Wednesday, August 15, 2012

Free Online Trading Education - Choosing a Trading System

Trading is both an art and science. There are numerous sites offering free online trading education. This is very important for a beginner. Various types of financial instruments are available for trading. Stocks, bonds, derivatives (futures and options) are broad categories of financial instruments which are traded on the financial markets. Some of these instruments are very liquid and offer an attractive way to build wealth over a period of time. A stock trading school should focus on these broad financial instruments.
The best way to begin trading is opening an account with a broker who offers a reasonable price. It is advisable to start trading live markets with play money rather than real money. Only after being profitable trading play money should you change to trading real money. A stock trading school should focus on making some concepts of capital markets clear to the student. Capital markets with a large number of participants are overloaded with information. A beginner might find it difficult to uncover useful information in this chaos. A stock trading school should ensure that the participants are not misguided.
Analyzing stocks can be a tedious task. Broadly speaking there are two forms of analysis- Fundamental and Technical. Fundamental analysis focuses on the financial health of a company. One must learn to read the financial statements thoroughly in order to master Fundamental analysis. It is also known that fundamentals play a role in determining the price of a stock in the long run.
Technical Analysis on the other hand focuses on the buying and selling activity building up in a stock. The Technical analysts plot the chart with price and time for a stock and try to analyse the possible outcomes during the next few hours/days/months/years. Technical analysis also has a lot of indicators such as Moving Average Convergence (MACD), Relative Strength, etc. A stock trading school can focus on of these or both methods of analyzing stocks.
In order to trade the financial markets, apart from knowledge, discipline also is very important. Some people recommend using techniques like stop loss to limit losses while trading. There are arguments both for and against the usage of stops. Trading is an art and one needs to develop based on his/her personality. To be successful in trading, one must be disciplined and adhere to ones plans. Also a trader should be always alert and aware of any news affecting the markets, he trades. He also must be adept at spotting news which might have very temporary effects.
A trader should stick to one method of analysis. If he is good at reading financial statements and believes in value investing, fundamental analysis can be good at spotting undervalued companies. If the trader is a short term player, a focus on technical indicators or price action is a must. Some traders also adopt the technique of scalping for quick profits. Such traders need to focus on the price action in the market. A good stock trading school should focus on the behavioural aspects as well. The behavioural traits of a trader play an important role in shaping the trading style of a trader.

Thursday, August 2, 2012

Trade News Releases

News trading is intriguing for many traders. As a result most traders prefer to stay out of the market at the time of the news release like the NFP Report or the FOMC Meeting Minutes. But there are traders who have adopted the profession of trading news. However, news trading involves a sense of instant gratification. Within seconds, if you can predict the market direction correctly, you can make a few hundred pips. Now, compare this with most of the day traders who make these much pips in a matter of weeks.
Trading news is for those traders who like a lot of action within a short period of time. News trading strategies are based on the fact that before any scheduled news release, market develops a certain expectation about the economic numbers that will be released. When the actual economic numbers are released if there is a wide deviation between the actual and the expected, there will be a knee jerk reaction in the market.
Now, suppose you are a risk taker who wants to trade the news despite the fact that many traders avoid trading it. How to go about it? There are basically three ways, you can trade the news. The first news trading strategy involves betting on the market direction and entering the market before the news is released. The second news trading strategy entails waiting for the news to hit the market and then entering the market. The third news trading strategy involves a combination of both the above two strategies. Let's discuss the first news trading strategy in detail.
Suppose, you are a pro active trader. You have been watching the market before the NFP Report release and want to make an educated guess on the market direction at the time of the news release. So, you enter the market 20 minutes before the news release time. One advantage of doing this is to avoid the widening of spreads that usually happens at the time of the new release. You made an entry well before the news release time when the spreads were tight. Now you place your bet on the market direction by going long or short. Place a stop 30 pips below the entry if long and 30 pips above the entry if you have a short trade. Now, wait for the news release to take place.
Now, it depends on how well you had predicted the market direction. If your prediction was good and the market moved in the same direction that you had predicted, you will close half of the position when the market moves by the amount you had risked. In this case 30 pips! For the remaining half, place a trailing stop with a 20 day Simple Moving Average so as to capitalize on the move as much as possible. In case, the market moved in the wrong direction, the stop loss will be hit and you are out of the market with a loss of 30 pips!
You will be using the 5 minutes chart for this news trading strategy. You might be wondering why exit half of the position when the market moved in your favor. This was done to reduce risk and take profit as quickly as possible in order to avoid any whipsaw that might develop in the market. The most important thing about this news trading strategy is to predict the market direction at the time of the news release correctly.