When it comes to trading the markets, methods, strategies, techniques a whole book could be written on it and it would only touch the surface. I’m not going to say much in relation to trading the market as far as on a short term basis and by stock picking. A lot of people are lured into the markets wanting to become a day trader, in other words sit behind a computer daily while they make large sums of money. The reality is this isn’t really possible and the chances of success are against you.
There are varying methods for trading on a day to day basis however when I speak to people about why they want to look at trading as a means to make an income, most say they wish to become financially independent or not be entirely dependent on the rat race. Me personally I’m totally against day trading as to me it sounds like a job with way more stress. There was a study done, I’ll paste an extract from it below to highlight that’s it’s almost impossible to make money from day trading.
We show that it is
virtually impossible for an individual to day trade for a living, contrary to
what course providers claim. We observe all individuals who began to day trade
between 2013 and 2015 in the Brazilian equity futures market, the third in
terms of volume in the world, and persisted for at least 300 days: 97% of them
lost money, only 0.4% earned more than a bank teller (US$54 per day), and the
top individual earned only US$310 per day with great risk (a standard deviation
of US$2,560). Additionally, we find no evidence of learning by day trading.
(Dept of Economics – Working Paper 2019-47)
Essentially trading the markets is what’s called a zero sum game in that any gains made in the market are cancelled out by losses elsewhere. If you’re making money, somewhere else a loss is taken and vice versa. I will be talking in a later post about how markets can be traded via alternate methods that isn’t a zero sum game however this utilizes different financial instruments and a lesson for another time.
When
trading the market, there needs to be a level of analysis and the two main
types of analysis are ‘Technical Analysis’ and ‘Fundamental Analysis.’ There is
a wealth of information on both these types of analysis on the internet. To put
it very simply technical analysis is reading signals, patterns and trends while
fundamental analysis is reading of financial data, economic news, management
information etc.
As an analogy think of it like this, Technical Analysis is like raw data your
doctor would use when examining you, ie cholesterol levels, BMI, blood
pressure, ECG etc and Fundamental Analysis akin to the data your doctor would
ask, ie family history, life style, diet, occupation etc. I am by far into
fundamental analysis over technical analysis. Most people sit in one camp or another.
I still believe it’s important to look at Technicals however the weight of any
decision making will be through my Fundamental Analysis.
Over the short term its anyone’s guess as to where the market will go, and the further out in time you go a robust analysis together with due diligence will greatly assist in making decisions that will enhance your portfolio. Having said all this, I stand by that not many people can beat the market when trading, in fact most will be beaten badly in comparison to the market, so as a beginner I suggest referring to my earlier article on Index Funds.