Trading
Master the Art of Trading
Welcome to this webpage dedicated to basic understanding and hands-on guidance of trading. Whether you are a seasoned investor or just a student stepping into the realm of financial markets, this webpage offers a treasure trove of resources designed to enhance your trading skills and strategies. Unlock your potential in the world of trading. Join me on a transformative journey towards becoming a proficient trader, equipped with the knowledge and skills to navigate the dynamic world of financial markets. Your journey can begin here and now.
Trading Techniques.pptxWhy?
First of all, it is impossible for anyone to NOT invest. When you choose to hold onto your cash, it is already a form of investment—an extremely conservative strategy that prioritizes liquidity over profitability. In an age marked by inflationary pressures, navigating the investment landscape becomes a crucial aspect of securing your financial future. More importantly, it is almost certain that one can never be financially free if you do not invest.
Assume you have two choices when you graduate at 22 years old:
a wage earner at £20K per year
an investor at 20% rate of return
What does your wealth projection look like at age 40? How about when you retire at age 65? As depicted in the two figures below, up until the age of 37, the wage earner (blue) accumulates wealth more rapidly and may even manage to afford a respectable home with the £300K on hand. However, beyond this point, the investor's wealth experiences exponential growth, reaching £50 million by age 65, while the wage earner struggles to reach £900K.
The distinction in wealth accumulation underscores the contrast between arithmetic growth and exponential growth in mathematics. However, comprehending the significant discrepancy requires recognizing a crucial factor: wage earners can solely employ their individual time, while investors can harness the time of many. This underscores the argument that capitalism can be likened to a form of modern slavery, where capitalists gain income from the combined output of all workers. To liberate ourselves from this contemporary form of enslavement, it becomes imperative for money to labor for money, rather than people laboring for money. So, for freedom's sake, let's invest.
How?
Like the three dimensions of wine tasting (appearance, nose, and palat), investment analysis also has three dimensions.
Return. It is considered the primary attribute of an investment strategy due to its direct connection to the core objective of investing: wealth growth. In statistics, return is usually measured by the expected value μ = E[r].
Risk. It refers to the potential uncertainties and fluctuations that can affect the actual outcomes of an investment compared to its expected or desired results. In statistics, risk is usually measured by the standard deviation from its expected value σ = sqrt(E(r-μ)2).
Liquidity. It refers to the ease and speed with which an asset can be bought or sold in the market without significantly affecting its price. In trading, it is usually measured by the bid-ask spread, i.e., the price difference between the buying and selling prices.
The optimal investment strategy is essentially a trade-off, as higher returns are typically linked to increased risk and reduced liquidity. Your investment strategy should commence with a well-defined prioritization of these three criteria.There are two main types of investment strategies, determined by your goals and risk preferences: long-term investment and short-term investment, also known as "trading". On this webpage, we will focus on the short-term trading techniques.
Investment is a long journey, but it is extremely easy to start. Let's get your hands on and build up your understanding bit by bit.
Trading Platform
To begin with, you need to have somewhere to operate. Assets are not like wines which you can buy in a physical shop. Instead, you must invest in a trading platform. There are loads of choices in the market, but I suggest eToro because of the following three reasons.
First, it has a comprehensive coverage of traditional assets (e.g., stocks, bonds, currencies, commodities, indices) as well as nontraditional assets (e.g., cryptocurrencies). One principle of investment is diversification. It is essential to choose a platform with a comprehensive set of assets.
Second, it has a very innovative "social trading" function, by which you can simply copy someone else's trading strategies with a simple click. This is similar to mutual funds or hedge funds but without entry barriers. For many new starters, it would be much easier to copy mature, professional traders than create your own portfolio. Personally, I really like social trading because it enables equal opportunities in investment. (Risk Warning: Copy Trading does not amount to investment advice. Your investments value may go up or down. Your capital is at risk.)
Third, eToro offers a virtual account for you to practice and learn. The prices and trades executed in the virtual account mirror those in the real market; the only difference is that real money is not involved. This provides a risk-free opportunity for you to assess if you are prepared for the actual challenges of trading.
Click here to register your own free account in eToro to start trading now.
Risk Warning: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. It offers both investing in stocks and cryptoassets, as well as trading Contract For Differences (CFDs) assets. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment, and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
Trading Fundamentals
Here are some jargons you need to know before delving into the practice.
Price quote. The price quote of an asset is usually measured by US dollars. But, if you trade in the currency market (aka foreign exchange or Forex), the price quote may not involve US dollars. For example, the currency pair EUR/USD means how much USD is needed to exchange for 1 unit of EUR, while the currency pair GBP/CNY means how much CNY is needed to exchange for 1 unit of GBP. The first asset of the pair is the base asset.
Sell Price. The quote is the ratio when you are selling the base asset. It is also known as bid price. For example, if EUR/USD = 1.0425 (S), then you will get 1.0425 USD when you sell 1 unit of EUR.
Buy Price. The quote is the ratio when you are buying the base asset. It is also known as ask price. For example, if EUR/USD = 1.0428 (B), then you will pay 1.0428 USD when you buy 1 unit of EUR.
PIP. Price Interest Point is the last digit of the price quote. For example, "5" and "8" in the two quotes above are the PIPs.
Spread. The difference in sell price and buy price is called the spread. It is the profit to the trading platform. A lower spread implies a higher liquidity. For example, the pair EUR/USD has a spread of 3 PIPs.
K-Chart. In most countries, green means a price rise, and red means a price drop. But, the colour code is reversed in some Asian countries like China, Korea, and Japan.
The green K-chart indicates that, in this period (minute, hour, day, etc.), the price of the base asset rises, so the close quote is higher than the open quote.
The red K-chart indicates that, in this period, the price of the base asset drops, so the close quote is lower than the open quote.
The maximum quote (high) and the minimum quote (low) are presented by the two tips in both cases.
Bullish Market. This is the case when the price is rising. For example, the green K-chart.
Bearish Market. This is the case when the price is dropping. For example, the red K-chart.
Leverage. Use your money as capital to establish a position worth N times of your money, e.g., X1, X2, ..., X100, X200. For example, if your own money is $50 and you use X100 leverage, then you are buying an asset worth $50X100 = $5000. It powerfully magnifies your profit and loss too. If your asset rises by $1, then your profit is $100 rather than $1. However, if your asset drops by $1, then your loss is -$100 rather than -$1.
Margin Call. If the loss of your leveraged position approaches the amount of your capital, then you are subject to margin call. You must top up your position with more capital, or you will be forced to close your position when the loss exceeds the capital.
Take Profit (TP). In your investment, you can set a price when you want to automatically close the winning position. You can always edit the TP parameter later or simply manually take profit. Let's use the symbol "O" to indicate the TP price.
Stop Loss (SL). In your investment, you can set a price when you want to automatically close the losing position. You can always edit the SL parameter later or simply manually stop loss. Let's use the symbol "X" to indicate the SL price.
Now that you have understood all the fundamentals, you are ready for the next level, trading techniques.
Trading Techniques
Essentially, there are only three trading techniques, longing, shorting, and hedging. They seem to be quite simple, but if you can master only one of the three, you will become a successful investor. For example, Warren Buffett only uses the longing strategy to earn $120 billion (as in 2023), while George Soros used shorting strategy to earn billions of dollars against the British pound and the Bank of England in 1992. Let's see how you can do it.
The Longing Strategy.
The Shorting Strategy.
The Hedging Strategy.
The strategy, often referred to as the "long position" or "going long", is a key concept in investment that involves buying and holding an asset with the expectation that its value will increase over time. This strategy is based on the belief that the asset's price will rise, allowing the investor to sell it later at a higher price and realize a profit.
The strategy, often referred to as "short selling" or "going short", is a key concept in investing that involves profiting from the anticipated decline in the value of an asset. This strategy allows investors to potentially benefit from falling prices by selling an asset they don't own and later buying it back at a lower price.
The strategy is a crucial concept in investing that involves taking opposite or offsetting positions to minimize potential losses or risks. Essentially, it's a form of insurance that helps protect your investments from adverse market movements.
Case Study: The Brexit Referendum
I strongly suggest you to use the hedging strategy when trading on big events. These disruptive events always create a trend, either rising or dropping, but you don't know which trend will realise.
Take the Brexit referendum night (23/06/2016) as an example. The exchange rate of GBP/USD was expected to either rise (if the remain campaign won) or drop (if the Brexit campaing won). Before the mid-night, no one knew which trend would happen, but there would definitely be a trend.
Before 23:50 on the night, the GDP/USD is about 1.5. What I did was to set up two opposite positions using the hedging strategy:
A long position with SL = 1.48 and TP = 1.6.
A short position with SL = 1.52 and TP = 1.4.
In reality, the dropping trend realised (to leave), so the long position hits 1.48 first, resulting in a loss of 0.02, but the short position hits 1.4, resulting in a profit of 0.1. The net profit is $0.08 per position.
If a rising trend eventualised (to remain), then the short position would have hit 1.52 first, resulting in a loss of 0.02, and the long position would have hit 1.6, resulting in a profit of 0.1. You would have earned $0.08 per position.
To summarize, you have the potential to profit in various market conditions – whether it's a bullish market, a bearish market, or even a volatile "monkey market" with significant price fluctuations. Armed with these three investment strategies and an accurate market forecast, I hope that everyone can find success and enjoyment in their trading journey.
Click here to register your own free account in eToro to start trading now.