Is it necessary to study economics in order to make money in the Stock market?
No. It is simpler than that.
So, how I can make money in the markets?
You have to learn technical analysis (method of evaluating securities by analyzing statistics generated by market activity). You can learn it in a few weeks. It is much more easy, fast and fun than study economics. But, above all, it is much more effective.
So, make money in stock markets is easy?
No. It is easy to obtain the knowledge to make money but if you want make money in the stock markets you need more things in addition to knowledge. Psychology is very important as we saw in the previous lesson. Experience is also very important. You need to practice several months doing virtual trading (simulated trading where beginner traders can practice investing without using real money) before performing actual operations.
If you follow our lessons you can make money investing in the stock markets systematically (that does not mean we will always get it right but have a trading system with positive mathematical expectation).
Software Para Analisis Tecnico
You must download one of the following software applications:
- Visual Chart
- Pro Real Time
With any of these two applications you can practice technical analysis. Although Visual Chart and Pro Real Time have hundreds of options at first you have to focus on searching an asset by name or by its ticker (code that uniquely identifies an asset) so that you can open its graph. Then you have to find out how to draw simple lines on the graph (both Visual Chart and Pro Real Time have a simple menu, you just have to search the Tools menu and select the option Line).
At the same time you use Visual Chart o Pro Real-Time you have to open a demo account in a broker (demo accounts allow traders to use virtual money in a simulated trading environment) in order to buy and sell according to the information provided by the technical analysis. Alternatively, you can use websites that also allow virtual trading like La Bolsa Virtual.
Thus, you will analyze the assets using VisualChart or ProRealtime determining which assets are appropriate to open long and short positions. Then, with your demo account, you will execute the buy/sell orders and you can follow the evolutions of your portfolio over time.
Another simple tool for technical analysis is our Trading Panel (see www.smartglobalmarket.com/market)
Figure 1. Trading Panel
You can also see it maximized here: https://www.tradingview.com/chart.
Getting Started in Technical Analysis
There are 2 fundamental things in Technical Analysis that help us make money in the stock market:
- Supports and resistances
Always before opening a trade, you must know the trend of the asset and its supports and resistances.
The trend of an asset is the tendency to move in a certain direction (beyond the daily noise). There are three types of a trend:
- The bullish trend: the asset tends to rise.
- The bearish trend: the asset tends to fall.
- The sideway trend: the asset does not have a clear bias towards any of the two directions.
There are several methods to identify trends. The graphical method is the simplest. You have to draw lines, using Visual Chart or Pro Real Time, connecting the maximum daily price (if the slope of the line is negative then you will get the bearish trend line) or minimum daily price (if the slope of the line is positive then you will get the bullish trend line).
You have to connect the daily highs (two or more high points are necessary). If the line has a negative slope then you will get the bearish trend line (see Figure 2). This indicates that the asset’s trend is bearish. Note that in the graph, the time progresses from left to right.
Figure 2.Bearish trend.
In fact, you can set the time frame to show the price movements on 5 minutes, 10 minutes, 30 minutes, 1 hour, 1 day, 1 week, 1 month, 1 year… But it is normal that each candle shows the movement of the asset over a day.
In each candlestick, we can see the high of the day, the minimum of the day, the opening price and the closing price. The body of the candlestick is black if the closing price is below the opening price and white if the closing price is higher than the opening price (although there are applications that display other colors like red instead of black and green instead of white). A candlestick without body indicates that the opening and closing prices for the period are at the exact same level.
You have to connect the daily lows (two or more low points are necesary). If the line has a positive slope then you will get the bullish trend line (see Figure 3). This indicates that the asset’s trend is bullish.
Figura 3. Bullish trend
You have to connect the daily lows (two or more low points are necesary) and the daily highs (two or more low points are necesary). If you obtain a horizontal rectangle similar to the Figure 4 then the asset’s trend is sideway.
Figure 4. Sideway trend
Actually, there are 3 types of trends: primary, secondary and tertiary. If the trend line has more than one year then we are figuring out the primary trend (the most important, is the main direction of the asset). If the trend line has less than 1 month we are figuring out the short-term trend (the least important since in the short-term the asset can be moved randomly affected by news and rumors). And if we are in between then we are figuring out the medium-term trend.
Supports and Resistances
A support is a price level at which buyers show up, keeping the price from falling. A resistance is a price level at which sellers show up and keep the price from rising. In the supports price does not fall because there are too much buy orders in that zone to satisfy all the offer (investors who want to sell). Similarly, in the resistances price does not rise because there are too much sell orders in that zone to satisfy all the demand (investors who want to buy). This can be clearly seen in the order book:
Figura 5. Order book
The order book shows for a given asset, the best buying prices and best selling prices. There is an order book for each asset and it resides on the servers of the Stock Market. On the left we see the buy orders submitted by investors (Bid prices). We can sell our shares at these prices (they are the best prices at which we can sell). On the right we see the best sell orders sent by other operators (Ask prices). We can buy shares at these prices (they are the best prices at which we can buy). Along with the different prices for buying and selling, we can see the volume (number of shares) for each price. When there is a significant increase in volume in the Bid price we have a support and when there is a significant increase in volume in the Ask price we have a resistance.
Supports and resistances are also easily locatable graphically using chartism (technical analysis). For example, in Figure 4 we can see how the bottom blue line is a support since when price touch the line the price does not fall more (because there are many buy orders and few sell orders). In the same way the top blue line is a resistance since when the price touches the line the price does not rise more (because there are many sell orders and few buy orders). You can also check that in Figure 2 (bearish downtrend) the downtrend line is a and in and in Figure 3 (bullish trend) the bullish trend line is a resistance.
Supports and resistances help us to establish the stop-loss and the stop profit. Thus, you can easily design the profitability-risk binomial. For example, in Figure 4.you can open long positions when the price touch the support setting a 2% stop-loss below support (it must be given some leeway because a support/resistance is an area rather than a specific value) and the stop profit in the resistance located on the top blue line (7€). This will get a good profitability-risk binomial: if the operation fails you will lose a 2% but if it succeeds you will earn a 8%. Moreover, you are more likely to hit that fail, since support level usually holds the price. A support/resistance can hold 3,5,10,…times before failing. We will determine the strength of support/resistance level by how many times the support/resistance level holds the price. If it is a short-term support/resistance will have little strength to hold the price whereas that if it is a long-term support/resistance will have much strength to hold the price. The medium-term supports/resistances have an intermediate strength between the short-term and long-term supports/resistances).
Trend lines also help to determine good entry and exit points, and help you decide where to put your stops. Busllish trend lines act as support. When price falls and touches the bullish trend line is a perfect moment to open long positions. Bearish trend lines act as resistances. When price falls and touches the bearish trend line is a perfect moment to open short positions. But not all trend lines have the same strength as supports/resistances. Long-term trend lines have much strength but the short-term tren lines have little strength and price can break trend line easily.
Also, the moving average works as support when the price is above or resistance when the price is below. Long-term moving average (for example SMA200), have much strength as supports/resistances. Long-term moving average (for example SMA40), have intermedian strength as supports/resistances. Finally, Long-term moving average (for example SMA14), have little strength as supports/resistances. Both Visual Chart as Pro Real Time allow you to draw the moving average you want.
Remember, supports and resistances act as price barriers. You must buy above supports and selling just below resistances.
Defining a good Profitability-risk binomial
When you open a trade you must define a good profitability-risk binomial. (at least 2:1). For long positions places the stop-loss just below the support which you buy and the stop profit in a resistance which is ubicated above the current price (not necessarily the first resistance appears above the price, because if your have a long-term position you can not choose a short-term resistance). For short positions places the stop-loss just above the resistance which you buy and the stop profit in a support which is ubicatedbellow the current price (not necessarily the first support appears bellow the price, because if your have a long-term position you can not choose a short-term support).
How to make money systematically in the stock markets
To make money systematically in the stock market (trading system with positive mathematical expectation) you have to open long positions in bull assets (long-term bull trend and medium-term bull trend at the same time, and if the short-term trend is bullish even better) and open short positions in bear assets (long-term bear trend and medium-term bear trend at the same time, and if the short-term trend is bearish even better). But not just any moment, to open long positions you have to wait to buy when the price reaches a support (or that the price is near a support level, provided that the price is above the support) and to open short positions you have to do it when the price reaches a resistance (or that the price is near a resistance level, provided that the price is below the resistance). Thus, you can define a good profitability-risk binomial.
It is as easy as that!? Only with that I always will hit?
No, that is not the point, that is impossible. The aim is tohave a trading system with positive mathematical expectation. A trading system is a set of rules for when to enter and when to exit a trade. There are hundreds of trading systems. Each user can have a different one. A simple trading system would be formed by the following two rules.
- Rule 1: Buy any bullish asset which its price is at a support level.
- Rule 2: Open short positions in any bearish asset which its price is at a resistance level.
For example, if our trading system fails 30% of the trades, losing 3% in each trade and hits 70% of the trades, getting 10% in each treade then we have a winning system, that is, a trading system with positive mathematical expectation.
How can the MapAdvisor help me to make investment decisions?
The MapAdvisor estimates the tendency of each asset, so you do not have to waste time finding out, and gives a score from 0 (very bearish) to 10 (very bullish). In general, assets with a scorehigher than 4 than 6 scores are in uptrend (assets to open long positions) and assets with a score lower than 4 are in downtrend (assets to open short positions). While the assets with a score between 4 and 6 are in a sideway trend. These rules are approximate and vary for each asset. For example, there could be anbullsish asset with a score of 5. For this reason, as supplementary information to the score, in column Justification, the short, medium and long term trend is indicated. Moreover, the MapAdvisor also gives a suggestion for each asset indicating whether or not it is a good time to open a trade. But, each user have to define his own profitability-risk binomial (the MapAdvisor does not offer personalized advice). There are users who will define a binomial 2:1, others will prefer a binomial 3:1,… depending on where each user puts the stop loss and stop profit (there is no single solution, each user will define a binomial that it deems appropriate according to their preferences and personal circumstances).
Summary of the Lesson: You have to download Visual Chart or Pro Real Time and begin to practice two important things: detecting trends over time (short-term, medium term and long term trends) and detecting supports and resistances (short-term, medium term and long term supports/resistances). It is easy, you just open the candlestick chart of different assets and draw lines joining the highs and lows. If the lines encompass more than a year you will be detecting long-term trends or long-term supports/resistances. If the lines cover less than one month then they are short-term trends or short-term supports/resistances. If the lines are in between they will be medium-term trends or medium-term supports/resistances. Moreover, you have to start using your broker demo account to open long and short positions in different assets. Remember that every trade you make must have defined a good reward/risk ratio.