How do I become good at trading in a very short period of time

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How do I become good at trading in a very short period of time?

I wanted to address something I get asked probably the most often, which I can generally summarize as “ How do I become good at trading in a very short period of time ?”

The truth is that the very best traders (and investors) are those that have put in the most time to become successful at it. Many people have heard of the 10,000 hours “rule” – the claim that it often takes 10,000 hours to become very good at something. In actuality, it’s an arbitrarily chosen amount of time. But the basic take-home message is that it does take countless hours of study to become good at something. There is no magical formula or technical indicator that is going to give you results (outside of perhaps finding someone else who can competently invest your money for you).

And even the very best traders out there have bad days, and sometimes extremely bad days that can be psychologically harmful and take a long time to recover from. Everybody loses trades. Many of the best traders ever lost the majority of their trades (note: obviously I’m not speaking of strike-entry binary options traders). I personally have trouble staying above a 75% ITM rate on binaries over a long period of time no matter how patient I become over trying to find a very high-probability set-up. Sometimes the markets just act in a way that can’t be foreseen from my personal perspective. Of course, the markets can be predictable to a certain degree, which is why the concept of trading exists in the first place and why it’s possible to have long-term profitability as a trader.

But trading is all a matter of probabilities. For binary trading, I personally can’t predict with much confidence what the market is going to do well over 90% of the time. In other words, at any given point, the probability of entering a winning trade is just too close to 50-50, which is never profitable when payout percentages always return less than your initial investment. That’s why I simply decide not to trade the majority of the time. Even back in the early stages of my trading career when I would trade 10-20 times per day, I truly wasn’t trading as much as it seems in a relative sense. Back then, I was often trading four or more assets per day and logging up to eight hours of screen time per session. That’s 32 hours of total price data. Hence I was truly only taking one trade for every 1.5-3+ hours of price data.

Yet as boring as that may seem, looking at, studying, and familiarizing myself with all those charts helped me become the trader that I currently am today. Trading should be a boring activity. That’s not to say you shouldn’t enjoy it. It’s hard to do any activity or occupation for a long period of time if you truly don’t enjoy it. But trading isn’t something you should be doing for the adrenaline rush. You should always be detached in emotion while trading and this take a certain amount of time and overall maturity to truly master. After all, trading the markets ultimately boils down to making money so it can be difficult to not be vested in the outcome of a trade. But the trick, in my opinion, is to risk such a small amount on each trade that it almost feels like a waste of time to even take it in the first place – even if it’s the only trading opportunity you’ll have all day.

If you’re trading too frequently, then you might need to re-evaluate your trading approach. Like many, you might be trading for the thrill of being in a trade and watching the colorful bars on your chart tick up and down. That’s pure gambling. My first ever day on a live account, I went 11/16 ITM trading for about three hours. My natural reaction was to believe I was pretty good. Of course, I ended up blowing the account to shreds the next day and would continue to wipe out a couple more accounts – which in all honesty I couldn’t financially afford to do. By the time I had wiped out three trading accounts, I finally realized that I was entirely deluded about my trading competency and needed a lot more practice before proceeding on with real money in the future.

Always consider the market itself to be “right.” That is, if your latest series of trades has seen you grow your profit, don’t become overly confident and internally believe that it’s your trading skill at work that’s causing the account to grow. This is especially true if you haven’t proven to yourself that you can be profitable at trading over a series of several weeks – or preferrably months – in the past. On the flip side, when a series of trades goes against you or you’ve lost some money recently, don’t simply assume that the market is irrational or you just can’t get luck to fall on your side, and that you’ll surely resume profitable trading once the market starts being itself again.

Mastering Short-Term Trading

Short-term trading can be very lucrative, but it can also be risky. A short-term trade can last for as little as a few minutes to as long as several days. To succeed in this strategy as a trader, you must understand the risks and rewards of each trade. You must not only know how to spot good short-term opportunities but also how to protect yourself. In this article, we’ll examine the basics of spotting good short-term trades and how to profit from them.

The Fundamentals of Short-Term Trading

Several basic concepts must be understood and mastered for successful short-term trading. These fundamentals can mean the difference between a loss and a profitable trade.

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Recognizing Potential Candidates

Recognizing the “right” trade will mean that you know the difference between a good potential situation and ones to avoid. Too often, investors get caught up in the moment and believe that, if they watch the evening news and read the financial pages, they will be on top of what’s happening in the markets. The truth is, by the time we hear about it, the markets are already reacting. So, some basic steps must be followed to find the right trades at the right times.

Mastering Short-Term Trading

Step 1: Watch the Moving Averages

A moving average is the average price of a stock over a specific period of time. The most common time frames are 15, 20, 30, 50, 100 and 200 days. The overall idea is to show whether a stock is trending upward or downward. Generally, a good candidate will have a moving average that is sloping upward. If you are looking for a good stock to short, you generally want to find one with a moving average that is flattening out or declining.

Step 2: Understand Overall Cycles or Patterns

Generally, the markets trade-in cycles, which makes it important to watch the calendar at particular times. Since 1950, most of the stock market gains have occurred in the November to April time frame, while during the May to October period, the averages have been relatively static. As a trader, cycles can be used to your advantage to determine good times to enter into long or short positions.

Step 3: Get a Sense of Market Trends

If the trend is negative, you might consider shorting and do very little buying. If the trend is positive, you may want to consider buying with very little shorting. When the overall market trend is against you, the odds of having a successful trade drop.

Following these basic steps will give you an understanding of how and when to spot the right potential trades.

Controlling Risk

Controlling risk is one of the most important aspects of trading successfully. Short-term trading involves risk, so it is essential to minimize risk and maximize return. This requires the use of sell stops or buy stops as protection from market reversals. A sell stop is an order to sell a stock once it reaches a predetermined price. Once this price is reached, it becomes an order to sell at the market price. A buy stop is the opposite. It is used in a short position when the stock rises to a particular price, at which point it becomes a buy order.

Both of these are designed to limit your downside. As a general rule in short-term trading, you want to set your sell stop or buy stop within 10% to 15% of where you bought the stock or initiated the short. The idea is to keep losses manageable so gains will be considerably more than the inevitable losses you incur.

Technical Analysis

There is an old saying on Wall Street: “Never fight the tape.” Whether most admit it or not, the markets are always looking forward and pricing in what is happening. This means that everything we know about earnings, company management, and other factors is already priced into the stock. Staying ahead of everyone else requires that you use technical analysis.

Technical analysis is a process of evaluating and studying stocks or markets using previous prices and patterns to predict what will happen in the future. In short-term trading, this is an important tool to help you understand how to make profits while others are unsure. Below, we will uncover some of the various tools and techniques of technical analysis.

Buy and Sell Indicators

Several indicators are used to determine the right time to buy and sell. Two of the more popular ones include the relative strength index (RSI) and the stochastic oscillator. The RSI compares the relative strength or weakness of a stock compared to other stocks in the market. Generally, a reading of 70 indicates a topping pattern, while a reading below 30 shows that the stock has been oversold. However, it is important to keep in mind that prices can remain at overbought or oversold levels for a considerable period of time.

The stochastic oscillator is used to decide whether a stock is expensive or cheap based on the stock’s closing price range over a period of time. A reading of 80 signals the stock is overbought (expensive), while a reading of 20 signals the stock is oversold (inexpensive).

RSI and stochastics can be used as stock-picking tools, but you must use them in conjunction with other tools to spot the best opportunities.

Patterns

Another tool that can help you find good short-term trading opportunities are patterns in stock charts. Patterns can develop over several days, months or years. While no two patterns are the same, they can be used to predict price movements.

Several important patterns to watch for include:

  • Head and Shoulders: The head and shoulders, considered one of the most reliable patterns, is a reversal pattern often seen when a stock is topping out.
  • Triangles: A triangle is formed when the range between a stock’s highs and lows narrows. This pattern often occurs when prices are bottoming or topping out. As prices narrow, this signifies the stock could break out to the upside or downside in a violent fashion.
  • Double Tops: A double top occurs when prices rise to a certain point on heavy volume, retreat and then retest that point on decreased volume. This pattern signals the stock may be headed lower.
  • Double Bottoms: A double bottom is the reverse of a double top. Prices will fall to a certain point on heavy volume and then rise before falling back to the original level on lower volume. Unable to break the low point, this pattern signals the stock may be headed higher.

Bottom Line

Short-term trading uses many methods and tools to make money. The catch is that you need to educate yourself on how to apply the tools to achieve success. As you learn more about short-term trading, you’ll find yourself drawn to one strategy or another before settling on the right mix for your particular tendencies and risk appetite. The goal of any trading strategy is keeping losses at a minimum and profits at a maximum, and this is no different for short-term trading. For additional reading, check out the Investopedia article 10 Steps to Building a Winning Trading Plan.

Learn How to Trade the Market in 5 Steps

Want to trade but don’t know where to start?

Millions of neophytes try their hand at the market casino each year, but most walk away a little poorer and a lot wiser, never reaching their full potential. The majority of those who fail have one thing in common – They haven’t mastered the basic skills needed to tilt the odds in their favor. However, if one takes the adequate time to learn them then they will be well on their way to increasing their odds of success.

World markets attract speculative capital like moths to a flame, with most throwing money at securities without understanding why prices move higher or lower. Instead, they chase hot tips, make binary bets and sit at the feet of gurus, letting them make buy and sell decisions that make no sense. A better path is to learn how to trade the markets with skill and authority.

Start with a self-examination that takes a close look at your relationship with money. Do you view life as a struggle, with hard effort required to earn each dollar? Do you believe personal magnetism will attract market wealth to you in the same way it does in other life pursuits? More ominously, have you lost money on a regular basis through other activities and hope the financial markets will treat you more kindly?

Whatever your belief system, the market is likely to reinforce that internal view over and over again through profits and losses. Hard work and charisma both support financial success, but losers in other walks of life are likely to turn into losers in the trading game. Don’t panic if this sounds like you. Instead, take the self-help route and learn about the relationship between money and self-worth.

Once you get your head on straight, you can embark on learning trading, starting with these five basic steps.

1. Open a Trading Account

Sorry if it seems we’re stating the obvious, but you never know (remember the person who did everything to set up his new computer—except to plug it in). Find a good online stock broker and open a stock brokerage account. Even if you already have a personal account, it’s not a bad idea to keep a professional trading account separate. Become familiar with the account interface and take advantage of the free trading tools and research offered exclusively to clients. A number of brokers offer virtual trading (more on that in step five). Investopedia has the Best Online Brokers Awards with reviews to help you find the right broker.

2. Learn to Read: A Market Crash Course

Financial articles. Stock market books. Website tutorials. There’s a wealth of information out there, much of it inexpensive to tap. And don’t focus too narrowly on one single aspect of the trading game. Instead, study everything market-wise, including ideas and concepts you don’t feel are particularly relevant at this time. Trading launches a journey that often winds up at a destination not anticipated at the starting line. Your broad and detailed market background will come in handy over and over again, even if you think you know exactly where you’re going right now.

Here are five must-read books for every new trader:

  1. Stock Market Wizards by Jack D. Schwager 
  2. Trading for a Living by Dr. Alexander Elder 
  3. Technical Analysis of the Financial Markets by John Murphy 
  4. Winning on Wall Street by Martin Zweig 
  5. The Nature of Risk by Justin Mamus 

Start to follow the market every day in your spare time. Get up early and read about overnight price action on foreign markets. (U.S. traders didn’t have to monitor global markets a couple of decades ago, but that’s all changed due to the rapid growth of electronic trading and derivative instruments that link equity, forex and bond markets around the world.)

News sites such as Yahoo Finance, Google Finance and CBS MoneyWatch serve as a great resource for new investors. For more sophisticated coverage, you need look no further than The Wall Street Journal, Bloomberg and, well, us at Investopedia.com.

3. Learn to Analyze

Study the basics of technical analysis and look at price charts, thousands of them, in all time frames. You may think fundamental analysis offers a better path to profits because it tracks growth curves and revenue streams, but traders live and die by price action that diverges sharply from underlying fundamentals. Do not stop reading company spreadsheets, because they offer a trading edge over those who ignore them. However, they won’t help you survive your first year as a trader.

Your experience with charts and technical analysis now brings you into the magical realm of price prediction. Theoretically, securities can only go higher or lower, encouraging a long-side trade or a short sale. In reality, prices can do many other things, including chopping sideways for weeks at a time or whipsawing violently in both directions, shaking out buyers and sellers.

The time horizon becomes extremely important at this juncture. Financial markets grind out trends and trading ranges with fractal properties that generate independent price movements at short-term, intermediate-term and long-term intervals. This means a security or index can carve out a long-term uptrend, intermediate downtrend and a short-term trading range, all at the same time. Rather than complicate prediction, most trading opportunities will unfold through interactions between these time intervals.

Buying the dip offers a classic example, with traders jumping into a strong uptrend when it sells off in a lower period. The best way to examine this three-dimensional playing field is to look at each security in three time frames, starting with 60-minute, daily and weekly charts.

4. Practice Trading

It’s now time to get your feet wet without giving up your trading stake. Paper trading, aka virtual trading, offers a perfect solution, allowing the neophyte to follow real-time market actions, making buying and selling decisions that form the outline of a theoretical performance record. It usually involves the use of a stock market simulator that has the look and feel of an actual stock exchange’s performance. Make lots of trades, using different holding periods and strategies, and then analyze the results for obvious flaws.

Investopedia has a free stock market game, and many brokers let clients engage in paper trading with their real money entry systems, too. This has the added benefit of teaching the software so you don’t hit the wrong buttons when you are playing with family funds.

So, when do you make the switch and start trading with real money? There’s no perfect answer because simulated trading carries a flaw that’s likely to show up whenever you start to trade for real, even if your paper results look perfect.

Traders need to co-exist peacefully with the twin emotions of greed and fear. Paper trading doesn’t engage these emotions, which can only be experienced by actual profit and loss. In fact, this psychological aspect forces more first-year players out of the game than bad decision-making. Your baby steps forward as a new trader need to recognize this challenge and address remaining issues with money and self-worth.

5. Other Ways to Learn and Practice Trading

While experience is a fine teacher, don’t forget about additional education as you proceed on your trading career. Whether online or in person, classes can be beneficial, and you can find them at levels ranging from novice (with advice on how to analyze the aforementioned analytic charts, for example) to pro. More specialized seminars—often conducted by a professional trader—can provide valuable insight into the overall market and specific investment strategies. Most focus on a specific type of asset, a particular aspect of the market, or a trading technique. Some may be academic, and others more like workshops in which you actively take positions, test out entry and exit strategies, and other exercises (often with a simulator).

Paying for research and analysis can be both educational and useful. Some investors may find watching or observing market professionals to be more beneficial than trying to apply newly learned lessons themselves. There are a slew of paid subscription sites available across the web: Two well-respected services include Investors.com and Morningstar.

It’s also useful to get yourself a mentor—a hands-on coach to guide you, critique your technique and offer advice. If you don’t know one, you can buy one. Many online trading schools offer mentoring as part of their continuing ed programs.

Manage and Prosper

Once up and running with real money, you need to address position and risk management. Each position carries a holding period and technical parameters that favor profit and loss targets, requiring your timely exit when reached. Now consider the mental and logistical demands when you’re holding three to five positions at a time, with some moving in your favor while others charge in the opposite direction. Fortunately, there’s plenty of time to learn all aspects of trade management, as long as you don’t overwhelm yourself with too much information.

If you haven’t done so already, now is the time to start a daily journal that documents all of your trades, including the reasons for taking risk, as well as the holding periods and final profit or loss numbers. This diary of events and observations sets the foundation for a trading edge that will end your novice status and let you to take money out of the market on a consistent basis.

The Bottom Line

Start your trading journey with a deep education on the financial markets, and then read charts and watch price actions, building strategies based on your observations. Test these strategies with paper trading, while analyzing results and making continuous adjustments. Then complete the first leg of your journey with monetary risk that forces you to address trade management and market psychology issues.

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