Trading 101 – Trading 101 The Basics
Trading 101 is exactly that. Before an investor proclaims him or herself investors, or even successful traders, they should have mastered trading 101.
Trading 101 isn’t consigned to the fundamental side of the market. However, that is where the newbie should concentrate. Fundamentals usually provide the investor with some rational reason for making an investment decision.
Value is probably a good starting point. That means the investor will be analyzing the factors that go into determining that value. I will stick with equities in this article so for equities the factors may include earnings or sales or other insights into the health of a company.
The investor should also keep in mind that trading 101 says the fundamentals change constantly. That is the nature of the beast. When the fundamentals change, chances are excellent the price per share will steer in that direction.
Because fundamentals change constantly, the fundamental analyst tries to maintain a long term view. They realize that because earnings are down this quarter doesn’t mean earnings will be down for the year.
Markets have an ebb and flow. The company may have experienced a minor hiccup that won’t happen again. On the other hand, if that hiccup is huge like the loss of major clients, fundamental analysis is more than likely telling the investor to go against this particular company. This is trading 101.
Fundamental analysis for physical markets comes down to the balance of supply vs. demand. Shift one side of the equation one way or the other, and there usually will be a corresponding effect on the other side and on the price of that market. This is the intersection of trading 101 with economics 101.
Analyzing markets isn’t that easy again because of the multiple variables happening on an instantaneous basis. What may look bad is really good. What may look good is a cover for the really bad.
Using stock prices as an example we see that a low price doesn’t mean the company will shutter its doors. The stock may have experienced a super downer this cycle and the price per share reflects this phenomenon.
The investor who can ferret out such information will make money because he will buy the shares or call options because he knows the shares will go up in price. That is trading 101 at its best.
On the other hand, a high price issue may look good. After all, its price is through the stratosphere. But when you peel back the layers you see the price is high because of the herd mentality. That is, investors chasing up the stock price so they can sell at an even higher price.
In other words the only support for this high of a price is the masses of asses who believe if they hold for a little while longer they will be able to sell and double or triple their money. This is the good masking the bad. It is also trading 101 at the unsophisticated level.
This raises the questions of, “What is ‘low’?” and “What is ‘high’?” Because both prices and supply and demand are in the equation an investor has to do some digging. This article won’t detail the size of the shovel you will need to do the digging.
Rather, trading 101 tells us that the digging should include such analysis as the supply factors and the demand factors. In other words, don’t look at one side of this occurrence. Look at both sides.
Also, the government may be a prime player in that investment you have under analysis. How is it affecting the supply, demand and price? Did it just enact new legislation that pushes any one or all of these three factors out of kilter?
You have to be on your toes and look at the situation in front of you with both eyes. Don’t be afraid to include some technical analysis in your decision making. This is where trading 101 becomes more interesting. Charts, graphs and candle sticks may provide your answer.
No one really knows until they put their head in the bucket and see what is in there. Trading 101 lets you do the seeing and the analyzing.
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