Would you like to start online trading, but you don’t know how? Or maybe you’re beginning and need a support in the form of necessary knowledge? Can you imagine that the most of traders failed? That’s why I want to show you how to trade online stocks!
Basics of Online Trading
I showed you what the stock market is in my last article, different kinds of stock market and which one is the best for people like you and me. That was an introduction to the secret world of online trading, but now we must take the next step, otherwise we will be stuck in the dry theory, which won’t be of much use.
The most of people thinks that the online trading is a “black magic” and you have to get a special economic education, after many years spent at a good university. It’s not true! Today, in the age of internet, the relevant knowledge is available to everyone, therefore the number of traders is increasing year by year. Unfortunately the vast majority suffer losses.
Now you can ask “why is he trying to teach me how to trade online stocks, if the most of people are loosing their money?” Because it is still a great opportunity to make money online! But you need to know the basics to achieve your goals.
The psychological factor plays a fundamental role, not only in trading, but in any business and even in personal life. This is not a place for emotions. Keep the good emotions for beloved ones and relieve the bad emotions by doing sports. What you need is an in-depth fundamental and technical analysis of the markets you want to invest your money in.
Make wise and thoughtful decisions, remembering that you are responsible for your own money, so you must manage it wisely. Read my article Money Management, where you can find a lot of valuable informations and tips, if you haven’t done it yet.
If you are still looking for an answer, “why the most of traders loose their money?“, I’ll give you that answer. It’s very simple: They make decisions based on emotions and they are not prepared good enough to start trading. Remember that phrase all the time!
Now you will learn the fundamental concepts, such as:
- Fundamental Analysis
- Technical Analysis
- Bull and Bear
- Different kinds of graphs
- Formations in the graphs
It really doesn’t matter that you are interested in forex online trading, shares or cryptocurrencies trading. All the rules are the same everywhere. The same as the risk assessment is important everywhere.
You need to know what is the Fundamental Analysis if you want to invest your money in shares of a company, trade forex or resources. Next to the Technical Analysis, it is one of the basic and most frequently used techniques of market valuation and asset value determination. We are going to talk a little bit more about the Technical Analysis later, but now let’s know what is the Fundamental one.
To specify the value of a company, we need to determine its condition first. We use the basic economic indicators. Before taking an action, investors collect all available data about company and study it thoroughly. They check what happens with the asset now and in the past, what are the perspectives for the future, whether the company is doing well.
The economic situation in the region or even in the whole world is very important as well. For example, look what is happening now and two, three years ago. We had the c19 pandemic and a lot of companies suffered losses, because of the lockdowns. Today we have a war in Ukraine and certain companies are loosing money. A lot of businesses have been closed due to the above mentioned issues.
The economic and political situation is fundamental to determine the markets value. If the company works in more then one country, you need to check what is currently happening in each of these countries. What is happening inside the corporation is also one of the most important informations. Look at the Twitter. The new owner – Elon Musk – said that his employees must work more and harder or… leave. What do you think? How does it effect the Twitters value?
Political decisions very often have a decisive influence on the market. Let’s take oil as an example. In last years politicians, religion leaders and other big organisations are pushing their green agenda. Ok, let it be your home work. Go to Google and do your own researches, what happened in the last years and how the oil price was changing.
I presented just an examples of fundamental indicators, that are the the base for the next steps of the Analysis. Trust me, this is a reliable source of knowledge about the current situation of the market and a companies. Now let’s sort the steps on the Fundamental Analysis:
- Macroeconomic analysis – it’s a general evaluation of the market
- Sectoral analysis – evaluation of the sector of the economy in which a company operates
- Situational analysis – analysis of specific companies with details
- Financial analysis – specifying the value of a company
- Final stock valuation.
Let’s summarise the above – the main and most important task of the Fundamental Analysis is to assess the investment profitability and condition of a company or other assets in the long term.
As you know what the Fundamental Analysis is, let’s find what is the next kind of the analysis, which is the Technical Analysis. This method is completely different and chosen by many as a better one. It’s because in this case we are using the graphs, lines, volumes etc and investors say that everything what happened in the past is presented on the graph.
Yes, it is a saving of time, as you don’t examine everything described in Fundamental Analysis, but my recommendation is to use both of them. The topic of Technical Analysis is much longer. I want to show you everything you need, to make sure that you understand what this technique is.
The main task is to specify the best moment, when it’s worth to start purchase or sale transaction using graphs and indicators. There are three main sources of information:
- Number of open transactions
All these informations are available in any trading platform, we have a quick access to check it any time. There are also three main rules in Technical Analysis:
- Trends – prices are always subject to trends. There are certain patterns of behaviour that repeat themselves cyclically, and which can be identified, by using appropriate tools of Technical Analysis
- History likes to repeat itself – take a look at any graph and you’ll find very similar formations in the certain time intervals
- The market discounts everything – the price of an asset explains everything what is happening with that asset.
One of the fundamental contracts in Technical Analysis is trend. It is a persistent of the tendency to change the exchange rate, or its absence, in one direction. One of the major tasks of the analysis is to specify the trend, using all available tools in our trading platform (for example MetaTrader 4). If we know, which direction the market is going, we can open our transaction and just wait for a profit!
There are three kinds of trends:
- Increasing or rising trend – the peaks and throughs in the graph are getting higher and higher
- Decreasing trend – the peaks and throughs in the graph are getting lower and lower
- Side trend, also called a horizontal trend – in this case the exchange rate fluctuates within a constant range, neither rising nor falling.
The peaks and throughs, mentioned above, are the local maximum and minimum price in a specific time.
If we talk about trends, then the trend channel is worth mentioning. Using your trading platform, you have an access to the big number of helpful tools, doesn’t matter that your work on your computer or mobile phone. Just draw the line connecting local peaks and second line which connects the local throughs and your trand channel is ready to help you to find the best moment to start or finish transaction.
Buy when it’s cheap (local through) and sell when when the price is up (local peak) – this basic method always works!
Support and Resistance
The next tool, that investors are using are Support and Resistance Lines. Once we know how to determine the trend channel, it shouldn’t be difficult to set the location of support and resistance, but first let’s define, what they are:
- Support line – on the graph it’s a line that connects all the local throughs. It determines the price level, where the demand is big enough to top the supply, in effect stops further price declines.
- Resistance line – analogically it’s opposite to support line. It connects the local peaks on the graph. The pressure of the sellers is stronger then demand, what results with slowing down the price increase.
Both lines are very helpful, and traders use them very often. Thanks to them we know when to start new transaction and when to expect that market turns back.
Between support and resistance lines we can notice interchangeably or a change of poles. At this point the line of support or resistance is broken through and because of that, the line of support becomes the line of resistance or vice versa. We use the pattern of peaks and thousands to specify the dominant trend, which is continued until it collapsed when:
- Upward trends price breaks out support – a permanent break in the rule of higher and higher throughs
- Downword trends price breaks out resistance – a permanent break in the rule of lower and lower peaks
We can notice a lot of different formations while watching the graphs no matter what assets we are interested in. Formations are one of the important elements of technical analysis and could be very helpful if you know how to read them. I’m going to show you the most common formations.
That characteristic shapes are been created usually in the periods when the trend is changing for example from upward to downward one, but also in transitional period. So they can herald the reversal of the current trend, its continuation or a break between trend. This is especially useful in long-term trades on higher intervals, which we will talk about a bit more when discussing charts.
1) Trend Change Formations
- Head and Shoulders Formation – similar name to the popular hair shampoo, but has nothing to do with it. It has a shape of head and shoulders and that’s why we call it like that. Usually occurs at the end of a long uptrend and heralds it’s reversal
- Inverted Head and Shoulders Formation – this is the reverse of the previous formation, which is easy to guess. Indicates the reversal of downward trend
- Formation “W” (double bottom) – two local throughs. After the second through, there is a breakout above the previous maximum price, with a clear increase of trading volume. It is usually a final phase of a long or medium downward trend
- Formation “M” (double peak) – this is just the opposite of the Formation “W”.
2) Trend Continuation Formations – they show that the horizontal trend, that appeared on the graph, is just a break in dominant main trend, could be often called a correction
- Descending Wedge – it occurs as a correction in the middle of an uptrend and shows us that the price will continue to rise soon. To determine wether we are dealing with this pattern, we can draw two lines on the graph – one connecting local peaks and second one local throughs. Look at the picture, successive peaks and throughs have lower and lower prices. The return of increases will take place when the price brakes the upper line drawn on the graph and this will be accompanied by a clear volume increase
- Rising Wedge – is the mirror image of the Descending Wedge
- Flag – it’s very similar to the previous formations. The difference we can see is that – if we connect the local peaks and throughs, the two lines will be parallel to each other, arranged at a similar or the same angle. This is also a corrective formation, that means the same as both Wedges, the Flag promises continuation of main trend once you notice increase of the volume and the price breaking out the top line.
- Vane or Symetrical Triangle – next formation that heralds continuation of the main tren. The lines connecting local maximums and minimums are not parallel to each other, but meet to form an isosceles triangle.
Can you imagine what online trading would be like without using the graphs? Would the Technical Analysis, discussed above, be possible at all? Certainly not! Most people are visual learners, so using graphs is very helpful. All these formations, which I wrote about above, make it easier to decide wether to start or end a transaction.
Every graph provides a lot of informations, what is happening on the market. There are a few kinds of graphs and we need to know how to read them, otherwise we will fail.
1) LINE GRAPH
Line graph is the most common kind of graphs not just in online trading but everywhere. Any statistics can be presented by it. It’s very simple and to be honest NOT recommend in trading. The length of the graph is usually a time range, and the height represents a value. I think you remember this graph from math class in school so let’s jump to the next one, which is…
2) BAR GRAPH
It’s more complicated graph the the line one. The Bar Graph could be used for trading as it provides much more useful informations. Consists of bars in the form of vertical lines and horizontal ones – the one on the left is opening price, and one on the right is closing price.
The length of the vertical line is the maximum price (top of the line) and minimum price (the bottom of the line). Every bar shows how the price changes within a specified time period – interval. You can change intervals if you want. If you choose one hour interval, then one bar is one hour. That bar tells you what was the opening price when the hour has started, what was the local peak and through within the hour and what was the closing price in the end of the hour.
If you choose daily time interval, then one bar is one day. It depends on what would like to trade. For example short intervals are good to trade Forex, sometimes even 5 mins interval is perfect. For a long-term transactions, like shares, the longer interval is definitely better.
3) CANDLESTICK GRAPH
The appearance differs from the previous graph in that we have so-called candles instead of the bars. This graph has been created by Japanese entrepreneur – Munehisa Honma. You can read more about him on Wikipedia. Sometimes we call it Japanese Candles Graph. It is the most used graph by all the traders in the world. That’s why we are going to concentrate on it instead two others. The candles are usually black and white but could be also green and red. White or green represents increases and black or red losses.
Each candle consists of:
- Body – a visible rectangle, that represents opening and closing price. In white or green candle the bottom is opening price and top is closing price, but in black or red one the top is opening and bottom closing price
- Shadow – a line above or below the body. Represents local maximum (above) and minimum (below).
If there is no shadow, that means the local maximum or minimum is the opening or closing price.
You have learned about the formations on the graph, but did you know that the single candles create a combinations and they are a source of very helpful information? I’m going to show you now how to read the candle graph correctly to increase the probability of success. Take a look below where I presented the candles formations:
- Doji – one of the most important candles. It could be taken as a separate formation or a part of multi-candle signal. Opening and closing price is the same, and depends on the length of the shadow it can take a different shapes, for example letter “T” or plus “+”. It heralds a coming trend change
- Marubozu – has no shadows, that means the opening and closing prices are local maximum and minimum or opposite. The upward candle is letting us know, that the demand has been controlling the course of the trade all along, and the downward one, the the trade was under the supply’s control
- Embrace the Boom and Bust – reversal pattern in both upwards and downwards form. The second candle covers the first one, and shows which way the market will go
- Upwards and downwards Harami – two candles, upwards and downwards ones, but this time the first candle is larger and completely covers the second one. If the second candle is white or green then the market will go down, and vice versa – if the second candle is black or red, then we can expect that the price will go up. There are also a Harami Crosses. In this case, the second candle is a Doji Cross (+). If the first candle is increasing one then we talk about Bullish Harami – we expect the price will go up. Bearish Harami is when the first candle is black or red, and then the price will go down
Another interesting formation is Hammer, which has a several forms and is letting us know about coming trend change:
- Morning and Evening Star – the Morning one is the Bullish formation of three candles: first one is decreasing with a long body, second one is short decreasing and the third one increasing and it’s closing price is above the half of the first candle. Obviously the Evening Star is a mirror image of the Morning star and says that the market will go down. In both cases the middle candle can take a form of Doji Star
Hangman is very similar to the Hammer, the upper shadow is short or the is no upper shadow, but the lower shadow is long. If the upper shadow is long and lower one short then we talk about the Falling Star, and both of them herald coming trend change or its correction.
All these formations above, as you notice tell us about tren change or its correction. But there are also a trend continuation formations such as:
- Three White Soldiers
- Three Black Crows
- Three Bulls and Three Bears
- Tasuki Gap Up and Down
These formations inform us to keep the transaction open. In my opinion the trend change formations are more important, because if you will see them, you’ll know what action to take.
Remember about the volume which is also important part of the graph!
I realise that I have presented a lot of information to you, but I believe that there is no other way to show you all the important elements of analysis. Just in the last few years the number of trader increased and the most of them failed, because they haven’t been prepared to start online trading. In many cases emotions take over, and this results with the loss of capital instead of the desired profits.
If you want to know how to trade online stocks or Forex or anything else the first thing is education. Many traders argue about which analysis is better, Fundamental or Technical one. Trust me, that you need to use both of them. Especially with the long-term transactions. We live in the time of the global crisis when everything is possible. Some assets are worth much more and others less. It depends on what asset you want to invest in.
Technical analysis and inability to read a graph combined with observation what is happening in the world will definitely help you to achieve a success, because any time is good to make money.
Remember to make a wise decisions as you are the one who is responsible for your own life and money! I want to help you with that, so if you have any questions please let me know.