Trading 101 for Dummies (Part 1)

Whenever you buy or sell a financial product, you are trading. When you buy shares in a company’s stock, for example, you are technically trading with the person who sold those stocks to you.

The primary purpose of trading is to make money. This is achieved through price movements that occur when a trader buys and sells (trades) a particular financial product. This is different from gambling because traders have an idea of the probability of how far the price will move after they trade. Gambling involves placing bets on something that has no predictable outcome; there is no research involved to determine your win/loss ratio beforehand.

Trading also differs from investing as investors do not actively manage their assets every day like traders do. Investors use an investment strategy based on fundamental analysis and hold their positions for the long-term while traders tend to focus more on technical analysis and manage their portfolios daily (or even intra-day).

Trading can be viewed as a form of risk management because traders take calculated risks when they decide what trades to take and how much risk to take on each trade. The aim of this is to make money consistently from successful trades in order to offset any potential losses incurred by unsuccessful trades.

Trading can be particularly beneficial for businesses since it allows them to hedge against future events by taking positions in markets or financial products that would profit if those events occurred (for example, if oil prices were going up). By entering into these types of trades, companies can minimize their exposure to potential losses caused by the event occurring

What is Day Trading?

Let’s first define day trading, shall we? Day trading is the buying and selling of stocks within the same day. Although it sounds simple enough, there are certain principles that all day traders should abide by:

  • Treat day trading as a profession. Even though it’s accessible to anyone with an internet connection, you need to think about it like a business or job. You wouldn’t set up a regular business on the fly without doing any research or having some method of organization in place; you need to do the same for your day trading endeavors.
  • Day traders need to be able to react quickly. Delays in order routing or poor execution can cost you time and money. So make sure that your broker partner has top-tier technology capable of making fast trades when markets get hectic.
  • Day traders also need to be able to adapt their strategies according to changing market conditions (such as geopolitical events). Make sure that your skillset allows you flexibility!

Some folks might make the mistake of thinking that they can just jump into this without any knowledge or preparation—and end up coming away with nothing but frustration and empty pockets. It is important not to confuse investing with gambling! When done right, investing can be a very rewarding opportunity; but there are multiple factors involved in making sure that this happens properly.

What is Charting and Why Do it?

Charting is a way to visually represent historical stock price movements over time. It is used by traders as an aid for decision making and to understand current market conditions. Chart patterns can give you valuable insight into the direction of current trends, the strength of those trends, and how long the trend may last.

Charts are graphical representations of a security’s history and are widely used in trading to identify key points that can be capitalized on for profit. A charting program allows you to plot out specific securities or categories of securities over different time frames (1-day, 1-month, 1 year) in order to analyze their performance. By graphing price action over time, it allows you see where prices have been, where they are currently at, and possibly predict where they will go in the future. You can use this information advantageously in conjunction with other indicators or even on its own to make informed decisions about your trades.

How to Read Charts (For Dummies)

There are several different types of charts you can use to analyze the markets, but for now we will focus on the most important chart type – candlestick. A candlestick chart contains more information about the price action than a line or bar chart does, which makes it easier for traders to spot trends and compare relative prices over time.

Candlestick trading chart

Think of a candle: It has a body (or “wick”), which shows the opening and closing price, or how much it moved up and down during a specific period. If the body is white (or filled in) then that means that prices increased—and if it’s black or empty then they decreased.

Now imagine each candle represents one day—so if you were to draw five candles next to each other on your chart, you would see how much each stock moved up or down in those five days respectively! This helps investors visualize changes over time as well as specific patterns like head-and-shoulders formations—which show when momentum might be changing course soon—on their chart without having to do any math themselves.*

What Does The Stock Market Do?

The stock market is an exchange. It’s the place where shares of stock are bought and sold. The stock market is a system, not a place. The system includes the actual exchanges that do the buying and selling, as well as computer systems that make sure everything goes smoothly. Think of it this way: A company’s shareholders own that company, or at least part of it; if you buy shares in a company, you actually own a small piece of it! And when you hold shares in your name, you have certain rights; for example, you can vote on certain matters involving the company. You might also be entitled to receive dividend payments from the profits made by the company.

The main reason people trade stocks is to make money. When you trade stocks, your goal is to take advantage of price movements in such a way that you make money whether prices go up or down. Buying low and selling high means timing your purchases so that you buy when prices are at their lowest point and sell when they seem to be peaking (and before they start falling). This strategy works best for investors who plan on holding onto their stocks for years at a time; if you hold them long enough, it’s likely that most will rise over time (even though some will fall).

Types of Stocks

There are many different types of stocks. Let’s look at some examples:

  • Common stock: By far the most common kind of stock, with voting rights and a potential to receive dividends
  • Preferred stock: Generally have no voting rights, but have an established dividend that is paid to shareholders before common stockholders receive any dividends.
  • Penny stocks: Low-priced shares that trade for less than $5 per share. These can be very risky if you don’t know what you’re doing, but there is also the potential for high returns on investment.
  • Foreign stocks: Stocks issued by companies outside the U.S., which often provide a wider range of choices or opportunities to take advantage of economic growth in certain countries or sectors (for example, emerging markets).

Stock Chart Patterns That Work

Although there are many different types of chart patterns, the most common are:

  • The Head and Shoulders Pattern – This pattern is a sign of a bullish trend. It forms when a stock rises to a peak and then declines, rallies again but can’t surpass the previous peak, then drops again below the starting point. A line that connects all three troughs would be called the support line because it supports prices as they go up after falling down. When price falls below this support line, it’s usually considered a sell signal.
  • The Inverted Head and Shoulders Pattern – This pattern is like its counterpart above but reversed. It’s usually considered a sign of an upcoming bearish trend. It forms when a stock falls to reach bottom, rises slightly but not enough to surpass its previous low, then falls again and ends at or under where it started from initially. Just like before, if price breaks through the neckline (the resistance line formed by connecting all three peaks) this indicates that traders should sell their shares.

Stock Indicators Explained

Indicators are tools that help traders predict the future price or direction of a stock. Indicators can be both simple and complex, but all of them are used to predict price movement, whether it’s bullish (up) or bearish (down).

Indicators have different uses: some tell you when buyers or sellers are controlling the market, others show you potential reversals in price or future trends. Indicators can also be combined to create trading strategies. The important thing is to learn how to use indicators effectively so you can make good trading decisions.

Now that we have an idea of what indicators do, let’s look at the different types: Trend indicators help investors know whether a stock is trending up or down

Volume indicators show how much a stock has traded in a given period

Overlap studies compare two different stocks and identify correlations between them

Momentum indicators measure the speed at which a stock is moving

What is Moving Average

A moving average is a technical indicator used to examine price changes over a specific period of time. It helps smooth out the volatility inherent in price fluctuations by averaging the prices on a given chart over a set period of time, such as five or 10 days. This indicator can help traders identify trends and patterns that might otherwise go unnoticed. It is simply an indicator that shows the average price of a stock or index over a set amount of time.

How to use Bollinger Bands®

Bollinger Bands are a technical indicator that you can use to measure volatility in the markets and help identify overbought and oversold positions, as well as find the right entry point, set stop loss orders and protect your profits.

The simplest way to understand Bollinger Bands is to think of it as a moving average that adapts to price changes in real time. Together with the RSI (Relative Strength Index) and ATR (Average True Range), Bollinger Bands can be used effectively across various asset classes.

How to Use the Relative Strength Index (RSI) Indicator

If you want to know when a stock is overbought or oversold, the Relative Strength Index (RSI) indicator can help. The RSI is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock, commodity, or other asset.

The RSI indicator was devised by J. Welles Wilder Jr., and debuted along with some other tools in his 1978 book titled “New Concepts in Technical Trading Systems.” The full name is relative strength index because it compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of an asset.

Let’s say you are trying to decide whether you should buy Tesla stock now, but you are unsure if it has reached its peak yet and fear that it may be too late to buy into this popular vehicle manufacturer. To find out how “overbought” Tesla stock is, check its RSI value using your trading platform’s charting tools. If it’s an uptrending market and the RSI number is above 70%, then yes—it may be getting overbought at that point.

Tips on Using the Moving Average Convergence Divergence (MACD) Indicator

Here are some tips on using the MACD:

  • Learn about how to use the MACD. After all, you can’t use it effectively if you don’t know what it does! The MACD is a popular and powerful indicator that helps traders determine the strength and direction of a trend.
  • Use other indicators in conjunction with the MACD. When one indicator alone isn’t enough, it’s helpful to use multiple indicators together when trading. For example, you could combine the RSI (Relative Strength Index) and Stochastic indicator with the MACD when making trades.

How to Use MACD Indicator and RSI Together

In this guide, we will discuss using MACD and RSI together since the two indicators complement each other. MACD stands for moving average convergence divergence and is a popular indicator used in technical analysis. RSI, on the other hand, stands for relative strength index which is another popular indicator that traders use to identify overbought or oversold conditions.

The two indicators work well together because they are measuring different things. While MACD measures momentum, RSI measures price movement as it oscillates between 0 and 100. This allows you to have an idea of the momentum of an asset while also having an idea of whether it’s overbought or oversold in terms of pricing.

Stay tuned for part 2.

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