Congratulations! You just opened your account and are ready to place trades. Well not so soon! Before placing any trades we have to see what you are looking for. The type of trader you are. If you read how to start investing in 3 steps, this is part 2. If you still don't know what type of trader you are, no worries. In this article, we will go over chart indicators, strategies, and fundamental analysis.
What are Indicators?
An indicator is a mathematical calculation based on the price of the chart. There are 4 major different types of charts.
- Trend Indicators
- Momentum Indicators
- Volatility Indicators
- Volume Indicators
From these 4 major types of indicators, you get hundreds of different ways to adjust the "main indicators". Take a look at the chart below. Look at the indicators highs and lows all across the top to bottom.
Similarly, they all look alike but are slightly different at some point. These are all considered momentum indicators. If you are looking to buy an indicator from someone ask what kind of indicator it is. You can probably make it on your own. In order to keep this simple if you are looking into the setting (the calculations) of the indicator, there is usually a major setting you can change. For example, all the ones above have a setting: Length that is changeable. Let's change that number from the default setting of 14 to 50.
As a result of changing the length, they look different now. The only thing that changed is the one settings. Some indicators have more than one setting that you can change. Therefore, there are so many different types of indicators out there.
What are strategies?
Strategies can consist of one or more indicators to create an entry and exit. For the sake of simplicity let's look at the same indicator above with the length setting of 50.
This indicator has two horizontal lines that are placed at 80 and 20. The strategy that we have above is every time the line cross up over 20 to buy and sell every time it crosses down from 80. Due to the same indicator as a strategy, you can see that there is multiple sell and buy orders one after another. There is no trade management in this strategy. To add trade management that would be trailing stop set dollar amount loss, or a different indicator like a moving average or parabolic.
There are a ton of strategies out there some have huge profits but also huge drawdowns. Find what fits your trading needs or make your own.
What is a fundamental analysis?
The income statement, balance sheet, and statement of cash flow are three of the must look at for fundamental analysis. Looking at those can give you the real value of the company. Let's look at AAPL (Apple).
Net profit for AAPL has been staying stay around the same 20 range. Recently it has fallen below 20 to 19. This may be due to the recent China trade war and the cost of Apple production go up. If Apple's net profit continues to fall then you the company may be overvalued at its current price. Therefore you might take a short position on Apple. Wait! There is a lot more to look at just net profit. For example, Apple said they are moving productions of the new Macbook back to the US. Now that leads to who will supply this and will it cost less or more overall than China. Will they increase the price of future devices to continue the same profit margins?
As a result, looking at Fundamental Analysis is not just looking at one thing. Looking at the whole company as a whole including the CEO of the financial reports.