Guide

Home > Money Guide

Advantages of Proper Trading Education

You're excited about trading for money, but this is already a key moment in your career in this financial landscape. If you want to succeed, then you need to temper that enthusiasm. While enthusiasm is good for most new ventures, that is not the case with trading. In this environment, you need to be steady at all times. You need to apply logic instead of emotion. And in order to apply logic, you need to know the best professional trading strategies. We'll take a quick look at them and their differences below.

Analysis-Based

This pertains to technical analysis, which relates to the statistical analysis of price movements. The basic principle is to identify patterns in price movements and capitalize on them. This removes the psychological aspect of trading. You will be using historical data and back-testing strategies. Your new strategies might involve support and resistance, trendlines, moving averages, oscillators, and/or chart patterns. You can apply technical analysis to stocks, futures, commodities, currencies, ETFs, or bonds. However, since technical analysis is mostly used in the short-term, it's mostly used for forex and commodities. It can be applied to stocks as well.

The real theory with TA is that you can use the past to determine the future. You might also find a situation where enough people are on the same trade due to a basic trend that it moves the price of the position in your favor. This is good for the short term, but the negative is that it doesn't lead to long-term results. And sometimes your read on the situation will be off, which can present danger. The other downside with short-term trading is increased fees. If you're going to trade short-term, find an online broker that offers very low fees.

Fundamental-Based

This is a different camp, and the two camps usually don't see eye to eye. That's somewhat ridiculous because it's apples and oranges. TA is best for short-term trading and fundamental trading is best for long-term investing. This is also a much better route for equities. When you're investing based on fundamentals, you're looking at a company's balance sheet, return-on-equity, debt-to-equity ratio, earnings per share, revenue growth, net income growth, cash flow, and more. Always pay a great deal of attention to cash flow. Cash flow is king because it allows the company to maneuver. Without cash flow, upper management is stuck in the mud.

Some investors would say that upgrades, downgrades, and earnings reports are part of fundamental trading. You can make a case for that, but if you're investing in the company, these should be ignored. Short-term events should not play a role in long-term investing. For instance, Apple has had disappointing earnings before, and it has been downgraded before, but did that mean that Apple as a company was headed for a fall? Of course not. You have to be careful with Wall Street analysts and their games. A lot of money is involved, and when a lot of money is at stake, many events will be designed to fool you. Ignore the games and stick to investing in the actual company. In fact, if you did your due diligence and believe in the product or service as well as the management team, don't even look at your investment.

If you're looking for faster returns in equities, the number one thing to look for is revenue growth. Ignore debt because growth will lead to excitement, which will overshadow debt. It's all about momentum. The key here is to get out before revenue growth slows. Once that happens, the stock is likely to take a big hit. If it's a short-term fad, you want out. If it's a company where you believe in their long-term vision, this is when you add to your position, not sell.

Avoid Emotional Reactions

In order to avoid emotional reactions, make small trades early in your career so you can learn via trial and error. Also be sure to diversify your portfolio. If you're all-in on gold and it takes a huge hit overnight, you're in trouble. If you're making short-term trades and things aren't going well, decrease your trading volume. Think of this like calling a timeout. And if you're invested in a company you believe in and it just took a hit, don't panic. Instead, dollar-cost-average so you own more shares at a lower price. By taking this approach, you make more money on the way up. If the company pays a dividend, you just increased your dividend payment as well. And worst comes to worst, you can write-off up to $3,000 in stock losses in one year.