|Nowadays when you go on the Internet, you see an overwhelming number of advertisements for traders: forex, options, commodities, stocks, bonds, eminis, exchange traded funds, credit swaps, special derivatives… the list goes on and on. As you wade through this ocean of trading opportunities, how do you decide which one is right for you? |
Fact: most retail traders lose money trading, regardless of the trading instrument they select. This is because they do not do their homework first, choosing instead to leap into the markets without a plan or even any idea about what it takes to succeed in a given market. Not only that, it’s not a given that trading in one market is like trading in another; each market has specific requirements.
Before you jump into any form of trading, take a moment to understand the limitations, capital requirements, risk, and knowledge you need to succeed.
THINGS YOU SHOULD KNOW
Here are some of the things you should know when you’re selecting a financial market and the trading instrument you will use for it:
Your trading style will dictate which instrument you should use. Some primary styles are:
WHAT ARE YOU TRADING TODAY?
Asset: Publicly traded stocks, OTCBB stocks, ETFs, and exchange traded notes (ETNs)
Trading styles: All
Experience required: Varies on trading style
Risk tolerance level: Depends on trading style. Leveraged ETFs and ETNs are higher risk due to the inherent nature of leveraging
Capital base required: Depends on trading style
Technical analysis skill level: Depends on trading style
Time required for trading: One hour a week to 10 hours a day depending on trading style
Market participants: All
Degree of difficulty: Low to moderate
Education required: Basic to advanced professional training courses
Underlying asset: Currencies
Trading styles: Intraday, daytrading, velocity
Experience required: Extensive; should have experience in other trading instruments before attempting forex trading. Stock, option, and futures trading experience would be helpful
Risk tolerance level: Extremely high
Capital base required: Moderate to high
Technical analysis skill level: Professional-level training; experience using technical analysis with other trading instruments
Time required for trading: A few minutes to all day
Market participants include: Large institutions, banks, foreign governments, corporations, small retail traders, and professional speculators
Degree of difficulty: Extremely high
Education required: Training in other financial trading instruments, experience trading other markets, professional-level technical analysis, economics, and training on impact of various global and other market conditions and how it affects currency pricing
|Commodity or Futures Trading|
Underlying asset: Raw materials, precious metals, foodstuffs, stock indexes
Trading styles: Intraday, daytrading, velocity, swing, position
Experience required: Other market trading experience and simulated trading. More experience needed than trading stocks or options. Option experience would be helpful
Risk tolerance level: High
Capital base required: Moderate to high
Technical analysis skill level: Higher skill level needed than for stock or option trading
Time required for trading: One hour a week to 10 hours a day, depending upon trading style
Market participants include: Small farmers, conglomerate farms, commodity traders, wholesalers, professional pit traders, speculators, corporations, and small retail traders
Degree of difficulty: High
Education required: High level of experience and market training
The derivatives market is the largest financial market with numerous trading instruments. Not all derivative instruments are readily available to retail traders, and many new derivatives being created are as yet untested and have insufficient historical data to determine their impact on other financial instruments.
No matter what financial instrument you choose, you need to be aware of which derivatives are most likely to affect that financial market.
WHAT ARE YOU GOING TO TRADE?
To avoid this trap requires diligence and patience, and that practice, simulated trading, and gaining skills are all required. A few free weekend seminars may get you intrigued in the subject, but they will not provide the education you need regardless of which trading instrument you choose. If you want to succeed, you will need to invest in your education, and a big part of that is experience.
The financial markets are not the lottery, nor are they a casino. There is no "house," no one entity. If you were trading against just one entity, trading would be far simpler. But you are trading against numerous groups of market participants, all with different agendas, experience, and knowledge bases. Being aware of who you are trading with and who you are trading against are crucial to your success.
If you look at trading as "you against the market" or trying to "beat the market," you will fail because you do not understand your situation. Instead, choose your trading style with care and thought, select the financial market and trading instrument that suit you best, and then put the muscle of a sound education with plenty of experience behind your trading. When you do that, consistent success will come more easily.
|READING AND REFERENCE|
Stokes, Martha . "Volume, The Forgotten Oscillator," Technical Analysis of STOCKS & COMMODITIES, Volume 28: July.
_____ . "The Angle Of Ascent," Technical Analysis of STOCKS & COMMODITIES, Volume 25: September.
_____ . "The Missing Cycle," Technical Analysis of STOCKS & COMMODITIES, Volume 25: April.
_____ . "What’s Your Trading Style?" Technical Analysis of STOCKS & COMMODITIES, Volume 25: Bonus Issue (no. 4).
_____ . "Tools Of The Trade," Technical Analysis of STOCKS & COMMODITIES, Volume 24: October.
• Decisions Unlimited, Inc. (codeveloper TechniTrader)