Basic Trading Principles

By Author: Anthony Green
Total Articles: 36
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A market exists as long as there are a buyer and a seller who put a different value on a particular item and are willing to negotiate a price that satisfies both of them. Traders buy and sell stocks and other financial instruments in order to benefit from fluctuations in prices. The process maintains a fluid market. The price of a stock is determined by the interaction between buyers and sellers who together create a market. The fluctuations in expectations about these prices are subject to myriad variables and have strong emotional effects on buyers and sellers, which contribute to the fluctuating nature of the markets. If prices are expected to rise, there is a natural increase in the sense of greed in the participants. If there is an expectation of prices dropping, emotions of panic are triggered.

Between these two extremes varying combinations of these emotional responses influence events. Various factors influence beliefs about the stocks, which in turn influence stocks' behavior in the future. It is because of the uncertainty of this behavior, and the interaction of the variables, that there is a market at all.
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... The skillful trader learns to read these variables while analyzing the market. The problem inherent in analyzing the market is that the markets are always changing and past events can at best give you only someindication of future events. Past events are not correlated with future events and do not predict them.

While there are numerous methods for analyzing the market, you are well advised to pick the one that is most compatible with your approach to stocks. If you are inclined to focus on price action, you will most likely want to do technical analysis. If you prefer to focus on information about the goods themselves, you ought to rely on fundamental analysis. Trading, too, is the result of many variables, not simply the trading method you have selected. It takes many ingredients to make a successful trader.

How you handle the seesawing effects of the marketplace and the emotions they provoke often turns out to be a more significant factor in your trading success than the trading method you have chosen. You may have used a good method and selected a good stock that trends upward, but suddenly it gaps down on the opening of the next day. You begin to panic and experience anxiety and the fear of losing. You hold on hoping against hope that it rallies. It does rally, and you experience an uplifting of spirits and a surge of confidence. But then it drops again, and you are plunged into a crisis mode, until finally, at the day's end, you arc exhausted and uncertain as to whether you want to continue.

Meanwhile, you have been focused on this stock all day long, and it has taken your attention away from many other opportunities. Although it cannot be separated from your mastery of the basic elements of trading, ultimately how you think, feel, and manage your feelings is critical to your trading success. Emotions can throw off your trading by influencing your ability to function in a high-risk situation. Fear can paralyze you into inaction or it can lead you to act impulsively so as to get rid of the fearful thoughts and feelings. Fear colors your objectivity and ability to consider all aspects of a question and to maintain that degree of internal calm that will enable you to stay with your discipline.