Basic Training Strategy

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This Article was written assuming you have some base knowledge of trading and investing. I’ll provide a quick overview in this article , just in case you need some brushing up on your vocabulary or basic foundational concepts. If this stuff is brand-new to you, and by the end of the Article you “just don’t get it,” again,
please email me and we’ll figure out what you need.

 

Fundamental Analysis vs. Technical Analysis

      1) These are two differing schools of thought when it comes to justifying an
investment or trading decision.
Fundamental analysis attempts to unravel what a company is truly
worth currently and what it will likely be worth in the future, based on
financial reports and underlying factors that affect the business and
operations. Someone performing fundamental analysis of a stock is
attempting to arrive at the value of a company in order to compare that
value to the share price to determine if the current price is overinflated
or undervalued.
      2) Technical analysis assumes that the price of a stock has little to do
with its “true value” and more to do with how the buyers and sellers in
the market are reacting toward its price. Someone performing
technical analysis is attempting to predict where the price of a stock
will be in the future, based on chart patterns and mathematical
indicators.

Trading vs. Investing

Generally, “investing” describes a longer term holding period and a focus on fundamental analysis; the idea is to buy value that will appreciate over time.
“Trading” describes a short-term holding period and frequent buying and selling with a focus mainly on technical analysis; the idea is to take advantage of shortterm fluctuations in price.

Bulls & Bears

Those market participants who believe a stock’s price will rise are referred to as “bulls” or as being bullish. Market participants who believe a stock’s price will fall are referred to as “bears” or as being bearish. Buyers are bullish; sellers are bearish.

 

Supply & Demand

As in any free market, stock prices are determined by supply and demand. For any given stock, the current price of that stock represents the equilibrium between demand driving the price higher, and supply sinking the price lower.
 Those with demand for the stock are the buyers, and those with supply of the stock are the sellers.

Support & Resistance

Support is a price level that a stock has historically had difficulty falling below, due to the high demand in that particular price area. Imagine a group of many buyers, all bidding around a certain price point; the demand pushes up against the supply at that level.

In the chart below, the support line is detailed in green:

image

 

At, and immediately below the price level represented by the green line, is where many buyers are all bidding to purchase stock. Because there are more buyers with demand for the stock than sellers with supply of the stock at that particular level, the price has difficulty sinking below that level. 

Resistance, in contrast to support, is a price level that a stock has historically had difficulty rising above, due to the high volume of supply in that particular price area. In this case, imagine a group of many sellers, all selling their positions to take profits or opening short positions around a particular price level. The price cannot rise above that level because there is more supply of stock from sellers than there is demand for stock from buyers.

In the chart below, the resistance line is detailed in red:

It is important to understand that, many times, support and resistance levels behave more like nets than walls; meaning they are elastic rather than firm and static at exact price points.


Support and resistance are two of the most important ideas to understand with regard to this trading strategy because knowing these levels allows you to make better decisions about entering and exiting trades. We will discuss more on this later.

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