insiders guide to the best techniques and strategies

7/25/2019 Insiders Guide to the Best Techniques and Strategies

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Insiders Guide to the Best Techniques and Strategies


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Table of Contents

Success Starts Here

Trading 101: Profiting from Marketing Swings

Mechanics of TradingBasics of A Stock Trader

Volatility

Trading Psychology

Trends

Shorting

Money Management + Position Sizing = Success

4 Types of Traders

Day Trading

Short Term Trading

Medium Term Trading

Long Term Trading

Trading Techniques

Arbitrage

Momentum Day Trading

Pattern Trading

Scalping

Price Action Trading

Swing Trading

Range TradingTrading on News

Establishing a Successful Trading System

Combining Analytical Tools to Create Trading System

Benefits of a Good Trading System

Investing 101: Buying Companies, Not Stocks

Core Concepts of Investing

Price vs. Value

Value Investing

Analysis Techniques 101: Making Informed Decisions

Technical Analysis

Fundamental Analysis

Moving Forward


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Success Starts Here

To be a successful investor or trader in the stock market requires that you get continuous and

accurate information about the stocks in your portfolio. Some information, such as the price of the stock,

is straightforward and can be found with a simple online search.

However, gathering and interpreting news about factors that may impact the fundamental

aspects of a stock can be more difficult and is subject to the bias of the person delivering the

information. Analysts often have contradictory forecasts for the price of the stock while media outlets

share conflicting rumors from a source close to the company. How should you determine what is news

and what is noise?

Start by establishing your own set of rules for good reasons to buy, hold or sell a particular stock.

Your rules should help you determine what is a downtrend, an uptrend, or a reversal.

Establishing these rules beforehand will prevent you from being tossed to and fro with the

waves of news you receive every day. This guide is designed to help you explore your options when itcomes to the kinds of profitable rules you can use.

Additionally, do not rely solely on the news as a source of facts for investing or trading. Instead,

check the information by referring to documents generated by the company such as annual reports or

press releases.

This information will help you, identify trends that have developed over time. Metrics such as

return on investment (ROI), earnings per share (EPS), and guidance for coming quarters can easily be

obtained from the company.

Looking at these metrics will help you analyze the stock and determine the validity of the advicecoming from analysts or report a offering information about that particular stock. This guide will show

you how you can easily take all of this information and make a profitable decision.

Finally, only invest in businesses that you truly understand. Focus on companies that offer

products or services that you use. Having firsthand experience will help cut the noise out of the reports.

Use this as your reference guide on your journey down the path of market profits.

To Your Investment Success,


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Trading 101: Profiting from Marketing Swings

Mechanics of Trading

Before we jump into the types of traders and the techniques,

there are a couple of pieces of information we need to keep in mind

as we learn about how trading actually works.

Basics of A Stock Trader

Stock trading is the act of buying stocks, selling stocks and

managing positions. A position is what a trade is called while a

trader's money is in the market. It is very important that we

understand the process of stock trading if we plan on risking our hard

earned money.

VolatilityStock trading works because of volatility. All trading

techniques exploit the price movements of stocks in one way or another. Without volatility, traders

wouldnt have anything to trade. So think of volatility as the lifeblood of a trader, in the same fashion

cash flow is the lifeblood of a business. The more volatility that exists in the market, the greater the

income opportunities of a trader.

Trading Psychology

Without getting too bogged down with the methodologies behind trading

psychology, as a trader wed dont ever trade the markets. We trade our beliefs

about the market. This means each trade you and I make is a result of our

perception of reality, not reality itself. This may seem a little abstract and that's

OK.

To really illustrate this point, lets take a look at the classic question: Is the

glass half full or half empty? You can say its half full, and Id say its half empty. The

trade we execute would be very different based upon our varied believes even

though we are looking at the exact same glass.

Trends

A market trend is a directional movement of prices. So a bull market would mean the market is in

an uptrend, because prices are rising. While a bear market would be a down trend because prices are

generally falling. Trends can occur on a market level and individual stock level.

Shorting

Many brokers allow you to short a stock so that you can profit from a drop in a stocks price in

the same fashion that youd profit from a rise in a stocks price. When a trader shorts a stock, they

borrow stock from the brokerage, and then sell the stock on the open market as if it were their own. If

the price drops, the trader will buy the same number of shares on the open market at a lower price. The

profit is the difference between the initial sale price and the cost of buying the stock back.


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For example lets say Tom wants to short XYZ Company. The current market price is $100. Tom

borrows 100 shares from his broker and sells them on the open market for $100. Lets say he holds the

position for a week and the price drops to $75. Now Tom, who currently owns no shares, buys 100

shares of XYZ company on the open market at $75 a piece.

Now Tom still, owes his broker 100 shares of XYZ company so he fulfills that debt with the 100

shares he just bought at 75. In this example, ignoring fees, Tom has made $25 a share, the differencebetween what he received to sell the stock initially, $100 and how much he had to pay to repurchase the

stock, $75.

Money Management + Position Sizing = Success

Finally, we need to talk about money management and position sizing, because it is the most

important success factor when it comes to trading. Position sizing answers the question of how much>

how much money to put on the line when we place a trade.

While this may seem like a simple subject, the mathematics and

methodologies behind money management can be quite complex. Money

management will keep us from risking too much money and blowing out our

accounts. So if you decide you want to be a trader, make sure you learn about

money management and position sizing. Any real professional will tell you its

the most important part of a trading system, even more important than chart

reading, trade techniques.


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4 Types of TradersSince there are several different types of trading techniques and time frames, we will define

traders by their trade time horizons and then discuss some of the more common trading techniques used

by the following types of traders.

The four most common types of trading are day trading, short-term trading, medium termtrading, and long term trading.

Day Trading

Day trading is buying and selling of shares in the time frame of a day. This means

that all of a day traders positions will be closed at the end of the day. Because all

trading must be completed within a 7 hour period day trading can be fast paced

requiring quick thinking and instantaneous trades.

As a result, fees are high because you have to pay for real time data and more

advanced trading software to be successful. As beginners we should steer clear of

day trading for now.

Short Term Trading

Short term traders will hold positions anywhere between a couple of days to a couple of weeks.

Pattern trading and swing trading are the most common techniques used by short term traders.

Medium Term Trading

Medium term traders will hold positions for 1 to 3 months. Typically, these types of traders are

focused on market trends and news developments. Swing trading and range trading are the most

common strategies used by medium term traders.

Long Term TradingIn long term trading, traders hold positions for several months

up to a year or more. Usually, this trading is done after thorough

fundamental analysis of the company and its future prospects.

The strategies used are very similar to those used by medium

term traders but the analysis and methodology behind these positions

tend to be much more complex, taking into consideration other asset

classes and macroeconomics factors.

Its important to note that long term trading is not the same as

investing. Investors are purchasing company stocks to profit from the

companys real growth and have a five to ten year time horizon. Whilelong term trading uses many of the same analysis techniques, the trader

is still looking to profit from a movement in a companys price and have a defined time frame to exist the

trade if the price doesnt move according to plan.


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Trading TechniquesEach of our four trader types will use one or more of these common strategies to profit.

Arbitrage

Arbitrage is when a trader takes advantages of mistakes in the

market place. When prices of a particular stock are different in two

different markets the arbitrageur buys the shares at lower price in

one market and sells it at a higher price in the other market.

Since these types of price mismatches dont last long, this technique

is primarily used by day traders.

Momentum Day Trading

This method of trading is done when a particular stock is exhibiting a

specific trend. The trader follows the trend placing multiple trades

until the trend ceases or reverses.

If the trend of the share is moving upward, the trader will buy thestock and sell it when the price has appreciated by a predetermined amount. If the stock's price is falling,

a momentum trader will sell the stock first then buy it back again as the downward trend continues. The

latter action is known as shorting. The amount of money that can be made is the same in both situations,

but shorting opens the trader to significantly more risk.

Pattern Trading

Some traders believe stocks have definite patterns to their price

movements. Pattern Traders study these patterns and use them to trade when they

believe a particular pattern is forming.

ScalpingThis trading technique involves making several small trades. This type of

trading only works when there is a difference between the bid and the asking. This

style of trading is very similar to arbitrage.

The profits are small and the trades have to be very quick because these

types of opportunities rarely last more than a couple of seconds. While this form of trading was once

reserved for highly experienced traders, this type of trading is pretty much non-existent now because

of all of the advancements in trading technology and a growing presence of computer generated

trading.

Price Action Trading

This trading is one of the simpler types of trading, in which traders only consider stock price

movements, such as the open, high, low, and close within a predetermined time frame.

This period will vary depending upon the type of trader. Whatever the trading period, the

position is closed at the end of that period, even if the trader didnt make any money.


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Swing Trading

Swing Traders look for the beginning of a change or swing, in the price of a stock to initiate a

position. The position gets closed when there is definite indication that the swing is coming to an end.

This is very similar to the how momentum traders operate when they are looking for an up or

down trend. In the case of the swing trader, only two trades are placed, one to open the position andone to close the position. In contrast to a momentum trader, swing

traders will follow the movement of a stock, opening and closing multiple

positions as the trend continues. Swing traders tend to have a much

longer trade time horizon than momentum traders.

Range Trading

When a trader believes that a stock will be moving within a given

range, the traders will use the range to buy at a lower level and sell at a

higher level and vice versa. The trader will have to studied historical price

movements to identify price support and resistance.

Essentially range trading is based on the concept of standard

deviation. So lets think back to our discussion of volatility, to help us view range trading as a concept of

standard deviation. This concept is what range trading is based upon.

In our example, our mean or stock price was 5 and the standard deviation or volatility was 2. This

meant that the stocks price range was between 3 and 7, based upon our standard deviation of 2. These

two numbers, 3 and 7, make support and resistance, respectively. So the range trader buys at 3 and sells

around 7.

Trading on News

One of the most common methods used by amateur, non-professional traders is news trading.

This isnt really a technique in and of itself; regardless many amateurs make trade decisions based uponnews developments. Normally, news developments are only a part of a complete trading plan. For more

on the multitude of issues with trading the news, you can review

module three of The Stock Market Foundations Course where we

discussed some of the challenges of trading news.


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Establishing a Successful Trading SystemA trading system is just a group of certain rules or parameters that help you in deciding the entry

and exit points for a particular share or equity. Traders mark certain points or signals on a chart and

execute trades based on them. Traders use a several common technical analysis tools to construct the

parameters of a trading system. They are: Moving Averages (MA)

Oscillators

Relative Strength Index (RSI)

Stochastic

Bollinger Bands

Combining Analytical Tools to Create Trading System

Most often, traders combine two or more of these

analytical tools to form a trading rule. For example, the moving

average crossover system uses the short-term and long-term

moving averages to create special trading rules. These rules tell a

trader to buy stock when the short-term line crosses over the

long-term line and then sell the stock when the short-term line

crosses under the long-term line.

Similarly, certain traders will not make any buy decisions if

the relative strength index (RSI) remains above a certain level.

Further, more experienced traders will experiment with different

types of moving average crossover systems on over differenttime frames (over 10-days, 30- days, 90 days, etc.). Traders will

constantly test, analyze and optimize parameters that will

provide maximum effectiveness. Although this type of optimization improves results marginally, the best

trading system always uses a combination of different parameters to be successful.

Benefits of a Good Trading System

One of the major benefits of an efficient system for stock trading is that it removes the factor of

emotion completely from the trading process. Humans tend to panic when there are sudden fluctuations

in the markets. However, establishing an automated trading system cuts down the chances for any

human deficiencies. Even more, traders can use computers to operate a trading system after it has been

developed to its most optimal level; ultimately saving time and effort.

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based upon company performance; not market sentiment. Take your returns to the next level here: The

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Investing 101: Buying Companies, Not StocksInvesting is the act of purchasing company stock to profit from a company's performance, not

the price movements of the companys stock. The majority of us fall into this category. Unlike trading,

investors are primarily concerned with the underlying company the stock represents.

In many instances, investors make investment decisions as ifthey were going to purchase the company, not the stock. Under this

mindset, the stock is simply a medium investors use to own a part of a

company.

Core Concepts of Investing

Price vs. Value

Price is what you pay and value is what its worth. Traders

operate with the assumption that a stocks price is always equal to its

value. Investors operate under the assumption the stocks price isindependent of its true value; providing opportunities to profit

because they can buy company stock at prices lower than its true

value.

Value Investing

Value investing, the most common form of investing, works on the belief that a company's stock

price doesnt reflect its true worth. Investors look for companies they believe are worth more than their

current price. Keep in mind, investing also includes an analysis of the strength of the company, but we will

get to that concept when we talk about fundamental investing in the next section.


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Analysis Techniques 101: Making Informed DecisionsThe stock market is a highly dynamic place with constant fluctuations. A combination of sound

planning and carefully crafted strategies is vital in order to make profits in such an environment. The key

to your financial success, whether it be trading or investing, is having a solid framework to make an

informed decision. This is where analysis techniques come in. Depending upon your path, trading orinvesting, you will use one of the two main forms of analysis: technical or fundamental.

Technical AnalysisTechnical Analysis involves assessing the stock market and the price movement of a stock.

Technical analysis is a huge subject with hundreds of analytical tools. However, most of the market

traders use a few major analytical tools such as moving average, trading volume, relative strength index,

moving average convergence divergence, stochastic, regressions, as well as business and market cycles.

All of these tools do one thing; they take historical price data

and compress hundreds of price points into a single, comprehensible

number. These metrics were developed to help traders analyze

thousands of data points in very short periods of times. Think of it as

using the mean or median of a data set to make a decision, as opposed

to looking at all 1,000+ numbers to make a decision. Over a period of

time, traders use these indicators, along with charts indicating the price

movement of a stock, to make informed trading decisions.

This act of combining analytical indicators and market charts

allows traders to make estimates of the future movements of stocks. It

is important to note that these results are only estimates, not a definite

conclusion. This is why it is so important that more emphasis is placed on

fundamental analysis when it comes to stock market analysis.

Fundamental AnalysisIf you plan on being an investor, it is crucial you understand the basics of fundamental analysis.

Fundamental analysis is the process of understanding the inner workings of a

company. It breaks down all the facts of the company and brings them under close

scrutiny.

The primary purpose of conducting a fundamental analysis is twofold; first to insure

a company is financially strong and will continue to make money for the foreseeable

future, and second to determine whether a stock is overpriced or underpriced.

Fundamental analysis is done using basic financial information pulled from a

companys financial statements.


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Moving ForwardTo get a jump start on your trading or investing, I encourage you to head over to

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your investment returns.

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