Entering the world of Technical Trading / Investing
If you are at a point where the average returns on your investments are no longer appealing to you and you want to try applying technical analysis to boost those returns, then read on.
There are many roads that lead to Rome (And now you can take a flight too!). The below mentioned steps are just one such way.
Step 1) The first thing to do is educate yourself. Take courses, read books related to the subject. To make good money in the market, it takes knowledge and perseverence. Don't expect to throw your money at the market and get double in return. You might get lucky once, but the market will make you pay it all back many times over.
Step 2) Once you have an overall understanding of technical analysis and its application, then decide what markets you want to trade or invest in. Are you interested in the stock market, or the bond market or perhaps the commodities market. What attracts you most? With online trading, most markets are easily accessible for trading. Once you decide your particular area of interest, study that market. What are the terms you need to know related to that particular market? What are the market hours of operation? What online brokers can you use? If you decide you are interested in stocks, then do you want to also trade their options? These are some of the questions you need to ask yourself.
Step 3) After you have decided one particular market, and for simplicity we will assume the stock market, you now have to decide what particular style of trading you are comfortable with. Broadly speaking, trading can be classified as follows:
- Long term trading/Investing
If you don't have the time and patience to monitor your holdings every day, then you can use Weekly time frame charts. Your holding period would be anywhere from a few weeks to months.
- Swing trading
If you can monitor your positions every night, then this type of trading is for you. You will mostly look at Daily time frame charts and your normal holding period can be a few days to weeks.
- Day trading
This infamous style got a lot of popularity during the dot com era. If you can monitor your holdings during market hours and have the time, discipline and acumen to make fast decisions, then this style is for you. You will mostly look at intraday time frame charts and your holding period can be anywhere from minutes to hours. Day traders usually don't carry positions overnight.
Each style of trading has its own merits and drawbacks. But primarily it depends on your personality. Always do what best suits your nature. (There are quite a few good books out there on this topic).
Step 4) At this point, you have knowledge of technical analysis, know the market you want to trade and have decided on a trading style. Now you need a system. A set of rules. The main pupose of these rules is to get your emotional self out of the market. Emotion is the greatest enemy of traders and investors. It impairs rational judgement. It makes one take careless decisions at the very time when one needs to be the most rationale. Anything you can do to keep your emotions from interfering with your investment/trading decisions will help you over the long run. The best way to do this to make a set of rules and mechanically follow them. These rules should accomplish the following things:
- Help you identify high probability trade/investment setups and,
- Help you in keeping your profits bigger and losses smaller. Remember, losses are inevitable in trading. Accept this fact sooner rather than later.
That's it. All background work is complete.
Now is the time to see how your knowledge and your trading/investing system work in the real world. You can try some paper trading just to get a feel for it. But the final test will be when you actually participate in the market. Keep a positive attitude and follow your system. Be assured the market will test your nerves and your decipline in following your own rules. That's when the 'men get seperated from the boys' as they say.
You have made the decision to not accept average returns on your hard earned money. Now act on it.