Posted by: The Soaring Eagle | August 1, 2012

How To Trade?


Trading is different from value investment in several ways. While VI is long-term in nature, trading is short-term by definition. VI focuses on the fundamentals of the business you’re investing in, trading is concerned about price movements and technical analysis.

In the last article, I talked about a special type of trading, called Binary Options (BO) Trading. In this post, I’m going to spend some time elaborating on trading in general.

Trading, as the name implies, is an exchange of two investment aspects, over a short period of time. A trader buys an investment instrument, at an attractive price, hoping that its price will go up (or down) over a certain period of time. This is an exchange between time and money.

If the instrument’s price went up, say after three hours of purchase, the trader could “long” the asset (sell it at a profit), retrieving the principal plus the difference between the original (entry) price, and the current (higher price).

If the instrument’s price went down, below the entry price, the trader would have few options here: He could “short” the trade, meaning he would sell the instrument at a loss, to avoid further loses, he could wait, if his information and best judgement expected the asset to go back up, at least to the entry price. Or he/she could set a “stop-loss” price, at which the trading platform would sell the asset automatically. Usually, the stop-loss and “take profit” prices are set at the inception of the trade. Setting these two price limits is tricky. It takes experience, knowledge of current market conditions, vision, and decisiveness (and a touch of good luck). “Take-profit” is the price at which the platform would sell (or buy) the asset, making a preset profit for the trader.

As you can trade on the way up, you can also trade when prices go down. In this case, you wait till the price reaches a point of saturation. To determine such point, you need to use your technical analysis skills. If you looked at the asset’s price vs time graph, and noticed a clear peak, that might be an indication that a price descend would follow. You would sell the asset at that high price, and then buy it back when it fell down. Your profit would be the difference between the two prices.

Some price peaks are deceiving. The price goes down for a short period of time, then moves up, reaching even a higher peak. In that situation, a trader would lose money if he/she had traded on the speculation of a price downfall.

It’s obvious that the two most important decisions here are: When to enter a trade (buy an asset or sell it), and when to exit (sell an asset or buy it).

In the next post, I’ll shed more light on these two critical calls. The successful trader never takes these two lightly. They actually distinguish a careful and wise trader from a lousy one. Since this is not gambling, lousiness and panic are the trader’s worst enemies.

The Wealth Maker

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Responses

  1. Indeed. Understood.


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