3 Key Elements of Online Trading: Analysis, Technique, and Psychology

Analysis in Online Trading

Beginners, or rather those who improvise as traders, perhaps because they are attracted by an aggressive or worse false advertising message, often believe that online trading is the tool to make easy and quick money. This belief reveals an association - not even so implicit - between gambling and online trading. A belief, to be clear, is false. Online trading is as different as can be from gambling. Or rather, it is possible to approach trading as if playing a betting slip, but in this case defeat would be assured. And defeat, in this case, means the loss of capital. One of the differences between gambling and online trading lies in the need for analysis. In online trading, unlike gambling, it is a compelling, acclaimed, inevitable necessity. The market is studied and, based on the evidence gathered, one invests. This is the mechanism and there can be no other if one intends to earn and not end up like kamikazes (perhaps unwittingly enriching a dishonest broker). Analysis, and specifically market analysis, is important because it allows achieving the intermediate goal of every trading activity. A goal that is not only intermediate but conducive to success: forecasting market movements. Now, it would be better for everyone to predict prices but foresight is a gift that goes beyond human capabilities, so, very simply, one must "fall back" on studying. Analysis in online trading, as in the world of investments in general, allows using the present and the past to discover, partially but sufficiently, the future. There are three types of analysis: technical, fundamental, sentiment. Technical analysis is the study of data that come directly from the chart and their re-elaboration through statistical models in order to obtain signals. Statistical models act through indicators. The main axiom is that the market tends to repeat itself, so the same consequences follow the same event, or at least very similar ones. If the price today behaves in a way similar to how it behaved a year, two years, ten years ago; then in the near future it will move as it moved - all other things being equal - like a year, two years, ten years ago. The indicators, which are tools for processing raw data, are very numerous and involve elements such as price, volumes, lows and highs and so on. Each has its own rules and its degree of reliability, which however varies from system to system. It is easy to approach technical analysis incorrectly. The advice is to use few indicators, and in such a way that the results of one can be confirmed or refuted by another. If several indicators give the same signal, that signal is correct. You must not overdo it, more indicators do not mean more chances of success, on the contrary. The risk is generating background noise and confusing false signals with true signals. The second type of analysis is fundamental. Here the register changes completely. The data are not provided by the chart but by everything that is outside it. Specifically, the economic, political and even social news that, in some way, can influence investors and therefore prices. Fundamental analysis is difficult to practice because, unlike technical analysis, it does not rely on the use of indicators that automatically return signals, but on the interpretation skills of the individual trader. An event can provide a signal but it may also not give it, since many factors influence prices. For example, if a central bank raises rates, the currency appreciates, but if the GDP figure is published at the same time and it turns out to be disappointing, there is a downward push. Who wins? Expert traders have the answer, but only if they are able to evaluate each single element organically, to place it in context. In short, to interpret it. The main advice, if you want to try your hand at fundamental analysis, is not to do your own thing. As already anticipated, interpretation skills are required and these are not acquired in a few months of trading. The secret is to rely on those who know more than us, on experts and analysts who know how to read the market, the real economy and politics, and who publicly say their piece. The difficulties are there even in this case, since they are often representatives of an interest, because maybe they work for an investment institution or a bank. The good news is that all papers declare authorship, so it's easier to filter content through the lens of objectivity. Another piece of advice is to study the market movers well, i.e. the events that influence prices, specific to the asset with which you are trading, in order to optimize energy. If we work on the euro-dollar, it is superfluous to sift through the decisions of the Reserve Bank of Australia, but it is better to focus on those of the ECB and the Fed. Then, it is essential to understand the balance of power between events, to understand how much one is able to prevail over the other. In the short term, inflation, for example, influences the decision on interest rates; on the other hand, the decision on interest rates influences GDP. Finally, there is Sentiment analysis. Sentiment is the climate, emotional rather than rational, that envelops the market. It is the set of feelings of confidence and distrust that move investors. The axiom of rationality is false, or rather it is not always true. Investors can be motivated not only by rational reasons but simply by feelings such as fear, hope, euphoria. These feelings generate actions, and actions influence prices. For this reason they must be analyzed. Now, everyone's heart is unexplored territory for the rest of the world, but there are channels in which these feelings are expressed in words or deeds. Investors talk, investors communicate, even their actions reveal what they feel. The problem is where and how. The spread of social media has made things easier, since it has given each investor a megaphone. Basically, it's not even very difficult to guess, from a tweet or a post on Facebook, the sentiment behind it. But, again, there is the need to aggregate the data and re-process it. The advice is the same as that given regarding fundamental analysis. Let yourself be guided by those who know more than you, or have better tools. If, on the other hand, you have Data Intelligence software available, then you can analyze the Sentiment yourself.

Psychology

Common sense, especially that which belongs to people who have never approached online trading, assigns precise characteristics to the successful trader: intelligence, coldness, competence, courage. In short, if he is not an automaton, he is not far from it. After all, the image is that produced by the many finance-themed films. Too bad this is a false image, which does not correspond at all to reality. The trader is always a man, and as a man he has a bitter enemy: himself. Specifically, his psyche. To be even more precise, his emotions. For this reason, psychology plays a major role in online trading (as in any other form of investment, especially if speculative). After all, the stakes are always high. It's about money, after all. And money means planning, serenity, happiness (in spite of proverbs). It can be deduced from this simple reasoning that the sentiment that most grips the trader is fear. When we talk about the psychology of trading, we are mainly talking about fear. Now, fear, this is well known and peaceful, saves a man's life. In any situation and at any time. It is fear that allows you to identify a danger and avoid it. Fear is healthy, up to a point. It becomes pathological when it generates, instead of a physiological and useful acute stress, a chronic stress, which paralyzes and compromises lucidity. When fear is paralyzing, it harms the trader, and he must run for cover. There are various techniques, all clearly difficult to put into practice (but necessary) to neutralize fear or render it harmless. Money Management. Wise capital management reduces fear. By wise management we mean a set of techniques that determines the volume of investment in order to achieve a goal: to avoid the trader spending more than he can afford, in case of defeat. The certainty of not being able to end up on the pavement is a panacea, this is peaceful for everyone. Do not increase your exposure, unless necessary. If you are used to a certain pace, keep it up. A given pace, in fact, corresponds to a given amount of psychological pressure. If you increase the pace, you increase the pressure and you may not be able to sustain it. Plan. The pitfalls are hidden above all in the operational phase, i.e. when you are physically on the market and the investment takes place. In short, when the position is open. Now, the secret is to plan a lot, as much as possible, even the answers to the unexpected. If you plan and follow your plan pedantically, you can experience the operational phase almost as an observer. In short, you will not have to decide anything in the midst of the storm, when clarity is inevitably compromised by the sense of danger, stress, fear in fact. If we are talking about a trading plan and operations, however, we are already talking about the third pillar, that of technique.

Technique

The trader must have a trading plan. Having a trading plan means establishing a set of actions that guide him clearly in the trading activity. Actions that concern the analysis, the size of the position, the moment of entry and exit from the market, all aimed at achieving objectives, better if quantified from a monetary point of view. Said like this it is very easy, but unfortunately it is not at all, for at least three reasons. There is no trading plan that is good for everyone and for all seasons. The objectives change from trader to trader, each phase of the market has its own characteristics, each trader has his own propensity for risk. This means that, however well designed the plan may be, to be used by others than its creator, it must be customized. Unless, of course, it's a basic plan. Complex plans must be flexible, they must bend to the personality of the trader and the contingencies. The trading plan often clashes with reality. The trading plan is drawn up on the basis of the conditions that, at that precise moment, the market offers. Those conditions, unfortunately, may fail and be partly replaced by others. The trader must therefore draw up the plan taking into consideration, almost anticipating, as many possible events - and unforeseen events - as possible, but he will inevitably always leave something out. The trading plan often clashes with the psychological sphere. The trading plan must be followed. It serves this purpose: not to improvise, above all not to improvise during the operational phase, when the psychological pressure compromises lucidity. Yet the emotional pressures are so overwhelming as to push the trader, out of fear more than anything else, to betray his own plan, to no longer trust it. Without prejudice to the fact that, if the plan does not work, it must be changed. This realization, however, certainly does not come after one, two, three trades. The trader is therefore literally forced to develop a sense of discipline, to get used to forcing himself. Now, we cannot propose a guide here to draw up a plan suitable for your needs. However, we can present a very basic plan, which can be taken as a model to create a more complex one. The plan is simple. Before opening any position, indeed before doing anything else, identify the lows and highs, both daily and weekly. The daily low will act as the first support, the weekly low will act as the second support; the daily high will act as the first resistance; the weekly high will act as the second resistance. If the trend is upward, enter long, place stop losses on supports and take profit on resistance; if the trend is downward, enter short, place stop loss on resistance and take profit on supports.