Understanding Trading: A Beginner’s Guide
What is technical analysis?
First and foremost, you want to become familiar with the method of trading that’s used by so many traders, from beginners to advanced. It’s the type of trading we use at Trading College and what we teach our students. Now I’m sure you’ve heard the phrase “history repeats itself”? Essentially, this is the idea behind technical analysis; the notion that future price moves can be determined by historical price moves.
A Technical Analyst looks for trends and patterns on trading charts to indicate future potential moves in the market. They’ll use software and strategies to help identify market moves and ensure they find the best trading opportunities.
What is a chart?
Well that’s all well and good, but what is a chart? Put simply, technical analysts use charts to analyse and evaluate markets to predict price movements. There are several types of charts a trader may use, including line, bar and candlestick charts. The latter is what you’ll see on our coaches screens.
So really, a chart is where trading happens and how you determine what and when to trade. Think of it like an analog clock – you analyse where the clock hands are on the clock face to determine what the time is. With trading, you analyse lines, bars and candlesticks to determine your next trading move.
There are many charting platforms you can choose from, but one of the most popular that our coaches and students use is ProRealTime. This is because it’s cloud-based, all of our software is fully compatible and it’s very easy for beginners to use. However, if you’re already using a charting platform then don’t feel like you need to change. After all, which charting platform you use is completely your choice.
What is a candlestick?
“So what’s a candlestick?” I hear you asking. Candlesticks are those blocks you see on the chart with the lines coming out of them. They’re called a candlestick because, well, they look like a candlestick. The coloured in or outlined block is called the body and the lines are called shadows, wicks (see why they’re called candlesticks?) or tails. The body indicates the opening and closing prices for the time period, whereas the shadows indicate high and low prices for the time period. A green candlestick means the close is higher than the open, while a red candlestick means the opposite; the close is lower than the open. Are you still with me?
What is an indicator?
Many traders will use indicators to make analysing their charts easier. An indicator is a mathematical calculation used to measure current market conditions and forecast trends. There are many indicators available to traders, and some you’ll hear us talking about here at Trading College are:
- Moving averages (MAs) – identifies the direction of a current price trend
- Exponential moving averages (EMAs) – similar to the MA but with a greater importance on recent data points
- Pro-Trading System – indicates where the market is going and tells you exactly where to place your entry, stop and profit target
- Trend Predictor – signals which way the market is going to go on the next candlestick, whether up or down
- Moving average convergence divergence (MACD) – compares two MAs to detect changes in momentum
- Storyteller – tells you when a trend is about to start and end
- Fibonacci retracement – pinpoints the degree to which a market will move against its current trend
There are literally thousands of indicators out there, but these are some of the best that our coaches use to ensure big profitable trades. And instead of relying on just one indicator to help you analyse the market, you can use a combination to really reap the benefits. For example, you could use the Pro-Trading System to tell you where to place your entry, stop and profit target, and use the Storyteller to tell you when the trend is going to start and end. This strategy helps traders save time and energy by smartly using their resources to do the hard work for them. They’re especially helpful for new traders or traders who are struggling to see a profit.
What can you trade?
Now we’ve talked about what technical analysis is and what technical analysts use to trade, but we haven’t talked about what you can trade. The beauty of trading is that you can really trade anything! You want to trade shares? Go for it. Interested in trading cryptos? You can trade it! Fancy exchanging some foreign currencies? Trade away!
Understanding the difference between these can be confusing at first, so here’s a short definition of each for you;
Shares: units of ownership of a company that provide equal distribution of the company’s profits, e.g. a company has 100 shares and you own 10 shares, therefore you are entitled to 10% of the company’s profits
Commodities: raw materials or primary agricultural products that can be bought and sold, e.g. Gold
Stocks: a type of investment representing ownership shares in a company, e.g. blue-chip stocks
Cryptocurrencies: digital currencies or assets, e.g. Bitcoin
Forex: foreign exchange market – the exchange of currencies, e.g. GBPUSD
Our coaches tend to trade forex and you’ll often see them focusing on some common markets. Sticking to a few markets instead of scatter-gunning across many markets will help you hone your strategy and keep you focused in your trading.
This isn’t to say you can’t start trading something different if you wish. However, if you do start trading a different market then you should be sure that this approach aligns with your trading plan and that you understand the risk involved with trading this market, or how it may differ to other markets.
What is a broker?
Finally, you will need a broker to trade. As an individual trader you’re what’s known as a retail trader. This basically means you trade for a personal account instead of on behalf of a group or institution (e.g. banks, mutual funds, pensions). As a retail trader you need to use a broker who will act as an intermediary between you and the other party. Think of them as the sales representative or the middleman.
For example, let’s say you’ve analysed your charts, you’ve checked your indicators and you decide you want to go long the market (to go “long” means to buy, to go “short” means to sell). You will place your trade with your broker who will place the order on your behalf. You’ll analyse the trade and when you’re ready to sell, you’ll use your broker again to sell, hopefully with a profit!
Another way to think about it is like this. If you’ve ever been travelling you’ll have needed to change money at some point. You’ll probably have noticed, and potentially even used, one of the currency exchange desks at the airport. On the boards you’ll notice two columns for each currency; a buy and a sell column. You want to buy some Japanese Yen for your trip to Japan, so you check the sell column next to Yen on the board. This is the price you are going to buy the Yen for. The currency exchange company (such as Travelex or Western Union) acts as the broker to help you complete your transaction. Once your Pounds are exchanged into Yen, you’ve now participated in the Forex market.
When you get back from Japan you’ll want to sell your Yen, so you’ll go to the currency exchange company and check the buy column. This is the price you can sell your Yen for, and chances are the price will be different from what you bought it at. This is the ever changing Forex market!
Choosing a broker can be difficult, but one of the key things you want to be sure of is that the broker you use is regulated. This is very important! The last thing you want is to set up a trading account with an unregulated broker that’s going to steal all your money. You’re here to make profits, after all!
Some things that people use to decide on which broker to use will be costs and fees, charting platform, and what types of trading they allow. For example, some brokers allow you to spread bet, others don’t. If you’re unsure on which broker is best for you, you can see the brokers we trust here. Otherwise, give us a call and we can have a chat!
That’s a wrap!
So there you have it. Whilst this list isn’t exclusive, it does outline some key things you need to understand when you first start trading. It can be daunting, but with the right education and tools in place you’ll be trading and making those big profitable trades in no time. Happy trading!
Take the First Step Toward Your New Trading Career
Lee is qualified at The Society of Technical Analysts, having passed his MSTA and CFTe with flying colours. To see Lee and our coaches use technical analysis, you can access our Live Trading Room 5 days a week. If you’re looking to step into the world of online trading, we’d like to help. We offer both courses and mentoring opportunities to help you trade with skill and confidence. Come along to our free Learn to Trade Live one-day course to really get your foot in the door! See here for more details and to find a date near you. Registration is now open for our Pro-Trader Programme!
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