Not too long ago, trading in stocks was restricted to the select few in the society. It was either the very rich - who would use their wealth to first create movements in the prices of the instrument and then to take advantage of these movements - or those who had the time and the opportunity to keep a close watch on the actions of the 'very rich' and following suit, to take advantage of the expected price moves.
The advent of the internet has completely altered many things about trading in instruments. Firstly, it has expanded the geographical scope of trading. What a few years back was available only at the national level and sometimes only at a regional level, is now available at an international and a global level.
We can now trade the New York Stock Exchange or the London Stock Exchange or the Tokyo Stock Exchange, or even all of these at the same time, sitting in the comforts of our homes. Secondly, it has expanded the scope of the instruments being traded. Trading, which was generally restricted to stocks and other domestic instruments has now expanded to commodities, currencies, metals and everything else that is bought and sold anywhere in the world.
Thirdly, the contemporary concept of "Mini" accounts has opened those doors for people who can only afford to risk a couple of thousand or sometime even a couple of hundred dollars, for instance, in exploring the potential of making money through trading, which were previously open only for the rich. A large number of internet-based companies provide softwares and, generally, uninterrupted data feeds making charts of all kinds of products available to our desktops. You can buy or sell gold, silver, palladium, platinum, copper, brass, wheat, or even livestock, sitting at your desk. You can trade the shares quoted on the New York Stock Exchange or the London Stock Exchange. You can trade the Euro pairs or the GBP (Great Britain Pound), the USD (United States Dollar), the JPY (Japanese Yen) the CAD (Canadian Dollar) or even the SGD (Singapore Dollar) pairs, five days a week, at any time during the day or night.
These developments have renewed and expanded the prospects of making money available to the common man in all parts of the world and have greatly increased the opportunities of exploring his potential more effectively. However, on the other hand, the lure of making money and "get-rich-quick" in most of these opportunities is so strong that the ambitious and aspiring mind jumps into it without equipping itself sufficiently with the technical and mental education and training necessary for consistent success in this field.
The result, in many cases, is disastrous - not only from the financial perspective but also from the perspective of the psyche and self-confidence of the aspirant and ambitious mind, which, if properly educated and trained, could have been very successful in the field. A tragic loss of potential indeed!
Combining this tragic state of affairs of the highly motivated go-getter, with the fact that many of the economies of the third-world nations are suffering from stagnation and slow rate of job growth, relative to the number of graduate and post-graduate students passing out of their universities and colleges.
It is my belief and conviction that not only should individuals try to equip themselves with such abilities which would allow them to benefit from the opportunities that are made available to them by the internet age, but our business schools should take the initiative of introducing formal courses that would develop such skills in their students which would allow them to benefit from taking part in the world markets and, thereby, creating their own vocations and sources of income for themselves and not become a victim of the stagnant local job markets.
FUNDAMENTAL ANALYSIS AND TECHNICAL ANALYSIS:
It will be beneficial to introduce to the readers at the outset that there are primarily two distinct philosophies of trading prevalent among successful traders. One is called 'Fundamental Analysis', while the other - which, according to some, became formally accepted by the trading community as recent as the late 1970's or the early 1980's - is called 'Technical Analysis'.
In its simplest form, 'Fundamental Analysis' relates to taking trading decision based on the study and analysis of the factors that can influence the price of a certain thing.
Thus, fundamental analysts would take into consideration and study all the factors that could influence the balance of the demand and supply of the product being traded and, thereby, raise or lower its price. Thus, for example, a rise in the interest rates of a currency is likely to increase the demand for that currency and, as a result, increase its value relative to another currency. Similarly, a better than usual crop of wheat is likely to increase its supply relative to its demand, and may affect the prices negatively.
On the other hand, 'Technical Analysis' relates to the study and analysis of the price itself, in determining what is more likely to happen to this price in the future. This analysis is based on the assumption that the price of the product is the net result of the decisions of all the buyers and the sellers in the market, at any given time.
This collectivity of buyers and sellers - being humans - most of the times, act in exactly the same way as the collectivity of the buyers and the sellers behaved in the past or as would this collectivity behave in the future. This collective behaviour of the buyers and the sellers create discernible patterns in prices, which if properly recognised will keep repeating themselves. This element of repetition provides the alert trader the opportunity to benefit from the process, by buying, when the pattern is bullish; and by selling, when the pattern is bearish.
There are also many successful traders who combine elements of both fundamental as well as Technical Analysis in their trading regimen. Nevertheless, without claiming success to be the sole domain of either of the two kinds of traders, I have to submit that I personally feel more in coherence with the Technical approach.
A final word. Consistent success does not imply that all the trades you enter will earn profits. On the contrary, consistent success should be perceived to imply achieving consistent growth in one's equity over a period of time.
Price charts are the foundation of 'Technical Analysis'. Today, we will what a price chart is. In its simplest form, a price chart shows us the movement during specific intervals of time. This time interval may range from a fraction of a second to a month or a year or even more.
For our purposes, there are basically two kinds of charts. Firstly, those which give the last price of each time interval. One such chart is called the Line Chart. Suppose our selected time interval is a day. In a line chart, a line would be drawn from the last price of the first day to the last price of the second day.
If, for example, the last price of day one was 10 and during day two, after some movement in price, it ended at 20, in a line chart, it would show as a line drawn from 10 to 20. Exhibit A, below, shows an illustration of a Line Chart of the USD/CHF pair.
There are many traders who prefer to use the line charts, for its ability to clearly present the real move from one day to the next, in the most precise manner. However, on the other hand, there are those, who do not like to use line charts because they fail to provide the complete picture of the price move during the selected time interval.
For example, the Line Chart only tells us that at the end of the first time interval, the price was 10, while at the end of the second time interval the price was 20. It does not, for instance, tell us where did the price start during the second time interval (although most of the times, it is the same as the last price of the previous time interval. This, however, is not always the case); it does not tell us how high or how low the price touched, during this time interval.
To overcome the shortcomings of the line chart, the Bar Chart was developed. The Bar Chart shows the complete price of each time interval in the shape of a bar. In modern Bar Charts, the opening price, the high, the low and the closing price during that time interval is indicated. 'Exhibit B' shows the same USD/CHF chart in Bars:
Thus a bar chart provides much more details regarding the price movement during the selected time interval. Finally, showing all of the above information, but in a much more expressive manner, is the Candlestick Chart. In addition to showing the opening price, the high, the low and the closing price during the selected time interval, the Candlestick chart also pictorially shows whether the net move during the selected time interval was positive or negative. Exhibit C, is the same chart of USD/CHF presented in the form of a Candlestick Chart:
As can be seen from the above exhibit, there are two separate colored candles in a candlestick chart. These separate colors of a candlestick chart also communicate a lot to the chart reader. The white (and, in some cases, green) colored candles of a candlestick chart imply that the net price move during the interval under consideration was upwards; while the black (and, in some cases, red) colored candles imply that the net price move during the interval was downwards. amjad.moiz@gmail.com.