How, and when to trade, comes with experience and depends on the market condition and asset one is trading. Trading is a long game and requires a lot of patience and discipline. Market conditions are always changing, and financial markets are evolving at a significant speed.
Traders of today trade a wide variety of market assets and diversify their portfolio accordingly, taking into consideration the risk and returns over a period of time.
Different types of trading styles :
- Scalping is the most short term form of trading, which means a scalp trader profits out from the short trades and only hold positions open for seconds or minutes at most. These short-lived trades target small intraday price movements.
- Day trading is suitable for traders, who are not comfortable with the intensity of scalp trading, but still don't wish to hold positions overnight. Day traders enter and exit their positions on the same day removing the risk of any large overnight moves.
- In Swing Trading, traders hold positions for several days, although sometimes as long as a few weeks. This type of trading style is suitable for people who have other commitments (such as a full-time job) and would like to trade in their leisure time. However, it is still necessary to dedicate a few hours a day to analyse the markets.
- Position trading is focused on long term price movements, looking for maximum potential profits to be gained from major shifts in prices. Weekly and monthly price charts are used to analyse and evaluate the markets, using a combination of technical indicators and fundamental analysis to identify potential entry and exit levels.
Choosing the right timeframe is important
For any trader, who is just starting out, choosing the right timeframe is very important. It is advised to trade on higher timeframes, because of less noise.
As you can see, a long term investor always look out for positions to be opened longer i.e from months to years giving significant returns. On the other hand, other traders get lower returns and have to do a lot more analysis because of more data for trend determination and entry and exit points. However, that's not always the case, experienced traders and institutions do trade lower timeframes which is known as high frequency trading and make generate good profits.
More importantly, one should only indulge in a lot of trades, once there is enough experience and learning of how markets work.
One, cannot just look at the charts and tell what the next move is going to be. And to predict it, we use various kinds of technical indicators.
Types of Technical Indicators
- Leading Indicators gives trade signals, once a trend is about to start. They try to predict price, by using a shorter period in their calculation, thereby leading the price movement. The most popular leading indicators are Stochastic, MACD and RSI.
- Lagging indicators are those that follow the price action. They give a signal after the trend or reversal has started. They are used to determine the trend. The most common lagging indicator is moving average.
Indicators from leading and lagging categories belong to one of the following types :
- Trend Indicators measures the direction and strength of a trend, using some form of price average to establish a baseline. When price moves above the average, it's considered as a bullish trend. When price falls below the average, it signals a bearish trend. Moving averages, MACD and PSAR are some of trend indicators.
- Momentum Indicators are used to identify the speed of price movement by comparing prices over a period of time and can be used to analyse volume too. It is calculated by comparing current closing price to previous closing prices. Stochastic oscillators, CCI and RSI are some of momentum indicators.
- Volatility Indicators measures the rate of price movement, regardless of direction. It is generally based on the change in the highest and lowest historical prices. They provide a useful information about the range of buying and selling. Bollinger bands, average true range and standard deviation are some of volatility indicators.
- Volume Indicators measures the strength of a trend or confirm a trading direction based on some sort of averaging or smoothing of raw volume. The strongest trend often occurs when volume increases; in fact, it is the increase in trading volume that can lead to large price movements. Chaikin oscillator, on balance volume(OBV) and volume rate of change are some of volume indicators.
Learn about Support and Resistance Levels
Another way of looking at peaks and troughs in a price chart is using the concept of support and resistance. Again, this is a fundamental idea used in technical analysis, and the various aspects of it can be very powerful.
The troughs, or low points, can be thought of as support points – they are the level down to which the price can go, but no lower. The price is supported at that level because the buying interest is strong enough to overcome the amount of selling. When the price goes that low, sufficient people want to buy the financial security that the price is maintained, as a direct result of supply and demand. As a result, the price goes down to that level and turns back up again.
Similarly the peaks indicate the resistance level. When the price gets that high, a lot of traders decide to sell and take their profits, seeing the price level as a reasonable place to cash in. Less people are interested in buying because of the relatively higher price, so the excess of supply over demand or the buying interest turns the price back.
And the most important is RISK MANAGEMENT
As a trader, if you are not managing your risk properly, you are not trading right. Risk management is the most important metric for trading, because it manages the risk of losses during a losing streak and protects the capital in every way possible.
Risk management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions. Risk is inseparable from return in the investment world. We tend to think of "risk" in predominantly negative terms. However, in the investment world, risk is necessary and inseparable from desirable performance.
A common definition of investment risk is a deviation from an expected outcome.
To learn more about Technical Analysis, Risk Management, Portfolio Analysis and Fundamental Analysis go through below mentioned links