Trading for Beginners

Everyone wants a piece from the stock market. However, how many of us leave the market in one piece or actually profit from the stock market?

Firstly, you need to understand that the market is brutal to most people who challenge it.
It is akin to climbing Mount Everest.
It has no favourites. It treats all challengers as equals.

Trading can be intellectually stimulating and it will bring out the extreme spectrum of emotions.

In order to be a successful stock trader, you need to understand that successful traders share certain key traits. In fact, 2 things are required.

  1. A desire to succeed
  2. Winning strategy

There bound to be people, especially your loved ones, throwing shade, giving discouraging comments. You need to learn to ignore discouragement and instead focus on empowering principles.

“Optimists are right. So are pessimists. It’s up to you to choose which you will be.”  - Harvey Mackay

The choice is yours.

Before you start trading, INVEST IN YOURSELF FIRST!! GET EDUCATED!! Almost all who do not get any form of education in trading will lose some money or blow up their account somehow.

The few who managed to make money without education? Either they have some “hot news” or luck. However, all of these are short term.

Eventually the “hot news” is not reliable and luck will run out. Once again, you will probably suffer a loss which you could not handle.

So, how do I educate myself?

There are so many strategies in the market that will confuse you rather than help you. And you will have to usually fork out thousands of dollars from your pocket to purchase one of those courses. Before you dive into any of those, first you need to understand what kind of trader are you and the market you want to trade.

The following will be on trading equities (stocks).

In General, there are 2 school of thoughts to trade stocks.

Fundamental Analysis VS Technical Analysis

Fundamental Analysis

The fundamental approach is often used by long-term investors. It is a method of evaluating a stock in an attempt to measure its intrinsic value by studying the economic and financial condition and other qualitative and quantitative factors.

Famous people who used Fundamental Analysis:

Warren Buffett, Charlie Munger, Benjamin Graham, John Bogle

Fundamentalist uses financial ratios to aid them in their analysis. Overall, there are 5 types of financial ratios you need to know.

  1. Liquidity
    • These ratios will demonstrate a company’s ability to pay their debts and liabilities. If the company is having trouble to generate enough cash flow to cover costs or it does not have enough short term assets to cover short term obligations, it will run into financial difficulties.
    • Liquidity ratios are put into higher priority especially for penny stocks as small and new companies have difficulty paying the bills before the business becomes established.

      Liquidity ratios include; current ratio, quick ratio, cash ratio and operating cash flow.

  2. Activity
    • In short, the effectiveness and efficiency of the business operations. What is the company doing with the resources available?

      Activity ratios include; inventory turnover, receivables turnover, payables turnover, working capital turnover, fixed asset turnover, total asset turnover

  3. Leverage
    • These ratios will indicate a company’s strength to pay their long-term debt

      Leverage ratios include; debt ratios, debt to equity, interest coverage

  4. Performance
    • These ratios are all related to profit, therefore people usually refer it to profit ratios.
    • Once again, it is difficult to use profit ratios on penny stocks since most of them are not operating profitably. Thus will not be possible to generate any performance ratios values.
    • It is able to reveal how profitable a business is at various stages of its operations

      Performance ratios include; gross profit margin, operating profit margin, net profit margin, return on assets, return on equity

  5. Valuation
    • Determining what a company is worth. Valuation ratios put that insight into the context of a company’s current share price where it serve as useful tools for evaluating a investment potential.

      Valuation ratios include; Price/Earnings (P/E), Price/Cash Flow. Price/Sales, Price/Earnings/Growth rate (PEG), Price to book value

Recommended books

  • “Warren Buffett and the interpretation of financial statements” by Mary Buffet and David Clark
  • “The Intelligent Investor” by Benjamin Graham
  • ‘Buffetology’ by Mary Buffet and David Clark
  • “Fundamental Analysis for Investors” by Raghu Palat
  • “Security Analysis” by Benjamin Graham

Technical Analysis

It is an analysis method used to forecast the direction of prices and trends of a stock based on the study of past market data and price movement. In short, the art of candlesticks reading. It can be both short-term and long-term.

Famous people who used Technical Analysis:

Marty Schwartz. Mark D. Cook, James Simons, Ed Seykota

Technicalists uses various market indicators to aid them in decisions making. The following are 5 popular indicators that many traders use;

  1. Moving Averages
    • Moving averages “smooth” price data by creating a single flowing line. The line represents the average price over a period of time.
    • Which moving average the trader decides to use is determined by the time frame in which he or she trades. For investors and long-term trend followers, the 200-day, 100-day and 50-day simple moving average are popular choices

  2. MACD (Moving Average Convergence Divergence)
    • This trend-following, momentum oscillating indicator shows the relationship between two moving averages.
    • The indicator is composed of two lines. The MACD line, and a signal line which moves slower. When MACD crosses below the signal line it indicates price is falling. When the MACD line crosses above the signal, price is rising.
    • When the MACD is above zero, the price is in an upward phase. If the MACD is below zero, it has entered a bearish period

  3. RSI (Relative Strength Index)
    • The RSI is another oscillator, but because its movement is contained between zero and 100, it provides some different information than the MACD.
    • It has at least three major uses.
    • The most basic use of an RSI is as an overbought and oversold indicator. When RSI moves above 70 the asset is considered overbought and could decline. When the RSI is below 30 the asset is oversold and could rally. Making this assumption is dangerous though, therefore some traders wait for the indicator to rise above 70 and then drop below before selling, or drop below 30 and then rise back above before buying
    • Divergence is another use. When the indicator is moving in a different direction than the price it shows that the current price trend is weakening and could soon reverse
    • A third use for the RSI is support and resistance levels. During uptrends, a stock will often hold above the 30 level and frequently reach 70 or above. When a stock is in a downtrend, the RSI will typically hold below 70 and frequently reach 30 or below

  4. Fibonacci Retracements
    • Fibonacci Retracements are ratios used to identify potential reversal levels.
    • These ratios are found in the Fibonacci sequence. The most popular Fibonacci Retracements are 61.8% and 38.2%.
    • Able to aid traders identify significant price points and predict levels of support and resistance. Learn how this tool can be used to determine how much a market might retrace before resuming its trend

  5. Stochastic
    • A momentum indicator that measures the current price relative to the price range over a number of periods.
    • Plotted between zero and 100, the idea is that when the trend is up the price should be making new highs. In a downtrend, the price tends to makes new lows. The stochastic tracks whether this is happening. 
    • When the Stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought.
    • When the Stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold.

Recommended books

  • “Technical Analysis of the Financial Markets” by John J. Murphy
  • “The Art and Science of Technical Analysis” by Adam Grimes
  • “Technical Analysis of stock trends” by Robert D. Edwards, John Magee
  • “Technical Analysis Explained” by Martin Pring
  • “The New Market Wizards” by Jack D. Schwager

Start taking action now!

Read books, go to seminars, meet like-minded people. Find a trading community that helps one another.

“The future depends on what you do today.” - Gandhi

Trading in a journey.
Focus on your learning journey.
Continue to hone your skills.
Eventually the money will follow.

“Challenges are what make life interesting and overcoming them is what makes life meaningful”
- Joshua J. Marine

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June 20, 2019

Trading for Beginners

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