What A New Trader Needs To Know…

So, if you’ve somehow come across the world of retail trading, it often seems overwhelming. And soon, I find most new traders try to figure out “what tool/indicator/setup do i need to know to make money with?”

My personal view is, this is not an effective way of going about learning to trade successfully. I believe it should be viewed as a craft. Learning to use 1 or 2 tools is like a mechanic learning how to use a wrench and a sledgehammer… but not knowing how to use any other tool. It really wouldn’t cut it. A mechanic needs to know how to use many different tools, and then depending on the situation or problem with an engine, he can choose the appropriate tool for the job, and is able to be effective no matter what the situation is. He is not limited by his tools, but he is a master of them, and therefore can acheive a much greater success rate than a guy who only knows how to use a wrench and a sledgehammer.

So, here is a list of what I believe every trader needs to know if they want to really learn how to trade the markets, day in, day out, and be successful.

1. Support and Resistance – There are a variety of ways to determine what “support” and “resistance” are… and I believe a familiarity with each of them is best.

• Classical support and resistance concepts
• Chart patterns that provide clearly identifiable places of support and resistance
• supply and demand zones (a form of S&R popularized by sam seiden)
• “diagonal” support and resistance, such as in a trending market (S&R levels that are NOT drawn horizontally, but diagonally)
• session/daily/weekly/monthly/yearly highs and lows, and how they operate as support and resistance
• zones of consolidation, and how they operate as support and resistance once price comes to “retest” them after it broke out of them at some point in the past
• newsfeed flow information – printed news info that provides price points where offers, bids, and stops of large institutions are “leaked to the press” and broadcast to anyone who has the appropriate news feed or news source

2. Trends – Markets do in fact move upward or downward over time, and this shifts for a variety of reasons as well. Learning how to measure a trend, including the following components of a trend, is invaluable and necessary IMO

• Learn how to draw trendlines. These are better than any other way of measuring a trend, IMO.
• Learn how price reacts when a trendline breaks
• Learn how to determine if a trend is sustainable or unsustainable
• Determining the “age” of a trend, and using this knowledge to better know the likelyhood of a reversal pattern working, or a continuation pattern working, etc.
• Understand the phases of a market trend, such as accumulation, mark up, distribution, mark down, etc. And understand what they look like on a chart
• Know what chart patterns support a current trend, and know which ones may signal the end of a current trend (or at least a retracement)

3. Price Action and Candlesticks – This is the “alphabet” of the language of a trader. Learning this is essential to top caliber trading

• Learn the basics of candlestick charting
• Learn the popular and most effective continuation patterns, as well as reversal patterns
• Understand exactly what the underlying market forces behind specific candlestick pattens are… and what the implication of any particular candlestick pattern is.
• Learn how to view various candlestick patterns in terms of how they should be interpreted within the context of other time frames and the overall trend.

4. Volume and volume analysis techniques – Many forex traders do not use volume, however, I believe understanding volume concepts can provide a great benefit to any trader, of forex or otherwise

• Learn how volume and price work together to further support a potential price pattern, or to warn of the potential failure of a particular price pattern
• learn the basics of how volume relates to a healthy or aging trend… strong volume in an uptrend should accompany breaks to new highs, and visa versa in a down trend.
• Learn the basic concepts of volume spread analysis
• Gain a basic understanding of market profile, and how volume relates to this

5. Market correlation – money in the world today connects all the markets in the world in some way. Some markets have a very strong correlation, and others have nearly none at all. By determining which markets move in tandem,which markets move inverse to each other, and which markets are generally uncorrelated, one can determine which way money in the world is currently flowing, and trade in that direction. A trader will need to have:

• an understanding of how the bond markets, currency markets, equity markets, and commodity markets all are interrelated.
• a knowledge of what markets move with or against the currency market you have choosen to trade
• a knowledge of how to use correlated and inverse currency markets to determine the overall strongest, and weakest, currencies, and how to best take advantage of opportunities that these will provide.
• a knowledge of the risk involved in trading too many correlated markets, and how it can create a situation in which you are risking far more than you believed you were

6. Market fundamentals – although many traders today tend to shy away from this, I believe a working understanding of what is and isn’t important in terms of fundamental factors that influence the markets. It allows one to make more informed trading decisions, even if it does not itself provide very specific insights into how to best take low risk, high probability trades in the markets.

• Central banks, what their goals are, and how they operate to attempt to control the money supply
• The prime interest rate, set by the central bank, and how it plays an effect in the currency markets
• The current events and situations that each major central bank is paying the most attention to…and how they are most likely to react to these current events and situations
• GDP, Employment, and other major economic factors that can help understand the overall strength or weakness of a country (and therefore, how it will affect it’s currency valuation)
• Bond yields, bond markets, and how they contribute to displaying the fundamental backdrop of the strength or weakness of an underlying economy

7. Market Sentiment – this is neither fundamental, nor technical, though it will use information that could be used by either school of analysis. It is really a study of fear and greed in the market, and what factors are having an effect to increase or decrease the fear and greed in a market, as well as how the market participants are reacting to this. One key difference between sentiment analysis and fundamental analysis is that sentiment analysis CAN and WILL consider the effect of “rumors” or “seemingly inconsequential events” before they are fact, or before the final outcome is known. It’s really the analysis of fear and greed in the market participants, and determining opportunities to best take advantage of these fluctuations of fear and greed.

8. Multiple time frame analysis. Most of all, how each time frame effects the other, and how correlation across multiple time frames increases the positive outcome of any particular opportunity, as well as how larger time frames are more significant and therefore smaller time frame opportunities should always be viewed in the larger context to see how relevent they are, etc.

9. Basic market microstructure knowledge, including:

• The various market participants, their needs, and typical behavior patterns
• How bids, offers, market and limit orders are used by different participants for very different reasons, and why
• how to determine where price is likely to move, in terms of finding liquidity necessary to any particular participant
• to understand how orders exist and are executed in the marketplace
• a familiarity with how larger participants and a need for liquidity will play out in the market.
• options, and how they affect the forex markets

10. Other technical tools to be familiar with, including but not limited to:

• Moving averages
• Fibonnacci levels, particularly fib retracement levels
• Pivot points, and their derived levels such as S1, R1, etc.

11. Almost forgot this one… but a basic understanding of the COT report and the implications of it:

• For all of it’s imprecisions and open ended answers to the questions many pose towards it, I feel it’s the single best indicator of potential triple and even quadruple pip, trend defining movements of anything I’ve ever seen. The fact that it actually works at all is something of a minor miracle….but work it does.
• Know it’s limitations… it’s very good on magnitude, it’s weak on timing. But COT is kinda like the tornado early warning system… just because it sounds doesn’t mean your house is moments from being uprooted in a tornado, yet one would be foolish to ignore what it is warning of
• Understanding that it can tell if a large scale trend shift is under way, and to at very least recognize trading against it is putting the odds against your best interest.
• A familiarity with the basic concepts of how the COT report indicates extreme optimism or pessimism in the market, and how that REALLY plays out in every market over time can be priceless in explaining why markets often move against fundamentals, and why the strongest trends of all are in fact the most vulnerable to equally strong, almost immediate reversals. This insight alone can be of significant value to a novice trader as they try to understand seemingly inexplicable large scale price movements

There is more to know, but this is a top 11 list for me. So… if your having trouble finding success in the market, and you believe or somehow know it is an issue of knowledge, and not psychology… see if there is anything on this list that you don’t really know about or understand, and get to learning it.These are all things that I personally use every day to determine the value of a potential opportunity in the market…and if you don’t know it, it’s likely that someone else does, and is going to be better prepared to avoid risk or exploit a good opportunity that you will not see, and either miss, or fall victim to paying out part of your account because of something you didn’t consider.

Again, learning to be a good trader is like learning to be a mechanic, or a pro athlete. It’s not about learning 1 or 2 tools, or 2 or 3 setups. It’s about learning how the market works, how to measure that, how each tool is best used to get the best information, and then how to use a different set of tools to best create a plan to exploit an opportunity for profit in the marketplace.

It is possible to get by with less, and many do… but very few are able to make consistent money without an understanding at least on the general level of how most of these concepts play out, and how to take advantage of them.