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Online Trading : Trading Articles

Trading Articles: Over the years I have written many trading articles and online stock tradingitems for magazines newspapers and trade publications. I have included the two shown below as I feel they give a deeper insight into two aspects of online trading which are the hardest to grasp.

The first article on trading is the parable of Uncle Joe, which I hope will get you to think about how the markets work. You may not believe this occurs, but trust me, it does - every day! The second article is to do with with psychology of trading.

If you would like to read more of my published articles please just follow the link here - more published trading articles - don't worry, the main navigation will always stay at the top of the page so you will always be able to find your way back to other pages easily and quickly.

The Parable of Uncle Joe - How the Stock Markets Really Work!

One day after a particularly spectacular trading debacle, my Uncle Joe took me aside and consoled me with some hard facts about how the stock market works. You see, Uncle Joe owns a very unique company and has an insider's perspective on how stock price movement is managed.

His company, Widgets & Co., is the only company in the State that distributes widgets, and it does so under license from the government. It has been buying and selling its unique widgets for many years. Now imagine also that these widgets have an intrinsic value, they never break, and that the number in circulation at any one time is the same. So, Uncle Joe, being a clever man with many years of experience managing his business, realized early on that just buying and selling his widgets to customers was, in fact, rather dull. The amount of money he made each time he bought and sold was quite small, and the number of transactions per day was also low. In addition, he also had all the running expenses of his office, his warehouse and his staff. Something would have to be done.

Having given the problem some thought, he wondered what would happen if he mentioned to a neighbour that widgets could soon be in short supply. He knew his neighbour was a terrible gossip, so this was nearly as effective as putting an advertisement in the local paper. He also knew from checking his warehouse that he had enough stock to meet any increased demand should his plan be successful. The following day he met his neighbour outside and casually mentioned his concerns, begging the man to keep it to himself. His neighbour assured Uncle Joe that he wouldn't breathe a word; his lips were sealed.

Several days passed and widget sales remained at their normal level. However, after a week or so, sales started to pick up with more customers coming to the warehouse and buying in larger quantities. It seemed his plan had worked and everyone was happy. His customers were happy as they knew that widgets would soon be in short supply and so their value would increase. Uncle Joe was happy because he was selling more widgets and making more money every day. Then he started to think - with everyone buying his widgets, what would happen if he raised his prices? After all, he was the only supplier and demand was high at the moment.

The following day he announced a price increase, but still believing there would soon be a widget shortage, his customers continued to buy in ever larger quantities! As the weeks passed he gradually increased his prices higher and higher, but still the buyers continued to buy. A few of his more astute customers started to sell their widgets back to him, taking their profits, but Uncle Joe didn't mind as he still had plenty of willing buyers.

This was all good news for Uncle Joe, until one day, he suddenly realized with some alarm that his warehouse was now looking very empty indeed. He also started to notice that the volume of sales each day was decreasing. He decided to keep moving prices up, so everyone would think that the situation was unchanged. But now he had a new problem. His original plan had been too successful. How on earth was he going to persuade all his customers to sell widgets back to him so that he could continue in business?

He pondered this problem for several days with no clear solution. Then, quite by chance, he met his neighbour one day in town. The man drew him to one side and inquired whether the rumour he had heard was true? Inquiring into what that rumour might be, Uncle Joe learned that his neighbour had heard that another, much bigger widget distribution company was setting up business in the area. Being clever, Uncle Joe realized that providence had given him the answer on a plate. Appearing crestfallen, he admitted that the rumour was true and that his business would suffer badly. More importantly, widget values were likely to drop dramatically in price.

As they parted company, Uncle Joe chuckled to himself at having such good fortune and such a helpful gossip for a neighbour. Within days he had queues of customers outside his warehouse doors begging him to buy back their widgets. With so many people selling, he dropped his prices quickly, making people even more desperate to sell before their widgets became worthless! As the prices fell further, more and more people cracked under the pressure. Uncle Joe was now buying back an enormous volume of widgets. After several weeks the panic selling was over, as few people had been brave enough to hold out under the pressure.

Uncle Joe could now start to sell widgets again at their old levels from his warehouse full of stock. He didn't mind if it was quiet for a few months as he has made a great deal of money very quickly. He could afford to take it easy. His overhead expenses were covered and he could even pay his staff a healthy bonus. Everyone soon forgot how or where the rumours had started and life returned to normal. Normal that is until Uncle Joe started thinking one day "I wonder if we could do that again?"

WHAT'S THIS GOT TO DO WITH TRADING? The answer, of course, is everything. To most people, the sudden moves seen in the stock market are a complete mystery. Movements seem to be heavily influenced by news and appear when least expected. The market seems to turn upwards when news is at its worst, and start falling when there is lots of good news. The market often does the exact opposite of what you feel it should be doing, or what your instinct tells you it might. More curious is when good news appears and the market or stock falls, or equally odd it rises on bad news or results. Stranger still is the fact that the market always falls faster than it rises. You might think this has something to do with gravity. It does not!

If you have the time, tune in to Bloomberg radio, and listen to the variety of experts who are wheeled out each day, everyone from economists to fund managers, each expounding on their latest take on the market and where it is going in general. These so-called professionals are paid to know what is happening and why, and advise major institutions and corporate clients where and when to invest, yet even they cannot agree. I guarantee if you listen long enough you will hear 10 different views from 10 different people. Some will favour the bear side, others the bull. Some will favour technology stocks, others will avoid them like the plague.

You will find these professionals in any business involving huge amounts of money and massive potential profits. As a private trader or investor you will be playing against these professionals and if you don't know how the game is played — please don't bother shouting foul — no one will hear you, least of all care. They don't know you and will take your money without a second thought.

If you think my Uncle Joe's story is fiction, think again. Many companies like Uncle Joe's are involved in the market and collectively they are known as the market makers, impacting the market every hour of every day of every week that the market trades. With over three hundred years of collective expertise, they have definitely reached professional status. To trade successfully in the market, you need to start thinking like they think.

So, finally, let me leave you with the chartist's prayer:

The Chartist's Prayer

May my assessment of today's price action be based upon the facts, all of the facts and nothing but the facts. May I not be influenced by fear, greed or the ill advised comments of others, which may be made in their interests and not in my own. May I take into account the past history laid before me on this chart and make my assessment based on my knowledge and logic, and not on my emotions

The Inner Trader and You

Real trading is hard. Real trading is stressful. Real trading is difficult, and it will physically drain you. One day, your emotions will soar as you watch your positions move in to profit; the next day, you will plumb the depths of despair as those paper profits vanish. So what makes you think you can succeed? The market is littered with the corpses of those who thought they could beat the market with the latest technical indicator that has worked for the last 10 years. Sadly, it failed in year 11, or when you tried it. Everyone's looking for the perfect system, the foolproof method, the quick solution, the get-rich-quick scheme. I have news for you — they don't exist.

So you think you can succeed in the toughest market of all? What makes you any different from anyone else? The answer is very simple — it's you.

You are unique; there is nobody else like you in the world. Your genetic makeup is unique, your background and upbringing are unique. They have made you what you are today, warts and all. The values that you hold are those that have been instilled in you through your childhood. Your perspective on life has been moulded and created by your parents, your teachers, your partner, your colleagues.

Your entire world is how you see it — not anybody else. Your idea of risk will be yours and yours alone. Your attitude to money will be unique to you. Some of you reading this article will think that $200 is not much to lose in a few minutes, while others will take an opposite view. In terms of your overall capital wealth, it may be a small sum. However, as a percentage of your trading capital, it could be significant. If it's 10% you would be out of the game in 10 trades. Less than 1%, you stay in the game longer and live to fight another day.

Undoubtedly, you will have strengths, but you will have weaknesses also. Understanding yourself as a person is the single most important factor in deciding whether you succeed or fail as a trader. If you do not understand yourself, you cannot succeed. Make no mistake about it; your personality has a major influence on how you trade. It is more important than the software you use, your broker, your system, or even what your partner thinks. In Market Wizards, Jack Schwager suggests that the single most important element of a successful trader is in having a trading plan that fits your personality. How can you write a trading plan if you don't know your personality? Oh — you probably don't have a trading plan either!

So where do you start? If you are currently trading or thinking of trading, stop now and complete a trading personality profile. Plenty are available on the Internet, some for free. An excellent place to start is at the website of Brett Steenbarger, author of Psychology Of Trading and associate professor of psychiatry and behavioural sciences at Suny Upstate Medical University. Here, you will find a simple 15-question test with a scoring system and explanation of the results. This is a very simple test that you can complete in a few minutes, but it will give you an overview of yourself and the facets of your personality. Further, you may want to consider taking a Myers Briggs test, the bare bones of which may be found on the Internet or in one of the many books on the subject, or even in the full-blown, professionally run test. The Myers Briggs test contends that individuals fall into one of four pairs of behaviour patterns:

Extroverted or introverted
Sensory or intuitive
Thinking or feeling
Judgmental or perceptive.

These behaviour patterns combine to form the 16 basic personality types that will tend to dictate the natural preference for behaviour in a given situation. There is no right or wrong type. The assessment is based on a series of questions that will indicate your particular behaviour preference. This is money and time well spent. After you take a test or two or fill out a profile, you'll have results that are most likely fairly close to the truth. At this point, you'll probably ignore the negative aspects and admire what you feel are the more positive ones. This is normal. Humans in general are optimists — why would everyone normally expect stocks to rise if this were not the case? Here's a tip — concentrate on the negative.

Now you have a better idea of your personality and the attributes that make up your personality. You cannot refer to the attributes as strengths or weaknesses, since strength in one situation could be considered a weakness in another. How do you merge this with your trading? Simple, really — take for example the personalities of my wife and me as we trade together.

I am an introvert and loner by nature, disciplined, with great attention to detail. I like things well-ordered and prefer to work to a plan. My view of money is not to take unnecessary risk and to err on the cautious side when investing. I am normally calm and rational, except when under pressure when logic can be overtaken by emotion. When losses occur, I can take some time reflecting on them, but on the positive side I try to learn a lesson for the future.

My wife, on the other hand, is almost the exact opposite. Gregarious by nature and an extrovert, she is undisciplined and bored by detail. She will tend to trade by instinct, and for her, money is a means to an end. She is quite happy taking large risks, and if these do not work out, she writes the result off to experience, and moves on.

As a couple, we trade completely different instruments. My wife trades currency pairs. Trades are completed in minutes and hours rather than days or weeks. A typical trade might last for 10 to 15 minutes, an hour at most. Once the trade is complete, the profit or loss is taken, the position closed, and on to the next trade. The market is open 24 hours a day, so trading can be fitted in to other activities. There are only a few major currency pairs to trade, so research is limited to the major trends, economic announcements, and world events. She has a loose trading plan that defines money management and risk.

In contrast, I trade US equity options, using a combination of covered call and covered puts. Positions are generally open for days and weeks, but entry and exit points are clearly defined by stop-losses and expiry prices, so the trades are virtually mechanical. This removes virtually all emotion from the trades. I only check the screen two to three times a day in a seven-hour trading session. There is considerable research involved in finding company earning dates, checking volatility, sectors, volume, charts, and so on. I have a clearly defined trading plan that defines all aspect of the trades, along with money and capital management.

I hope you can see how we have selected the markets and instruments we trade to suit our personalities as closely as possible. We would not be able to swap — it simply would not work, and I would not swap her for the world!

Please spend some time discovering yourself — you might just get a surprise.

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