The Basics of Trading

This is a discussion on The Basics of Trading within the First Steps forums, part of the Reception category; Hi all Techcherry has asked me (well I offered) to do a step-by-step guide on how trade. BEFORE I START: ...

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Old Jan 26, 2003, 12:53pm   #1
 
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The Basics of Trading

Hi all

Techcherry has asked me (well I offered) to do a step-by-step guide on how trade.

BEFORE I START: I want to point out that this is NOT going to be a Holy-Grail, and you will be disappointed if you think it is.

Also, don't invest your money based on anything I say. Remember it is your own money on the table and not mine!!

Thirdly and most importantly. Anything you learn within this thread must not be used against me in any Trade2Win competition!!!! I want to win occasionally.

Ok, now the legal stuff is out of the way. I would like to say that there is no right or wrong answers in the market. The important thing is that we share our views, and all learn together.

If at any point I miss out something, or I haven't explained something clearly enough, then please post a question. A Chinese saying says
Quote:
A man who asks a foolish question is foolish for a minute, a man who doesn't ask a question will remain foolish for a life-time
...and this is something I really want to embrace.
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Old Jan 26, 2003, 1:10pm   #2
 
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FTSE Beater started this thread Ok let's start with the basics of Support, Resistance and Trendlines. This really is the core basics of trading, and in my view is the foundation of a trading strategy. We will move onto indicators in time, but first

How Candlesticks are constructed.

There are 3 types of bars that can be used for charting. A line chart (which connects the closing prices), a bar chart and a candlestick chart.

A bar or candlestick chart will show the high, low, open and close for a set period (so on a daily chart, one bar represents one day). The high and low data is very important, so a line chart is no good for that.

There is no real difference between a bar or candlestick chart – they both show the same data so it’s personal preference – but I prefer to use candlesticks.

Click the image to open in full size.

The above just shows how a bar or candle is created. The up candles have light or hollow "bodies", where as down candles have dark or filled "bodies"


Ok onto the technical stuff, Support, Resistance and Trendlines

Support:

Support is a level on a price chart, that price hits and finds a large amount of buyers, and hence the price starts to rise again

Click the image to open in full size.

On the chart above of Cadbury’s you can see that every time price hit 399 / 400, it found enough buyers to force the price up.

Resistance:

Resistance is the level at which a price chart struggles to break above. When price hits a resistance level, the number of sellers is strong (as they know that the next move is down), and it takes a lot of buying pressure to get it above this level.

Click the image to open in full size.

In the above chart you can see that there was a large number of sellers at 423, which was too strong for the buyers to push through.

Trendlines:

Trendlines are made by connecting 3 or more points along the same line. They either connect the tops of the highs together or the bottoms of the lows. Trendlines work because everyone sees them and know that the next time price hits that level, a reversal should happen, so they either rush to buy or sell depending if it is an uptrend or downtrend.

Click the image to open in full size.

On this chart I have connected the highs together to create the straight line (or trendline). This is a downtrend because the trendline is pointing down (simple really)


Click the image to open in full size.

On this chart I have connected the lows together, and as the lows are rising, it is in an uptrend.

….and that’s pretty much the foundation to trading. I know it sounds simple (and many of you would all ready know this), but it works and that is the main thing.


Ok, enough of me talking. Take a look at the chart for Anglo American, which has the symbol or ticker AAL.

We’ll look at the Daily chart (so every candle represents one day), and look at it over the last 6 months, and I would like you to draw in any support, resistance and trendlines you can see that you think are relevant. Remember there is no right or wrong to this.

For those of you who haven’t got a charting package, you can use the charts on www.advfn.com It’s free to sign up, and they do have a good service.

The link for the chart in advfn ishttp://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3= To draw trendlines onto the chart you will need to load it up onto a charting package. To do this have a look at this link, which goes through and shows how to post charts onto Trade2Win. http://www.trade2win.co.uk/boards/sh...&threadid=4624
To draw the trendlines. Once the chart is on the paint package, you can draw lines and then save the image, complete with trendlines, ready to be posted.

It would be great if you could post a chart into this thread, and give some reasons why you’ve decided to draw the lines you did. To take it a step further, could you please write down what you would do based on the chart. So either buy now, sell now, stand to one side, buy at X price or sell at X price, and we’ll see how the chart progresses over the days and weeks to come.

Well that’s part one done, and I look forward to seeing your interpretation of the Anglo American chart.
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Old Jan 26, 2003, 2:33pm   #3
 
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Post first attempt...

Hi f...tsuie!!!

Very good, simple and approchable, if any day you decide to quit in the trading world I'm sure you have a future in teaching...
1. the big black line its theneral trend which I believe its a upwards...
2. the red one which is after the resistence point the reverssal efect a big & fast fall in the price share, which I believe will see for the next few days continuing...

This is my first interpretation, please correct me ...
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Old Jan 26, 2003, 2:37pm   #4
 
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I don't know why when I attached my .gif image doesn't come on to the screen...
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Old Jan 26, 2003, 7:58pm   #5
 
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Hello everybody,

This is my first post on the T2W boards. I have never traded a share in my life, not directly anyway, but I find the whole topic of trading addictive reading.

This is my first attempt at technical analysis so feel free to laugh

AAL has been steadily moving upwards for the past six months, therefore I would wait and see if it dips below 862 and buy it on the way up at 862. I would then hope to hold it for 2 weeks and sell at 950 (which is a little lower than my resistance level).

From everything I have read about trading I believe it pays not to be too greedy and pick a realistic target to sell at before buying. Hence I would sell at 950 and be v. happy with ~10% profit.

What worries me about my analysis is it treats the share price movements as clockwork. Surely this is often not the case?

FTSE Beater are you willing to say what your analysis is? I would really appreciate it, especially if you analysis is totally different to mine.

Regards
Paul.
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Old Jan 26, 2003, 8:26pm   #6
 
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Hi Paul,

You are right of course, all trades are not clockwork.

In fact probably only a small percentage are. This game is all about mathematics. You need to make more than you lose just to cover costs.

It is therefor essential that losers are small and winners are relatively large.

In the case of AAL it is showing a steady five month uptrend. Personally if I were to buy, my protective stop would be around 820p. I also wouldn't be adverse to getting in around the current level of 875p, but my initial target price would be around 1080p

Therefor my risk is 55 points and my profit target 205 points. Therefor from a textbook prospective a viable trade as the risk/reward ratio is better than 3:1.

I would certainly be looking at tomorrow though for a better entry to improve this still further.

JonnyT
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Old Jan 26, 2003, 10:11pm   #7
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To JonnyT.

I am very interesed in your explanation of Risk Reward ratio,I am trying to learn how to use it in my trading.I liked the way you set it out with the AAL example.Can you give me some more examples with other chart patterns. I have picked up the cup and handle one from this site and would like to see others.
I know the theory 3to 1 etc .
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