Core Framework of Financial Trading
1. Buying & Selling in the Market (i,e Participation in the Market )
2. Japenses Candle and Price Action
3. Leverage , Margin and Lot Sizing
Which way to the Profits ?
When we say buying, we do not mean you’re purchasing anything because you are not exchanging money for goods or services at all. For example, if you buy coffee on your trading platform, you are not going to have sacks of coffee delivered to your doorstep, you are simply speculating that the price of coffee is going to go up after your buying decision. When you buy or sell you are speculating that price will move in your favourable direction from the exact moment that your trade is executed. Which again, is why timing is very important. Your decisions are based on an indication of future price movements which one achieves through analysing historical data. Essentially what we are doing is preparing for what is going to be happening next by reacting to what has been happening over a certain period of time.
1.Buying & Selling
Buying :
It’s time to look at what we mean by Buying the market. A candlestick shows the same thing as an OHLC bar (open-high-low-close chart)but there is just a rectangular box drawn out between the open and close and I’m sure you will agree that it’s a lot more visually pleasing to look at when comparing the two.
When we buy, we don’t just buy for the duration of one bar only, we might end up holding a trade over a couple of bars. If the market has been moving upwards over a period of time, then that means (on average) there have been more bars closing higher than where they initially open. When you make a buying decision, you are speculating that the market will continue to move upwards from your entry level to your Take Profit level (where you will exit the trade with a profit). However, if the market had to move downward for long enough and reach your Stop Loss level then your trade will close in a loss (preferably no more then 2% of your entire account value).
Selling :
The same concept as of Buying defines the nature of selling in the market just visa versa. If the market has been moving downward over a period of time that would mean there has been a collection of bars that have closed lower than where they initially opened. When you make a selling decision, you would be doing so based on a speculative view that they market is going to continue moving down between your entry level and lower towards your Take Profit level where you would exit the trade in profit. Once again, if the inverse had to occur and the market moved upwards instead and had to reach your Stop Loss level then you would lose the trade.
Directional Bias:
It’s one thing being able to determine if you should be buying or selling in an upward or downward direction but what’s the best way to determine directional trend bias? Understanding directional trend bias is very important but how you may ask?
There are many different approaches we could take but the easiest by far would be by using EMA’s which stands for Exponential Moving Average.
-
An EMA looks at a certain number of bars and draws an average moving line that follows price in real time
-
It is a lagging indicator because it is always looking at historical data
-
EMA’s are best used in pairs when using it as a trend filter (eg 5&10, 8&20 etc) some people also use EMA’s to show dynamic levels of support and resistance or maybe even as a trade execution tool when the EMA’s cross over. We will just be looking at how they can assist us as a trend filter though.
Choosing the right EMA pair isn’t something you can learn straight away, it comes with practice over time and a bit of experience plays a big role too.
An EMA can be created using ANY number:
-
The number you choose will determine how many bars will be taken into consideration when drawing the average moving line out
-
An 8 EMA will look at the most recent 8 bars and a 61 EMA will look at the most recent 61 bars etc.
-
When two EMA’s are being used as a trend filter, the smaller number is considered as the FAST EMA and the larger number is considered as the SLOW EMA
-
The Colours of EMA’s are irrelevant
Price Action : Timeframes
It’s important to understand that price action or the movement of price can be analysed over different timeframes. 1 bar will represent 1 specific period of time. The most common timeframes exist between the 1min and 1 Month periods.
The 1 and 5min timeframes are the shortest. Which means that 1 bar will represent a 1 or 5 minute period of time and obviously show the changes in price over that period accordingly. The type of traders who trade on these timeframes are generally scalpers who are known to place many trades on one opportunity or setup.
We then have the most common timeframes which are the 15min, 30min, hourly, 4hr and daily charts. This is most likely where you’ll be analysing the charts. We call the traders in this category Day Traders
Then we have the investors playground, the much higher timeframes being the weekly and monthly charts where 1 single bar represents price changes over a week
or a month. Because these bars take quite a while to close its not always the best suggestion to analyse and trade on these timeframes if you are looking for short term returns but it also wouldn’t be a bad idea to incorporate these higher timeframes for your medium to long term setups once you get a grip of the short term setups and trade management.
2.Japense Candlesticks
Japanese Candlesticks are a technical analysis tool that traders use to chart and analyze the price movement of securities. The concept of candlestick charting was developed by Munehisa Homma, a Japanese rice trader. During routine trading, Homma discovered that the rice market was influenced by the emotions of traders, while still acknowledging the effect of demand and supply on the price of rice.
Japanese Candlesticks provide more detailed and accurate information about price movements, as compared to bar charts. They provide a graphical representation of the supply and demand behind each time period’s price action.
Candlesticks Pattern
3. Leverage and Margin
Leverage :
Leverage allows small investors like yourself to trade with what could potentially be large sums of money.
The best way to understand anything is through an example so take note. If the broker allows a leverage of 100:1 (or 1% of position required), and you wanted to trade a position worth Rs 100,000, but you only have Rs 5,000 in your account, it wouldn’t be a problem as your broker would set aside Rs 1,000 as a deposit and let you “borrow” the rest that’s how leverage options can benefit the trader.
Margin :
Margin is not a fee or a cost of transaction of any sorts. Margin is just the small portion of your deposit into your trading account that the broker will set aside from your account balance to ensure you can keep a trade running and pay for a potential loss if it had to occur. In the previous example, the broker required a one percent margin. This means that for every Rs 100,000 traded, the broker wants Rs 1,000 as a deposit on that position specifically. This is like a deposit on the financed position
Lots Size :
In the Stock Market Lot Size refers to the number of shares you but in single transaction.