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Technical Analysis As a Tool for Forex Trading Success This book features the in and outs of currency trading as well as strategies needed to achieve. A simple, straightforward guide to the fundamentals of technical analysis Technical Technical Analysis For Dummies, 2nd Edition explains the basic principles and . For Dummies; 2 edition (January 11, ); Language: English; ISBN [DOWNLOAD Free] Technical Analysis For Dummies 2nd Edition Ebooks [ Read E-Book Online] at. osakeya.info Free Download Books Technical Analysis For .
These swing traders watch the market during the day but rely on orders placed outside market hours to enter or exit their positions. And if they trade in tax-deferred accounts, like an Individual Retirement Account, they can ignore the tax issue. In fact, doing so can lower them if it causes you to overtrade or react to market gyrations.
Swing traders who trade full time devote several hours a day to trading. They research possible trades before, during, and after market hours. And they handle pressure well. After all, if swing trading is your main source of income, you face a lot of pressure to generate consistent profits. And you may be more tempted to gamble if you encounter a string of losses. Take a step back and evaluate the situation. Rather, it requires an incredible amount of self-restraint, discipline, and calm.
A swing trader who trades for income must always be unemotional. The name of this game is to always have enough capital to come back and play again.
That would require a monthly gain of Some of the best all-time traders in the world topped out at returns of 20 to 25 percent annually over 20 or 30 years. Swing trading with an eye on earning additional income or improving the returns on your portfolio is less stressful than swing trading for a living. You still have something to fall back on if you make a mistake, and you can swing trade while holding down a full-time job.
Part-time swing traders often do their analysis when they get home from work and then implement trades the following day. Even though they may not be able to watch the market all the time, they can enter stop loss orders to protect their capital. If you want to eventually swing trade full time, you should go through this phase first. Swing trading just for fun Some swing traders get a rush from downloading and selling securities, sometimes profiting and sometimes losing. Rather, these swing traders do it for the excitement that comes from watching positions they download and sell move up and down.
Of course, this can lead to significant losses if they abandon the rules designed to protect their capital — rules that I outline throughout this book specifically in Chapter I recommend that you get your kicks at a bowling alley or basketball court.
You may begin to risk more of your capital to satisfy your need for excitement. If you lose, you may take extreme action to prove yourself right in the end, like putting all your money into one or two securities. If you insist on trading for fun, at least restrict yourself to a small amount of your assets and never touch your retirement nest egg. That gives them an advantage over someone who just enjoys the game. Fail to plan and you plan to fail. A trading plan is the business plan of your trading business.
Your trading will be erratic. In the following sections, I preview the critical parts of the strategy, trimming them all down into one neat little package. For more on your trading plan, see Chapter Common stocks, American Depository Receipts, and exchange traded funds fall under this rubric. Swing traders often trade stocks exclusively because of the variety, ease, and familiarity of trading corporate stocks.
Most stocks listed in the United States trade every day, but stocks in foreign markets may trade infrequently perhaps once a week. To make your entries and exits as painless as possible, you must focus only on those stocks that meet a specified level of volume. Trying to sell 1, shares of a stock that trades 5, shares in a day can be extremely costly. I recommend you use stocks due to the abundant information on firms domestically and even internationally. One of the beauties of stocks is how efficient they are to trade, partly because they offer exposure to other asset classes.
For example, you can gain exposure to the commodity gold by trading an exchanged traded fund with underlying assets in gold bullion. Simply put, an ADR allows U. ADRs are quoted in U. Trading ADRs is much more cost efficient than setting up accounts in several foreign countries, converting your dollars into foreign currencies, and so on.
And because the economic growth of emerging nations is outstripping the growth of developed countries, ADRs can offer strong profit opportunities. ADRs of companies based in emerging markets like Brazil or China are sometimes highly leveraged to a particular commodity, making ADRs one way to profit from commodity price strength.
If you want to ride a coming tech bounce, you may be better served trading a technology ETF than choosing a particular tech company that may or may not follow the overall tech sector. However, a single technology security may buck the trend. ETFs also offer you the ability to profit from international indexes and commodities. Closed end funds are different. Sometimes, a closed end fund will trade for more than its net asset value; other times, it will trade for less.
Closed end funds may be an efficient way to profit from international markets. Because the fixed-income market tends to have less volatility than stocks and other asset classes, many swing traders usually avoid trading it. Futures are traded on commodities and financial instruments, such as equity indexes.
I strongly recommend avoiding the use of such extreme leverage because of the potential to lose most, if not all, of your assets due to an unexpected move in a security. Newcomers in particular should avoid using leverage. Even experienced swing traders can become careless or arrogant before the market educates them. With the boom in the prices of everything from gold to crude oil, commodities are attracting more money from swing traders.
Commodities — including energy commodities, agricultural commodities, and precious metals — are traded in the futures markets. You can profit from commodity price movements through stocks or exchange traded funds. For example, swing traders wanting to profit from movements in gold prices can trade streetTRACKS Gold shares, which tracks the movement of gold bullion prices. But trading commodities involves risks and issues that differ from trading equities.
Like the futures market, trading in the currency market allows for extreme leverage. Not all brokers offer trading in foreign exchange, so make sure you check whether your broker has the capability. Unlike stocks, trading in the currency market is concentrated in a few currencies: the U. Options are highly risky and not efficient swing trading vehicles because of their illiquidity.
Stocks, commodities, currencies, and bonds trade on different markets.
Recently, electronic communication networks ECNs have emerged as an efficient way to match download and sell orders. ECNs connect individual traders with major brokerage firms.
You sometimes can get a better price by submitting orders to an ECN instead of a broker. The easiest way to access ECNs is by subscribing to a broker who provides direct access trading. But swing traders can download and sell other securities on other markets.
For example, if you want to trade an actual commodity, the Chicago Board of Trade CBOT lists several commodities: ethanol, gold, silver, corn, oats, rice, soybeans, and wheat. But you must consider the additional risk factors if you venture outside trading stocks. For example, commodities require different margin requirements than stocks. Not properly employing a risk management system can lead to losing your entire capital on a single trade.
Commodities also trade on different fundamentals than companies or fixed-income securities. If you want to trade commodities, currencies, or other investment vehicles, you need to trade via firms authorized to transact in those markets. They also find more trading opportunities because they have more time to devote to swing trading.
How you trade refers to your various trading strategies, which I outline in this section. Establishing your analysis techniques Swing traders rely on two major analysis techniques: technical analysis and fundamental analysis. Technical analysis, broadly speaking, encompasses chart pattern analysis and the application of mathematical formulas to security prices and volume. Fundamental analysis covers earnings, sales, and other fundamentals of a company or a security.
However, I explain both analysis techniques in this book because I strongly believe that understanding and using both improves the odds of success. For example, a trained swing trader can use technical analysis to quickly decide whether to download or sell a security using chart patterns of technical indicators. In contrast, a swing trader relying on fundamental analysis needs more time to read about a company, its business, and its earnings before coming to a conclusion.
In other words, if you know how to interpret a chart, then the kind of security being plotted is largely irrelevant. In my opinion, the ease of application is the biggest advantage technical analysis has over fundamental analysis. Rallies and declines that are driven by fundamentals are more profitable to trade than rallies and declines that are simply the result of noise in the markets such as a large mutual fund liquidating or downloading a position.
Crude oil prices rise when demand exceeds supply or when supply becomes scarce — not, as technical analysis may superficially indicate, because the chart developed a bullish formation. Of course, crude oil — or any security — can rise or fall due to non-fundamental reasons.
But such rallies and declines are often fleeting and not as strong as fundamentally driven price moves. Generally, fundamental analysis is seen as long, laborious, and not always right.
The general rule of thumb is that the longer your investment horizon, the more important fundamental analysis becomes. The shorter your horizon, the less important fundamental analysis is in trading securities. This is because short-term movements are driven by momentum, noise, and other factors. Over the long term, however, fundamentals always win out. Markets can remain under- or Chapter 1: Swing Trading from A to Z overvalued for long periods of time.
Choosing candidates to download You can find promising securities in two main ways — the top-down approach and the bottom-up approach. If you fit this category, your entry strategy should begin with an examination of the overall markets, then trickle down to the major sectors in the market, and then to the industries within the strongest or weakest sectors. At this point, you rank the securities in the industry on some technical or fundamental measure more on that in Chapter 8.
Then you select the securities that meet your entry strategy. If you fit this category, your approach begins with a screen of some sort a screen is a quantitative filter , sometimes depending on whether growth or value stocks are in favor at that particular point in time.
After identifying which securities rank highest in the screen, you determine which securities meet your entry rules, and then you trade only those securities that reside in leading or lagging industry groups, depending on whether you favor downloading or shorting. So although planning your entry is important, you need to spend equal if not more time on your exit.
For example, some exit strategies for profits stipulate that the time for departure arrives when prices reach the implied target based on a chart pattern, or when shares close below a moving average. Your exit strategy for losses should be based on the breach of a support level, a resistance level in the case 21 22 Part I: Getting into the Swing of Things of shorting , or some type of moving average for example, the nine-day moving average. Support levels are simply price zones where securities stop falling, and resistance levels are price zones where prices stop rising.
This keeps your losses limited to some known quantity barring, of course, a gap up or down in the security price, which must be addressed by proper position sizing and other risk management techniques. That is, it meanders sideways and results in dead weight. I prefer to give a position a few days to prove itself one way or the other.
You should outline your exit strategy by making sure your trading plan addresses when you exit for profit, loss, and capital redeployment. Generally, the decision to be net long or net short is driven by the state of the major market index. And when the market is in a trading range, swing traders may be market neutral. Preparing your risk management plan The most important part of your trading plan is how you manage risk.
Risk management, which I cover in detail in Chapter 10, addresses how you manage risk on an individual security level and on the portfolio level as a whole. A trading plan with a weak entry strategy and a weak exit strategy can still be profitable if the risk management strategy limits losses and lets profits run. Generally, this figure should be 0. You need to have exposure to different asset classes, sectors, and market capitalizations.
The 7 percent rule caps your total risk at 7 percent. Thus, this last point is paramount, because humans are affected by emotions, experiences, and hopes. This fact can cause a swing trader to abandon the stringent rules he or she has fashioned and may have been following for years. The better you get at trading, the more likely your emotions will convince you to cut corners and abandon the rules that got you to where you are.
But emotions can be managed. You can limit their impact by, for example, implementing stop loss orders that get you out of a security without your interference. The preceding bullets all boil down to two categories of action: position sizing and limiting losses at the portfolio level. Alexander Elder, a trading expert, once differentiated between losses suffered at the individual stock level and the portfolio level through an analogy of sharks and fish.
That is, a single major loss that wipes out your account value.
On the other hand, portfolio risk management is done to prevent several small losses from killing you — or as he described it, death by piranha bites. A single small piranha may not be able to kill a larger mammal, but dozens of piranha working together can be deadly.
Similarly, a small loss is not life threatening for a portfolio. The risk is that several small losses may gang up and cause major loss. Markets have a way of humbling even the most skilled traders if they let their egos get in the way of their trading. Some traders hold onto losing positions in the hopes that they can eventually break even — a policy that devastates an account in the long run. A losing position not only may lose more money but it also ties up capital that could be invested in more promising trading opportunities.
Successful swing traders never stop absorbing information. The markets are always changing, with new investment vehicles appearing and new laws being introduced. As a swing trader, you must maintain intellectual curiosity. Reading books is one way to continually stay informed.
Take an interest in understanding your positions and reading the pro and con arguments on them. Remember, Wall Street is a community, and analysts send out their opinion reports to hundreds, if not thousands, of traders and portfolio managers. Reading those reports can lead you to think like the analyst does — and like hundreds of others do.
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