Before I get to Part II of How I Started Trading, I want to answer a couple of Questions that were emailed to me about Part I. They all centered on what was the most important concepts to learn. Well to be truthful, I like to use the “KISS” method. (Keep It Simple Stupid) I found that the simpler I can keep things, the more I can remember and apply. This is what I focused on learning and what I recommend learning before you start trading.
1. Market Terminology – I had to learn the market terminology to follow along with what is happening on Twitter, in chat rooms, etc. Without this fundamental knowledge you will fall behind and never catch up. The terminology I learned came from chapter 2 of Textbook Trading DVD. It starts off with basic terminology like buy, sell, short, buy to cover, limit order, market order, margin, short squeeze, and the exchanges. Then it gets into typical chat room terminology and acronyms and then Level II terminology. However, there are a lot of free resources on the internet such as YouTube where you can learn this terminology
2. Basic Supply and Demand - Next, I learned about how supply and demand effects the price action of a stock and why the stock price moves up and down. This is very important to understand and connect to what you are seeing when you are following a stock. This knowledge, though it may seem elementary, is very crucial when you are analyzing the action of a stock.
3. Technical Analysis – If you are just focusing on day or swing trading versus long term investing, you must understand basic technical analysis. In my opinion, the basics is all you will ever need. In technical analysis you are basically looking at charts, identifying support and resistance levels, predicting possible entry and exit points, and setting educated risks.
a. Charts – This gives you the story. It allows you to visually see what’s happening as a stock is being traded. I use candlestick charts and I believe there is nothing better. I learned basic candlesticking. None of the candlestick patters you read about in books or magazines, just the basics on how to read the candles. I learned how to read charts over multiple time frames, daily, 6 month, 3 month, 30 day, and intraday charts. I learned how to find support and resistance levels. All these moving averages and studies on charts just add too much noise and for me, took my focus off of what’s truly important, support and resistance. Tell me which chart you feel makes more sense to you:
These charts are from FINVIZ.com which offers part of their services for free. I always eliminate the “noise” from my charts.
Once I received this basic market education, I was able to follow trades and understand what was happening. Only then was I able to begin studying the trade set-ups and developing my own comfort level for how I wanted to trade. I was able to make educated decisions on what trading tools I needed and which ones made sense for how I wanted to trade. When I first started trading I did not do this and I lost money. I was blindly following throwing good money after bad and there is no future in that.
WARNING! There are a lot of videos and publications on the internet teaching their version of the same thing. It is imperative that you pick one person and lean from that person and the traders in his/her community. All of the “good” ones have free videos on their YouTube channel so that you can take a free ride along with them. I took advantage of it and that is how I ended up where I am today. Listening to too many people from multiple trading communities is a recipe for disaster.