TRADING FUNDAMENTALS
“Life is an adventure full of changes. Embracing them with courage, confidence and a sense of adventure is essential for success.” — Roy T. Bennett
As you know, from the IAESIR team we seek to facilitate your path to financial freedom. We work every day to adapt and improve our “IAESIR AI” algorithm so together we can find the best way to do it.
Therefore, our community is born with the aim to be stronger and to make this path easier and more fun. We want to share with you what we know well and thus get yourselves involved in the project.
In this article we will discuss the fundaments that anyone should know about trading. We do not pretend that you will become a successful trader (as we already saw in our article “HOW TO BECOME A SUCCESSFUL TRADER”), but it will surely allow you to better understand one of our passions and understand how we work.
TYPES OF TRADING
There are many types of trading, each classified in different ways (number of operations, time frame…) For the sake of simplicity, we will group them into 3 main types:
DayTrading: this type of trading refers to traders who open and close their trades on the same day. As is obvious, it is the most complex and risky. It requires a great knowledge of the markets and a great amount of hours (between 4 and 6 hours a day). Within this category we also find scalpers, daytraders even more focused on the short term who open and close their trades in a matter of minutes. The strategies are very elaborate and risk management has to be very calculated in this type of trading.
Swing Trading: this category includes all the traders who carry out trades that are maintained for days, weeks and even months. It is not as professional as the previous one, but it is very popular because it allows trading without being completely dedicated to it. The knowledge required for this operation in general is not so high and the mentality does not usually play such bad tricks. The analysis of the market is not so exhaustive and the strategies are usually simpler.
Position Trading: this is the case of trading focused on the long term (several months, even years). It can be considered an extension of Swing Trading because it is carried out with the same analysis as the previous one. It is very similar to long-term investment (value investing), but its difference lies in risk management, since we will not always be invested. If our strategy does not work we will get out of the trade (active management), while in value investing we will remain invested despite the movement against the price (passive management).
TECHNICAL ANALYSIS
Technical analysis is a methodology used to analyze the behavior of the price of financial assets, with the aim of predicting their future behavior. It is based on the study of historical price charts and patterns to identify trends and patterns that can be used to make buying and selling decisions.
In trading, technical analysis is the most widely used tool and is used to identify buying and selling opportunities, set price targets and establish loss limits.
Technical traders use charts and tools to identify patterns and trends in asset prices such as the ones we will see below.
Technical analysis is based on the idea that price reflects all relevant information about the asset, including economic and political factors. That is why it is considered that the analysis of historical price patterns can provide information about the future behavior of the price.
CHART TYPES
Generally a trader, for the analysis of the historical price of an asset uses 3 types of charts:
Line chart: this is the most basic type of chart, showing the closing price of an asset over a given period of time. It is useful for identifying long-term trends.
Bar chart: is similar to the line chart, but also shows the range between the highest price and the lowest price over a given period of time. It is useful for identifying price volatility.
Candlestick chart: similar to the bar chart, but uses colors to indicate whether the price has risen or fallen over a given period of time. It is useful for identifying price patterns.
TRENDS
Trends are patterns of price movement that continue over time. Traders use trends to determine the direction of the market.
There are three types of trends: Uptrend (bullish), downtrend (bearish) and sideways.
Bullish: is a trend in which the price of an asset moves in an upward direction over time. An uptrend is considered strong when the highs and lows are increasingly higher.
Bearish: a trend in which the price of an asset moves in a downward direction over time. A downtrend is considered strong when the highs and lows are increasingly lower.
Sideways trend: a trend in which the price of an asset moves in a defined range with no clear direction. In a sideways trend, prices move up and down within a set range, without an uptrend or downtrend.
SUPPORTS AND RESISTANCES
In technical analysis, supports and resistances are price levels where the asset has shown a tendency to stop or reverse its movement.
Supports are areas where the price has shown a tendency to stop its fall. That is, it is a price at which buyers are willing to enter the market and the price is less likely to continue falling.
Resistances are price levels at which the asset has shown a tendency to stop its rise and decrease in price. That is, it is a level at which sellers are willing to enter the market and the price is less likely to continue rising.
Traders use these support and resistance levels to determine entry and exit points in the market, as well as to set price targets. If the price breaks a support or resistance level, it is likely to continue moving in the direction of the break.
In conclusion, after analyze the basic tools and concepts of trading we now understand much better the markets and their price behavior, allowing us to see more than the average with this simple tools. In future posts we will talk about risk management, a complex but very important topic.
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