

On the other hand, there are some major reports that are released weekly or monthly; and their impact on the market varies in regard to their frequency and the information that they include. Some major reports that happen once per month such us the NFP (Non-farm Payroll), affect the markets for a longer period of time and have the potential to even reverse the trend. Those events are usually the ones that are happening once per month.

There are 3 ways to trade with the financial calendar, with the trend, with the aftermath of said trend or avoiding assets that are directly affected by the day’s events, and just trading other uncorrelated assets.

Trading with the financial calendar

Before any event happens you need to make your research and have a better understanding of the potential movement and the strength of the movement, once you understand that; you will be in a position to place your trades; even before the event takes place. This way you are taking a risk of a surprise move that could play against your positions, on the other hand, if you trade in the correct direction, it could potentially benefit you greatly.

The second way of trading it is to wait until the event takes place and then follow the correction. With those kinds of trades, there is again risk involved because you follow the aftermath and you have to take into consideration how strong or how weak the movement will be and be prepared for it. While trading the aftermath you should always be careful and prepared.

The third way of trading is avoiding any daily events by not trading on the assets that are directly involved by these reports; for instance, if you have any reports in regards to the U.S Markets. you would rather focus your attention on the European markets or the Australian/New Zealand market in order to avoid any direct contact with that market. With this type of approach, you avoid any unnecessary direct conflict between today’s market events and your trades.

Therefore, you have 3 different options for how traders can trade by the use of an economic calendar and it’s up to you and the information that you have available in order to choose which one you will use. It’s always wise to experiment with different styles and different opportunities in order for you to decide which style suits you better.

Technical analysis

The second type of analysis is Technical analysis; it depends on indicators to show you where the direction of the market might go according to those indicators. There are three types of indicators: short-term indicators, mid-term indicators, and long-term indicators.

You can never rely on only one indicator; you need to use multiple indicators in order to have a clearer and more accurate indication in regard to price movements. It is best to diversify in regard to your trading style.

If you are a short-term trader, you should focus on short-term indicators to get a more precise movement. If you are a mid-term trader, you should focus on the mid-term indicators and if you are a long-term you should focus on your long-term indicators. Once you figure out what type of trader you are and once you apply the technical analysis you should combine it with the fundamental analysis in order for you to make a more accurate decision.

If the fundamental analysis and technical analysis both point in the same direction, it is a good indication for you to trade. On the other hand, if they are contradicting each other you might want to reconsider the trade. This way you have a basic indication and understanding of how to lower your risk, and a better understanding of the markets. There are many different indicators and oscillators that can provide crucial info for your trades.

Relative strength index

A momentum indicator known as Rsi is used in technical analysis. RSI measures the speed and magnitude of a security’s recent price changes to evaluate overvalued or undervalued conditions in the price of that security, so if it’s overvalued we expect the price to fall but if it’s undervalued we expect the price to rise.

Bollinger bands are technical analysis tools defined by a set of trendlines plotted two standard deviations away from a simple moving average (SMA) of a security's price, but which can be adjusted to user preferences. John Bollinger, a famous technical trader, designed the Bollinger Bands to discover opportunities that give investors a higher probability of correctly identifying when an asset is oversold or overbought.

Moving average

The moving average is a very simple indicator that shows the average prices over a period of time. This is very useful since it clears out the ”noise” from the charts. Another variation of the Moving average is the MACD.

Macd just like the moving average shows the average price of convergence and divergence of the price. The lines produced are called exponential moving averages. The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA, this forms the signals line which whenever it overlays with other EMA it indicates a change in the trajectory of the price.

Fibonacci retracement

The Fibonacci level is an indicator that operates by connecting a significant low point on the chart with a significant high and indicates where the support and resistance levels are more likely to occur. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. The higher the level the bigger the potential retracement.

The stochastic oscillator is a momentum indicator that is widely used in forex trading to pinpoint potential trend reversals. This indicator measures momentum by comparing the closing price to the trading range over a given period.

Sentimental analysis

The third type of financial analysis is sentimental analysis. Sentimental analysis is the analysis that you do base on your own preferences or your own beliefs. Imagine for example that you are using a specific type of phone or car that you like. One’s that you always use and always buy, different models from the same company. Knowing that your neighbors and friends are buying and using the same brand of the current phone or car makes you probably think that these companies are doing well and that you should invest in them. Even though sentimental analysis sounds pretty straightforward and easy to understand, it hides major risks.

If you focus directly on how you feel about the company, and if you don’t take into consideration the fundamental analysis and the technical, you put yourself in a position with a potentially really low success rate.

Whenever you decide to make an investment, especially in stocks you need to take into consideration of how the company and its competitors are performing and sales statistics, not just focus on your own personal opinion.