An understanding of technical stock market analysis can be a valuable tool in determining the trend of any market and assisting with entry and exit levels for your trades. Using technical analysis to determine when a market is trending (and just as importantly, when it is not) is a good way of putting the odds in your favor when you enter the market.
As a general rule, strongly trending markets have small reactions of between 1 and 4 bars on any chart you may be looking at, so we are always trying to enter trends that meet this criteria. These bars can be for time periods of a little as one minute for day-traders, up to weekly or even monthly charts for long-term investors.
All it takes is a couple of trends like this a day for day-traders, or a couple of strong trends each year for long-term investors, to make a lot of money trading. Unfortunately, many people fight the trend and buy or sell at every small change in direction, thinking they have picked the top or bottom of the market, only to see the trend continue on it's merry way immediately.
By the time the trend is finished, these traders have spent their psychological and monetary capital in a futile attempt to pick the top or bottom.
Another common mistake traders often make is increasing their position size when they are wrong, or averaging a loss (sometimes called dollar cost averaging). This can (sometimes) work for long-term investors (but only sometimes), but it can be a very dangerous strategy for traders. It is often advocated by well meaning friends and others when they hear of a loss you are facing - they justify it by saying things like "You don't lose money until you sell".
Of course we know that this isn't true - a loss is a loss no matter when you take it. Better to take it sooner rather that later or you won't have a trading account left to trade with. This kind of strategy can prove disastrous to a trader, you don't want to go there.
Remember - The trend is your friend, so don't ever buck it.The correct use of technical stock market analysis also gives us a mechanical indicator to use for entries and exits, and takes a lot of the guess work out of our trading. It is very hard to argue with the trend being down if you are looking at a series of lower tops and bottoms on your chart.
Will every trade be a winner if your technical analysis skills are good?
Of course not. Losses on some trades are inevitable, as we cannot know for sure what the market will do. If you are a day-trader, it only takes one large trader dumping a bunch of orders into the market to invalidate your perfect trade set-up and send the price of anything in the opposite direction to what you were certain was going to happen.
If you are a longer-term investor, it can take more than one big trade to change the trend, but still you are going to have losses when you get it wrong. All our analysis can do is alert us to probabilities - there are no certainties in financial markets. This is the hardest thing for most traders to accept. We all hate to be 'wrong', but that is the nature of the trading business.
All we can do is take every trade our analysis gives us and see what happens. The better our stock market analysis and our trading system, the more likely our trades will produce profits over the long term. So remember, the large profits come from identifying a strongly trending market in whatever time-frame you are trading, and taking multiple positions (limited of course by your trading account size and tolerance for risk) with that trend. You need a system to identify these strongly trending markets and alert you to the potential of a trade.
While trading a basket of stocks has it's advantages, such as removing the risk of any single company you own going bust and taking all of your money with it, stock indexes (on which index funds are based) can tend to be highly volatile, especially the smaller ones.
The S&P 500 is probably one of the worlds best know stock indexes, and it has a long history of strong trends that have made and lost traders fortunes over the years. By trading a managed fund that tracks the index, options over the index, futures contracts over the index or Contracts For Difference (CFD's), we can participate in the movements of the market.
The easiest way to do this (and the system that many mom and dad investors use) is to simply buy a managed fund like the Vanguard 500 Index Fund. This works fine when the trend is up, but what about when the trend is heading in the other direction? There are several mutual funds that trade inversely to their respective index. One of these can be used to trade the downside when prices are falling, as they do from time to time, sometimes quite spectacularly.
The problem with most of these funds is you have no leverage. This is why many traders move on to index fund trading through derivatives such as futures contracts as an alternative to simply buying and holding mutual funds. While the margin for the full S&P 500 futures contract is too high for the average trader, a smaller contract is available called the S&P Emini; which mirrors the larger contract, but is only 1/10th the size. This allows anyone with an adequate account to safely trade this liquid, often strongly trending market.
The S&P Emini futures contract gives you tremendous leverage to movements in the underlying market. Of course, if you have no idea how to trade, this leverage is a double edged sword (and you'll most likely get cut). Index Fund trading means you MUST have a good understanding of technical analysis and have clearly defined trading rules to make it work. It can be very profitable, but you have to learn how to do it right.
This is why learning how to trade profitably is far more important than the vehicle you use. You must possess the skills of profitable trading before the Emini futures market or any other financial product is going to help you create wealth. This is especially true when the concept of leverage is introduced, as it is with futures contracts.
The solution? Make it your goal to find a mentor with a successful track record as a trader who can teach you what he (or she) knows, and you will be in a position to trade profitably. You need to know the difference between trends and counter trends - and then only trade trends. Once you have this training you will know, with a high degree of certainty, what the trend is and how to trade it. The lessons apply equally to both stocks and indexes, and will give you a good grounding in how to trade trending markets
By understanding trends (and understanding technical analysis will teach you this), you will be in a position to enter and exit trades with a high probability of success in any futures market or stock index you choose to trade.
Some of the common mistakes and attitudes that uneducated traders and investors make are:
* Not knowing where to start in trading or investing
* Holding losing trades, hoping they will go back up so they can get out without a loss
* Buying on rumor, tips or gut feel - always a great way to the poor house
* Continually trying to land a 'home run' to make back previous losses
* Closing out positions early as soon as they start to become profitable
* A feeling that the market is against you. The market has no memory; it doesn't know or care about you
* Buying expensive software analysis programs that don't work
All too often, people jump into index futures trading head first without a thorough understanding of exactly how they are going to approach the market. The result is usually nothing short of disastrous. A successful trader treats trading as a business. The first step in the process of becoming a profitable trader is to construct a business plan, much like one that you would use for a conventional business.
A business plan to a trader is known as a trading system, and like a business plan it is used to define the exact strategy of actions that are used to create a profit. The key to successful trading is a properly implemented strategy, not subjective decisions based on your opinion of the market or the news of the day. The three key ingredients to becoming a successful share trader are:
1. A proven trading system; look for RESULTS not hype when choosing a coach or mentor to teach you how to trade. Personal one-on-one coaching is best, so search out a coach who will be there for you
2. The tools to implement the system; don't reinvent the wheel. Use the proven tools your mentor shares with you and get started the right way
3. The ability to implement the system. Profitably trading, especially trading the Emini futures contract, requires a mindset that only a good teacher can install. Without this mindset, you will most likely fail to make it as a trader in this fast paced market.
Learn these three things and you have a wonderful opportunity to build a profitable Emini trading business. Without them, no matter whether you are trading index funds, options or futures, you'll always struggle to make it as a trader.
Article Source :
Rockford Tapscott has sinced written about articles on various topics from Religion, Web Development and Surveys. Rocky Tapscott works with Emini Trading Coach Sam Goldberg who has written a Free 5 day Mini Course called 'The Futures Trading Mastery Course' which shows how to become a professional Emini trader. Drop by. Rockford Tapscott's top article generates over 12100 views. to your Favourites.