STOCK MARKET FOR BEGINNER | Stock & Option Guide

Generally people know that trading is a stressful and dangerous job. Most also know that it isn’t easy and takes lots of work and learning. Of course, there are the few who believe that the market can be beaten with a system or with some high-tech software. There are those who cling on to the ignorant belief that the market is a place that can get them rich quick.

Let’s not waste time discussing the dreamers and ignoramuses. Rather, lets look at the fellow who knows what it takes and is ready to work for it. Let’s look at the fellow who sincerely wants to learn all you should know about this business but is unable or unwilling to get a formal education for it. It is often argued that one is able to learn about trading by reading books and obtaining information through the internet.

So if it is that simple, why do so many still fail? The reply is just as simple; Learning the wrong thing without realizing it.

Most of the books available, either at bookshops or at the library are about INVESTING and very few are actually about TRADING. So what happens is that most people don’t realize the real difference between investing and trading and will assume the two to be the same with slight variances. That could not be farther from the truth.

Investing is less difficult to learn – like learning to drive a Honda Jazz. It doesn’t take much to learn it and it is easily understood and put into practice without much difficulty. The trick thereafter is not to crash.

Trading , however, is an extremely different skill and mind set. It is akin to driving a Formula 1 car. Unlike the Honda where the manual version has the clutch on the left foot, the F1 car’s clutch is an extremely different mechanism and is controlled by the right hand. Unlike the Honda which packs less than 80bhp, the F1 car stacks up an earth-shattering 900 bhp which, in untrained and inexperienced hands, could end up killing the driver.

There is so much more to trading than investing. The skills involved are very different, the psychology is worlds apart, the knowledge needed requires way more weeks and even months to acquire and the quantity of research needed to become good investor is nothing compared to the daily research and monitoring the trader is required to do to survive the market day in and day out. Where investing requires minimum practice, trading demands never ending hours of practice time to hone the skill. The financial management skills are also extremely different in that the investor protects his capital by how much he invests while the trader requires a different skill set to manage his finances – its called “cutting loss” – something easier said than done.

So without realizing it, most beginners will pick up an investment book or visit sites hosted by investors or have contributing members who are investors and assume that all that knowledge gained will stand him in good stead as a trader.

And when things don’t work out, it gets confusing. The common query that follows is always, “Why is it others can make it but I can’t?“

You can’t blame the poor fellow because there isn’t much literature on this subject and even some so-called gurus don’t know the difference. But all you’ve got to do to know that this is true is to just look at Wall Street – how come the investors don’t have to be on the floor of the exchange everyday while the ones on the floor everyday are known as traders?

Knowledge … a bit of it can kill you quickly while the wrong kind will slowly bleed you to death.

Now we look at a controversial reason why most traders fail – The Attitude

It starts right in the beginning where most newcomers think that the market can be quite a get-rich-quick plan. This is akin to thinking that the market is like a casino. Consider this fact – the house ALWAYS wins. So if you treat the market like a casino, it will cause you to feel like most gamblers do. Gamblers always win a few but lose a lot.

Some trade like the market is a system to be beaten. Such traders ought to give themselves more credit. You’re insulting yourself for those who have this attitude. To think that the market is a system is to include yourself in that system. Therefore, the system you are looking to beat includes you. Give yourself some respect and while you’re doing that, give the market the same respect – we’re not robots in the market and we’re definitely not part of a system. We’re humans that are driven by emotions. The market is an emotional place, not mathematical. You cannot have a system to beat an emotion because there is no math that can factor emotional irrationality.

Then we have those that don’t realize how unscrupulous the market is. Their ignorance is evident when they correctly assume the market is not that clear cut but will still buy into the hype. What is obvious would be that the market is made up of a myriad of people especially those who will do anything to get an edge, even through illegal and criminal means. It’s also full of experts who have spent years in Harvard and Princeton and then more years with established institutions such as Goldman Sachs, Morgan Stanley and so on. They have hugely experienced mentors to guide them to become generation x of world class traders. These people have so much leverage and influence on market sentiment and to make their advantage more unfair, they collude with their competitive counterparts so that you can corner the larger market for their own gains. With such power, how is a three-day workshop graduate expected to beat the odds? Yet increasingly more look past the obvious and end up throwing their hard earned cash to the power-brokers.

These are also those who buy into the concept that the market can be analyzed fundamentally with valuations. Such valuations do aid in reducing risk. But that is an investment-styled strategy and not suited for trading. Trading is way faster and seldom allows the security time to flex its fundamental muscles before the next gyration takes out the profits. Read the previous lesson to know the difference between the investor and the trader and you’ll have a clearer understanding of this.

Others rely purely on technical analysis. I can’t deny that I base lots of my analysis on technicals. But that is not the end all. It just takes one bit of macroeconomic news and all that technical analysis is out the window faster than you can say “Cut loss!” TA is great as long as there isn’t any news to upset the prevailing sentiment if volumes don’t dip. But the market is never so generous. So ultimately, TA is only a “best guess” … and contrary to common belief, TA is not the best guess of when to buy or sell – rather it is most reliable when used to guess the best potential against the least risk or the most risk against unfavorable potential.

Then there are those who believe that a good tip from a trader is the key to easy money without putting in any effort. For this, I have only one analogy; Would you take a heap of hard-earned money from your wallet and give it to someone you hardly know and expect to get all of it back after a few weeks? And if that person was trustworthy, would you still do it? And do you really believe that it will come back with more than you gave him? If in life we don’t make such practices, then the same principles should be applied in the financial world and first and foremost, in the market. The desire to get-rich-quick-and-easy makes simple people do really silly things with their money. Which is always only after getting burned that you hear those famous last words, “ … if only I knew …“. Yes, you’ve heard the horror stories time and again and so has everyone else. Yet people continue to write new chapters into this horror story ever so frequently … all in the name of greed, gluttony and sloth.

The financial markets are like an office block in a busy business district. The people who go to work there are serious professionals who take the things they’re doing very seriously. They are highly experienced, very influential and extremely powerful. It is also like a hospital where the surgeons, doctors and nurses are highly qualified and trained professionals. People put their life in their hands everyday.

Then one day, some over-zealous graduate with three days of workshop knowledge comes into this office block and expects to beat everyone out of their jobs. Or this hyped-up graduate with only three days of experience comes into the hospital and expects everyone to trust him with their former lifestyle.

Okay, maybe that’s a tiny stretch but the implications are no different. Every professional takes years to study his craft and then spends more years honing the skills with hours and hours of practice and hard work. There is no easy path to success and you will see failures along the way. The financial market is to be respected and feared. There is no other attitude except humility that will help a trader survive it.

It is stated that more than 80% of the market is made up of those who lose and less than 20% are winners. The truth is that those statistics apply to any profession – how many top rated lawyers, engineers, surgeons, etc are there when compared to many also-rans?

The big money is always at the very top where there are few who have it while the small money is at the end where most have to fight for it. And there are only two ways to be at the top – either you are already there or work hard to get there.

By Conrad

The Rally Continues, Gold Comes Back Into Focus

Numerous events had an effect on yesterday’s session, driving Wall Street and the major currency pairs higher. The Bank of Australia surprised the markets, increasing their central rate from 3% to 3.25%. Gold jumped above the $1000 mark and rumors that the Dollar might lose its status as a major currency in the oil trade, helped to push the indices higher.  The S&P500 closed the session with a gain of 1.37%, while the Nasdaq finished higher by 1.77%.

The trading day started on a positive note, as the RBA mentioned that they expect the Australian economy to return to a normal state during 2010. The bank took certain measures against future inflation, raising their central bank rate.  The RBA finished their speech by mentioning that with inflation now around stable levels and growth likely to be close to trend over the year ahead, they feel that it is now time to start to remove the stimulus provided by monetary policy from the markets.

Even though all the Australian Dollar crosses felt an impact from the bank’s decision the AUD/USD showed the most movement, continuing higher within its recent trend. After bouncing off trend line support last week, the AUD/USD climbed during yesterday’s session reaching the middle of its current channel.

Gold Climbs to new Levels.

The buzz of the day was Gold, reaching an intraday high of $1042.32. Already during mid-day, European hours, this hot commodity broke its prior minor range and headed higher. Within a matter of a couple of hours, Gold broke all resistance levels and climbed higher. Gold finished the day around its highs and held at $1040 during the overnight session.

From a technical point of view Gold has now breached its prior high formed in early 2008. When taking a glance at the weekly chart below one can see that even though this commodity is trading around high levels, indicators aren’t yet pointing yet to an overbought situation. According to some analysts including J.P Morgan, Gold could see higher levels in months to come due to the current situation. With the Fed expected to keep interest rates at low levels, investors are now heading out of the U.S Dollar, rushing to counterparts, which include Gold.

Market Data to Watch Out For

Looking forward, today’s session will be characterized by investors preparing for tomorrow’s interest rate decision. Even though the markets are expecting a ‘no change’ statement from both the banks, recent actions by the RBA have shocked traders, showing them that anything can happen.

GDP is scheduled to be released shortly in Europe and is expected to show a -0.1% figure. In addition, Australia will continue to shake the market, releasing their employment figures later on during the trading day.

For those who still don’t know what this Credit Crisis is all about, here’s a really great visual treat from Jonathan Jarvis that simplifies the whole deal …

The Crisis of Credit Visualized

And then we have Steve Forbes from September last year with a reminder about the importance of a strong USD and what, in my opinion, is the only way to get the U.S. back to greatness; Value Adding and Innovation …

So now that you know the crux of the problem, this is where we are, one year later …

And finally, for your viewing pleasure, on the eve of two of the worst market crashes in history, let’s go back 80 years with two series of documentaries to see how the market destroyed so many lives then and how close the similarities are to our current time …

1929 – The Great Wall Street Crash & Great Depression: Part 1 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 2 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 3 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 4 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 5 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 6 of 6

Here’s the other series on the same subject:

1929 Stock Market Crash Part 1 of 5

1929 Stock Market Crash Part 2 of 5

1929 Stock Market Crash Part 3 of 5

1929 Stock Market Crash Part 4 of 5

1929 Stock Market Crash Part 5 of 5

So that you don’t leave my blog uninspired and unmotivated, take this last video with you … if anyone knows the value of failure, I do and I can appreciate this message. Have a great day!!

[Conrad Alvin Lim]

Price Patterns result when the market is not in agreement on the value of a stock. Essentially, they are the “visual remains” of a big battle between Bulls and Bears. In many ways, they are like weather patterns that you see on the nightly news. Often today’s weather can be forecast by looking at yesterday’s atmospheric data but occasionally (frequently?) the forecast is wrong. Similarly, chart patterns often but not always indicate future price movements.

At their core, most price patterns are combinations of several trendlines. The simplest pattern is the Rectangle Pattern.

In a rectangle pattern, price moves between two horizontal lines of support and resistance. In order to qualify as a rectangle pattern, both support and resistance lines must be touched at least twice. Rectangle patterns have a narrow or wide price range and last from days to months. The pattern ends once the line of support or resistance is broken.

A price break through resistance may be anticipated if volume expands when prices rise and contracts when prices fall within the rectangle pattern. An imminent price break above resistance may exist if prices don’t fall to the support line before rising again.

A price break through support may be anticipated if volume expands when prices fall and contracts when prices rise within the rectangle pattern. An imminent price break below support may exist if prices don’t rise to the resistance line before falling again.

As illustrated above, as soon as the pattern breaks down, the top (or bottom) of the rectangle changes into a support (or resistance) line for the stock.

Rectangle patterns clearly show the battle between bulls and bears with the bulls repeatedly buying when prices hit the support level and bears repeatedly selling when prices hit the resistance level. At some point, one of those groups will “win” and prices will breakout of the pattern. The longer prices have been in the pattern then the larger the “breakout move” will be and the more significant the new support/resistance line becomes.

Another common price pattern is the Triangle Pattern. The triangle pattern is very similar to the rectangle, except that the upper and/or lower trendlines that define the pattern are sloped instead of horizontal.

Go back to the rectangle diagram above and imagine that bearish sentiment about the stock was growing over time. What would that look like? Well, in that case, more and more sellers would not wait for prices to return to the level of the red resistance line before selling. Instead, they would sell sooner. That would cause the red resistance line to become a downward trendline forming a Descending Triangle Pattern.

Alternately, what if buyers started getting impatient and started buying before the stock got back to its green support line? Then a Rising Triangle Pattern would form.

And what if both the bulls became more bullish while at the same time, the bears became more bearish? Then both the red and green lines would be slanted and we’d have a Symmetric Triangle Pattern.

By the way, triangle patterns are also referred to as “coils.” Can you see why? As the upper and lower parts of the triangle get closer together, the battle between the bulls and the bears gets more intense and the suspense builds. Obviously, at some point, prices are going to move outside of the triangle’s boundaries – but will they move higher or lower? Psychological energy coils up like a spring inside of the triangle and the closer the lines get, the bigger the inevitable breakout will be.

As you probably guessed, the diagrams above are not realistic. Typically, triangle patterns have a breakout well before the apex of the triangle is reached. It is the direction of the breakout that is the key question when watching a triangle form. Will the bulls win? Will the bears win?

A couple of clues can be found in the price action that precedes the triangle. If the stock was in an uptrend prior to the triangle, there is a good chance it will break out of the triangle pattern on the upside and continue the uptrend. In addition, rising triangles tend to breakout to the upside while descending triangles often break lower. Symmetric triangles are usually not completely “even” – i.e., the support side may be stronger than the resistance side making the triangle “point up” or, if the support side is weaker, “point down.” In that case, the triangle often breaks in the direction it is “pointing.”

Next time, we’ll look at how to confirm these patterns with volume and examine some real-world examples.