Taking stock of your stock trading knowledge: A review of the latest IG’s e-book, written in collaboration with Bloomberg
What’s the difference between day trading and scalping? Why is it important to know about the fund flows between stocks and bonds, and how do these trading volumes affect your trading?
For most who are starting out in trading shares, these are questions which you should ask. If you do not have the answers to them, the latest Bloomberg e-book, Taking Stock: A Guide to Modern Trading discusses these topics and more.
Download the free e-book here.
Revisiting the origins of share trading
Did you know the early beginnings of share trading involved trading ships taking perilous journeys, and their ship owners share profits in order to hedge their losses? That’s a piece of history that few experienced traders would be aware of.
In fact, the early versions of share trading also inevitably led to the first market bubble and subsequent collapse, when fundamentally unsound businesses issued shares to hungry investors. Sounds just like every stock market crash in recent history, doesn’t it? You can download the free e-book here to learn more in detail.
The e-book continues to talk about the eventual emergence of our modern day exchanges and electronic trading, and how it brought trading out of the hands of the wealthy minority and into the hands of the masses.
This chapter helped to put our present-day shares trading into historical perspective, while alluding to some universal truths about investor behaviour, both past and present: Investors can be irrational, markets can be volatile and due diligence is essential.
Popular trading styles that work
Taking Stock: A Guide to Modern Trading then moves on into a detailed discussion of various trading styles and strategies that are popular among different types of traders.
If you buy and hold a stock for the long term, you are doing “position trading”. If you prefer to invest for shorter term gains, you might consider “swing trading”, where you trade for swings in price trends over a period of days or weeks. When prices swing low, you can buy a long position, or sell a short position. When prices swing high, you sell a long position or buy a short position.
For investors who prefer not to watch the market over a few days, they could consider “day trading”. Day traders buy and sell throughout a single trading day, and take advantage of short-term market movements, without paying overnight holding costs.
How do day traders maximise their gains with such small price movements? They do so by holding several different positions during a market session, to lock in multiple small gains, instead of trying to secure a single big gain. The problem is, day traders may sometimes allow a losing position to run, in hopes that it will recover, which does not always happen.
How can day traders reduce their risk exposure then? The e-book recommends day traders to use stops and limit orders. Stop orders close a position at pre-set levels to cut losses, while limit orders close a position at pre-set levels to lock in profits. The e-book goes into further detail to discuss how a day trader fully maximises his trades with the use of such stop and limit orders.
There is another trading style known as “scalping”, for investors who are able to spot trends quickly. Scalpers hold trading positions for just minutes or seconds, to lock in gains as soon as the market moves in their favour. This trading style is best suited for investors who are dedicated to analysing and monitoring the market.
There are other trading strategies that investors can utilise, no matter their trading style, and they can find courses on them at IG Academy.
Identifying trends with data
In the second chapter, Taking Stock: A Guide to Modern Trading explains the seemingly irrational behaviour of markets, and how retail investors can learn to use data to decipher how the market will move.
Aside from China, stock markets in most developed countries are “dominated by large quantities of institutional money”. That means most individual investors are not able to move the needle on how prices move. However, it also gives a clue on who is, in fact, moving the needle.
“Market observers look for trends; patterns in the way billions of dollars of investor money wash between the assets of the world. Keeping up to date with these patterns will give you crucial insight into how global investors are thinking.”
One such data is the global fund flows between bonds and stocks, which provides an indication into investor sentiment. Bonds are considered a safe investment, which investors buy to hide in a bear market. Stocks offer a better upside in a bull market, and funds flow towards stocks when investor sentiment turns positive.
Another important piece of data is the trading volumes, which are an indication of the specific stocks that institutional investors are invested in. Trading volumes and other indicators can be obtained from investment service providers like IG, who gives a weekly Momentum Report and its News & Trade Ideas page. Investors can also make use of stock-screening services, analytical tools, as well as financial TV news channels like Bloomberg to learn about the investment strategies of major investors.
If you would like to learn more about the other trading data that indicates the current market trends, you can download and read the e-book here.
What automated trading is and is not
A common problem among investors, regardless of experience, is that they often get caught up in a pattern of emotion-led trading decisions when the market does not move as they expected. This happens more frequently when investors are actively monitoring the market. To take emotion out of the equation, many are opting for automated trading.
What is automated trading? Sadly, it is not a matter of clicking a mouse and watching the profits roll in.
Taking Stock: A Guide to Modern Trading explains that automated trading is a computer programme that will enter and exit trades based on pre-determined rules set by an investor.
To perform automated trading, investors would need to make use of technical analysis tools to set the parameters for the opening and closing of trades. To minimise their risk, they would also utilise trailing stops and guaranteed stops. With all the details in place, the system will then be able to manage all the trades from opening to closing.
Why is automated trading good for investors? Besides the benefit of taking emotion out of trading and enabling investors to stay disciplined, it is also designed to respond to changes in the market situation within milliseconds, which is much faster than any human investor possibly could.
Another benefit of automated trading is that it also allows investors to do backtesting. Backtesting allows investors to see how a single stock had performed under various technical analysis scenarios based on past data and enable them to make better decisions in their automated trading.
Investors should still be aware that automated trading systems can malfunction at times. Some bugs may result in orders not being placed, not being fulfilled, or getting duplicated. Others may arise from hardware or software issues, and some can be resolved by using a server-based automation system.
It is also essential that investors make use of well-known, and reliable systems. For instance, IG offers APIs, MetaTrader4, and ProRealTime. Investors should also be wary of advertisements for automated trading products that offer gains that are too good to be true, because they are likely to be.
You can get more details about automated trading by downloading the e-book here.
Taking Stock: A Guide to Modern Trading provides a frank discussion into the stock markets, offering solid advice for both experienced and novice traders, in a handy format.
While it is impossible for any e-book of this size to provide comprehensive information that all investors will need, the e-book overcomes this by providing plenty of relevant links to other sources where more in-depth information, courses, and explanation videos are in abundance.
If you are serious about trading stocks, you need to download this free e-book now.
This article was written in partnership with IG, the world’s No.1 CFD provider (by revenue excluding FX, published half yearly financial statements, June 2019).
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