Dear Readers,
Over the last 25 years, I have been asked this question many times – how do I trade stocks? As such, I thought that I will share some insights into this topic.
But before I begin, I need to let you know that trading stocks is not for everyone; especially those who can get too emotional. Trading stocks or other financial instruments like FX, options, etc, can be very hectic and stressful. Therefore, I will still be advocating long term investing over trading stocks in the short term. So let’s start.
Types of Trading
1. Scapling
This involves taking multiple positions in a day and taking profits and cutting losses fast. Usually these trades will last from seconds to minutes. Scalpers will take small profits, but multiple times in a day and these profits are supposed to add up throughout the day.
Though it sounds easy, being a scalper before, it can get very tiring mentally. Thus, it is not really recommended for beginners.
2. Day Trading
As the name implies, day trading involves taking intraday positions without undertaking overnight risks. For example, if you are trading the Singapore market, day traders will close off positions before the market closes at 5pm everyday. This is to prevent taking overnight risks, as the US market opens only at 9.30pm or 10.30pm. Anything that happens to the US market will definitely affect the opening of Singapore market the next day. The drawback of day trading is the cost of executions. The instruments traded will need to be volatile as well, so that there will be margin for profits.
3. Momentum Trading
This is simply trading “breakouts” or “breakdowns” on charts, with volume expansion. This kind of trades can last for several minutes to hours to days, depending on the time frame of the charts that you are using. Refer to the chart below.
4. Swing Trading
This style is basically trading short-term trends on financial instruments’ prices. Traders employ technical analysis to look for stocks with short term price momentum.
5. Position Trading
Position traders are usually the ones whose trades last longer compared to the above 4-mentioned styles of trading. They can range from days to months and in my opinion, the easiest for most beginners to try out. However, as with all trading styles, beginners will need to stick with strict risk management protocols like cutting losses as well.
Fundamentals are usually not a consideration
Traders are usually using technical charts rather than performing fundamental analysis for the positions that they are taking. That is one of the reasons why this method is less time consuming and most people will be able to pick up some skills and knowledge pretty fast.
Technical Indicators
There are numerous technical indicators that a trader can use to enhance the probability of success. These indicators are used to analyse the possible price movement of an instrument going forward like the entry and exit prices.
There are mainly two types of indicators, namely leading indicators and lagging indicators. Examples of leading indicators are stochastics oscillator and relative strength index. Lagging indicators include MACD and bollinger bands.
Traders use crossovers and divergence in these indicators to give them signals to buy or sell.
Different traders will use different indicators as there is no one sure-fire combo that will correctly predict price movement going forward. As I have tested previously in 2015, with a total of more than 300 indicators, it shows no positive correlation between prices and these indicators. Therefore, a lot of times, it boils down to the trader’s experience. Many trader will have a special set of indicators that they will consistently use for trading. Personally I only use 3 indicators for my trading and they are 1. MACD, 2. RSI and simple moving averages. Each of these indicators helps me to gauge where the price is, and make a forecast where the price will be in the next few hours or days or even months.
Types of charts
There are generally 3 different charts available for traders. They are line charts, bar charts and candlesticks charts.
Line Charts
- Simplest
- Only display closing price
- Patterns easier to spot
- Possible to miss important price movements during the day.
Bar Charts
- Shows opening and closing prices as well as the highs and lows for each period.
Candlesticks Chart
- Showing the same data as bar charts
- Body of the candle shows the open and close range
- Wick is the high/low range
- Most popular
Support and Resistance
- Technical analysts use support and resistance levels to identify price points on a chart where the probabilities favor a pause or reversal of a prevailing trend.
- Support occurs where a downtrend is expected to pause due to a concentration of demand.
- Resistance occurs where an uptrend is expected to pause temporarily, due to a concentration of supply.
- Market psychology plays a major role as traders and investors remember the past and react to changing conditions to anticipate future market movement.
- Support and resistance areas can be identified on charts using trendlines and moving averages.
Breakouts
- Breaking resistance
- Especially with high volume
- Price appreciation can be significant
- Psychological
False Breakouts/ Bull Trap
- Not every breakout is genuine
- Possibility of price overshooting as a result of psychology
- Trading breakouts can be risky as there is no buffer of safety
- Look at volume
Trends/ Trendlines
- 3 trends namely, uptrend, downtrend and sideways
- Steeper trend lines tend to be unreliable and break easily
- connect two major peaks or troughs to draw a trend line, however a third is needed to confirm the trend.
Channels
- Extension of trend lines
- Channel support/ resistance
The above are just some of the common technical analysis tools that a trader will deploy for their trading. If we dive deeper, there are also chart formations that we look out for. However, to keep this post less demanding for readers, I have decided to touch on the other topics in future.
Risk Management
This is crucial for all traders in which I will share more.
- Don’t trade money you can’t afford to lose – When you invest in the stock market, remember that there is always a chance that you can lose all of your money. Therefore, only trade with your spare funds and ask yourself if you can lose 100% of that money.
- Don’t be too enthusiastic at the beginning, and start slowly.
- Set stop losses, regardless of your trading styles. This will eradicate emotions in your decision making process if prices move against you.
- Maintain a journal and note down successes and failures for future reference.
- Remember, we are not trying to get 100% right all the time. If you are able to achieve 70% of the trades right, and making more than your losses each time, you will be profitable. Don’t aim for 100% right and this was my mistake when I was just an amateur. Having the right mindset again will prevent you from getting emotional executing your trades.
- Always starts with a neutral mindset, meaning not to have a bullish or bearish views before you start analysing charts. This is to prevent biasness accessing technical indicators. Again, this is to remove prior emotions.
Last but not least…
Choosing a stock platform or broker! Of course, I will be strongly recommending iFAST as a platform in view of their pricing transparency and markets available to investors. For example, every trade in the Singapore market is only $8, regardless of size. In another words, regardless whether you are trading $50,000 or $100,000, the fees will be $8.
If you like to open an account with us, click the button below. You can open the account using MyInfo using your Singpass.
Hopefully, this article has shed some insights into trading for you. However, if you would like to find out more about investing or trading, do feel free to contact me!