target="_blank" rel="nofollow" href="#litres_trial_promo">Chapter 11 fills you in on moving averages and how to use them to identify trends. You also find out about oscillators and other indicators that traders use for recognizing trading signals. As a newbie trader, you’ll probably find that your greatest risk is paralysis of analysis. That’s where you may find that you’re having so much fun reading the charts or are just so confused about which chart has the right signal that you feel paralyzed by the variety of choices. We show you how to create and use a tiny subset of tools that is available in today’s charting software packages to simplify your life and make your choices easier. You’ll likewise discover how to use such odd‐sounding but critical tools as an MACD indicator or a stochastic oscillator, and we help you take advantage of the powerful concept of relative strength.
Putting Trading Strategy into Practice
After you get used to using the tools, you’re ready to put your new skills into practice making money. In Chapter 13, we show you how to put your newfound affinities for fundamental analysis and technical analysis together to develop and build your trading strategy. Using fundamental analysis, you can
❯❯ Determine which part of the economic cycle is driving the market.
❯❯ Determine which sector makes the most sense for stock trading.
❯❯ Figure out which sectors are in the best positions to go up.
❯❯ Find out which stocks are leading in the ascending sectors.
❯❯ Evaluate where the Fed stands on the economy and which potential moves by the Fed can impact the strength of the market.
❯❯ Evaluate and hopefully anticipate potential shocks to the market. Although doing so may seem like gazing into a crystal ball, you really can pick up some signs by checking out the key economic indicators. We show you what they are.
After you complete your fundamental analysis, we show you how to use your new technical analysis skills successfully. Using them, you find out how you can
❯❯ Trade within the overall technical conditions.
❯❯ Confirm which economic cycle a market is in by using index charts.
❯❯ Determine whether an ascending sector is stuck in a range or ready to enter a new upward trend.
❯❯ Determine whether leading stocks are stuck in ranges or ready to break out in upward trends.
Finally, we show you how to use your newfound skills to manage risk, set up a stop‐loss position, and choose your time frame for trading.
In Chapter 14, we introduce you to techniques for using exchange‐traded funds (ETFs) to ride the trends instead of taking the risk of finding just the right company in each sector. Sector ETFs have become a major trading tool for position traders who want to take advantage of sector rotation, which we talk about in Chapter 5.
After honing your skills, you’re ready to start trading. So in Chapter 15, we focus on the actual mechanics of trading by
❯❯ Discussing how to enter or trade into a position.
❯❯ Explaining bid and ask prices.
❯❯ Discussing the risks of market orders.
❯❯ Explaining how to use limit and stop orders.
We also explore how to exit or trade out of a position and still stay unattached emotionally, when to take your profits, and how to minimize your losses, in addition to discussing potential tax hits and how to minimize them.
Now that you know how to research the fundamentals, effectively use the technical tools, and mechanically carry out a trade, the next step is developing and managing your own trading system, which we discuss in Chapter 16. We explore the basic steps to developing the system, which include
1. Designing and keeping a trading log.
2. Identifying reliable trading patterns.
3. Developing an exit strategy.
4. Determining whether you’ll use discretionary trading methods or mechanical trading. We explore the pros and cons of each.
5. Deciding whether to develop your own trading system or buy one off the shelf.
6. Testing your trading systems and understanding their limitations before making a major financial commitment to your new system.
We also discuss assessing your results and fixing any problems.
Trading at Higher Risk
Some traders decide they want to take on a greater level of risk by practicing methods of swing trading or day trading or by delving into the areas of trading derivatives or foreign currency. Although all these alternatives are valid trading options, we steer clear of explaining even the basics of how to use these high‐risk trading alternatives. Instead, in Part 5 (Chapters 17 through 20) we provide you with a general understanding of the ways these trading alternatives work and the risks that are unique to each of them.
If you decide, however, that you want to take on these additional risks, don’t depend on the information in this book to get started. Use the general information that we offer you here to determine what additional training you need to feel confident before moving into these trading arenas.
Remembering to Have Fun!
Although you are without question considering the work of a trader for the money you can make, you need to enjoy the game of trading. If you find that you’re having trouble sleeping at night because of the risks you’re taking, then trading may not be worth all the heartache. You may need to put off your decision to enter the world of trading until you’re more comfortable with the risks or until you’ve designed a system that better accommodates your risk tolerance.
You may find that you need to take a slower approach by putting less money into your trades. You don’t need to make huge profits with your early trades. Just trading into and out of a position without losing any money may be a good goal when you’re just starting out. If you notice your position turning toward the losing side, knowing that you can trade your way out of it before you take a big loss may help you build greater confidence in your abilities.
