Part 1: The basics
Daniel Weston the Australian, who has journeyed his way through investment markets and sizeable funds, is breaking down the industry for young budding individuals looking to tackle the finance world head on. With over a decade of experience in financial markets Daniel introduces a young dynamic mix into a very serious industry!
What is a Trader?
A trader is someone speculating on prices in the hope of making a profit. A trader achieves this by buying something and expecting it to rise in price, or by selling something and then expecting it to fall in price.
What are the most popular markets to trade?
Financial markets provide endless trading opportunities, from Currencies (US Dollars, Euros, Pounds, Rand etc), Commodities (Oil, Gold, Copper, Wheat, Sugar etc), Bonds (Government, Company etc), and Stocks (of companies like General Motors, Nike, or entire markets like FTSE100, S&P500 etc).
What makes a successful trader?
Trading is very risky! So managing risk is the most important aspect of being a successful trader. No matter how good a trader you are, losses at times are inevitable. So planning definitive ways to minimize losses and maximize profits is essential in having success. Successful trading is all about having a plan to put the probability of a profitable outcome on your side.
Therefore, before entering a trade, work out the strategy to exit. Ask yourself, why should a particular market go up or down? At what point will I cut my losses if I’m wrong? What needs to happen for me to take a profit when I’m right?
Sticking to a plan provides a repeatable approach and having rules to follow is very important, and takes out the emotional aspect of trading. Emotional trading is when something is bought or sold on gut feeling instead of careful analysis or a planned approach, this generally makes us do the wrong thing at the wrong time!
An example of a simple, good rule to follow to be successful could be, to cut losing trades fast when they are small and let profitable trades continue to run. Inexperienced traders generally see a small profit and take it quickly, and see a loss and let it continue as they expect it to recover. This often results in big losses, and small profits, and losing money!
Like anything, success usually comes when you enjoy what you’re doing. You have to have a passion for the markets, a strong curiosity as to how the business world works, what’s driving markets, an interest in current affairs, being good at math and probabilities, understanding economics, also being good at spreadsheets and computer programming helps...so you can work faster!
Describe a trading system that could be used?
Generally, a trading system is implemented by using technical analysis of charts and prices, or by fundamental analysis of company or economic data to attempt to predict the future path of a market.
Technical analysis trading systems for example could be looking for trends or reversals in prices. For example, if the price of a company’s share moves from 1 to 1.01 the trader believes this upward trend will continue, and buy the share expecting the price to move higher, say the share continues up to 1.05, and then reverses and goes down to 1.04, the trader uses this as a signal that the upward trend has finished, and sells the share with a 0.03c profit per share.
Fundamental analysis trading systems could be looking for specific economic data which gives the trader a reason to take a view on a market. For example, the U.S un-employment number is widely used by traders to predict the future moves of the stock market. If the U.S un-employment number goes down, this could be seen as positive for growth in the U.S economy, and therefore a good reason to buy in to the market, expecting companies to make higher profits and therefore rising share prices.
It could be assumed, that the strongest moves in a market for traders to profit from are when both technical analysis and fundamental analysis support the same view for a market to move in the same direction as a good opportunity to trade.
It is important to remember that there is no perfect way of trading or creating a trading system. So a strong focus on risk management is always number one priority!
What’s the best way to start becoming a trader or entering into a trading market?
There are many online trading platforms nowadays which let you sign up to a free practice trading account. This account gives you virtual money to trade at no risk, and it gives you a good feel as to how markets move and react at different times, and gives you a risk free way to experiment with your own strategies before risking real money!
Connect with Daniel on Twitter or visit danielweston.com for more information.