Trading Basics 101
With global economic growth stagnating, with some European countries experiencing negative interest rates and mounting debts, most expect an impending recession. Even so, many economic bubbles exist in several sectors such as real estate and stocks in developed regions across the globe. How can you, a potential retail trader, minimise your risk in theses uncertain times and perhaps profit a little?
- Technical Analysis
Technical Analysis involves studying the trends and patterns of prices and speculating the short-term future prices and use appropriate financial instruments to profit from market volatility.
How to make read a trading chart:
a. Time-frame: Technical Analysis is usually reserved for short-term speculations (several days to a few months)
b. Candlestick chart:
Opening price: price at the start of the day when the market opens
Closing price: price at the end of the day when the market closes
Extreme ends of the line (called shadow): highest/lowest price of the day
If the opening price > closing price, the price has decreased for the day and vice versa.
Volume: the length of the rectangle measures the amount of stocks traded during the day, such that it reflects the psychology of the majority of retail investors and/or large firms which can engage in transactions in bulk.
c. Resistance and Support lines
Resistance line: connects several highest points of a price for a given period of time
Support line: connects several lowest points of a price for a given period of time
When the price breaks above the resistance line as in the case above, the price is likely to rise and that would be the time to buy, while if the price falls below the support line, the price would likely fall and that would be the time to short.
- Fundamental Analysis
Fundamental Analysis involves studying macroeconomic factors affecting the global economy, specific industries and the company itself. It is usually reserved for long-term investment and usually requires holding power due to commissions.
a. Macroeconomic Factors:
Interest-rates affect the availability of credits which affect the amount of economic activity. For example, low-interest rates encourage borrowers to borrow money and purchase big ticket items such as housing. Assuming a growing population, real estate prices will likely increase due to increase demand for houses which also drives up retail consumerism. Conversely, low-interest-rates, coupled with an ageing population, may increase speculation in the real estate sector, leading to the formation of a bubble which may result in a liquidity shock if the price of real estate drops.
Unemployment rates affect the amount of income people receive and as such, high unemployment rates limit the purchasing power of consumers, limiting the effective demand for goods and services in general.
b. Company Management
The character and transparency of the management is of utmost importance. What will the CEO of a company do with the money you invest? Invest in exactly as how he had explained to you in a detailed proposal? Buy a mansion and a Porsche for his own use? How do you keep track of the progress of the project? How much of the fund is he spending on what thing?
Academic qualifications and experience of the management team also play a significant part since experienced, well-qualified professionals are less likely to screw up managing a fund.
c. Company Balance Sheet and Annual Report
Balance Sheet is used to view the Assets and Liabilities of a company. Assets include factories, offices and equities while liabilities include debt from loans, recurring expenditure such as rental and utilities. Is the company high in debt or managing the day-to-day finances well? However, the Balance Sheet should not be taken at face value as certain data can be manipulated or withheld to portray good company earnings. The Annual Report shows the performance of the company for a Audit Year and maybe plans for the future by the management team.
Indicators such as Earnings Per Share (EPS), Debt-to-Equity ration, Estimated Earnings and Actual Earnings can be used to estimate the current state of the company.
All in all, both methods should be used together, regardless of whether you are trading or investing.
