Dynamic Trader Guide: Trading for Absolute Beginners

Everyone has to start somewhere. This guide aims to help absolute beginners get familiar with the essentials of trading - how to begin and what to look for when trading with technical analysis.

Technical vs Fundamental

‘No man is an island’ John Donne

Whether you prefer to trade using technical or fundamental analysis is entirely up to you - but neither exist in a vacuum so it’s extremely rare to find a trader who only uses one method to the exclusion of the other.

• Fundamental Analysis:
  A study of the intrinsic value of a stock or asset, generally for the medium- to long-term.

• Technical Analysis:
  A study of charts, with the assumption that fundamental information is already built into price, generally for the short- to medium-term.

As a technical trader, this guide is biased towards that practice - but there will be several references to fundamentals as it would be foolish to ignore such a huge influence on price in the markets. However, as individual traders, we frequently have limited access to time-sensitive information - so relying primarily on our charts (technical analysis) makes more sense.

What to trade?

There are many assets available to us. Some people prefer to specialise in just a few (sometimes only one) while others, like me, prefer to keep their options open with any liquid market.

For stocks you can trade the stock (a company) from your prefered exchange. For example, the NYSE (New York Stock Exchange) or any other USA or local exchange. Or you can trade the index itself (such as the S&P500 - Standard and Poor’s top 500 companies by market capitalization).

There are other asset classes you can trade - foreign exchange or commodities are both good liquid markets for retail traders. This guide is predominantly about stocks - because with so many stocks to choose from we have to know how and when to pick the best ones.
Not all assets are available for retails traders via their broker. You should check what you’re able to trade - sometimes it can be worth asking, if there’s an asset you want to trade which isn’t currently available.

• Stocks (also called equities or shares)

• ForEx (also called FX, foreign exchange or currencies)

• Commodities (such as metals or energy)

• Anything else your broker supports

What’s a bull or bear market?

There are many theories as to why an upward trending market is called a Bull Market, and a downward trending one a Bear Market. The main thing is to know what they are - by having a clear definition.

• Bull Market
  An index moving up (making higher highs) with retracements/pullbacks against the trend (downwards) of less than 20%

• Bear Market
  An index moving down (making lower lows) with retracements/pullbacks against the trend (upwards) of less than 20%

The term ‘bull’ or ‘bear’ can also be applied to shorter term up or down moves.

If an asset is generally heading up it may be called ‘bullish’ and if heading down it can be called ‘bearish’. Even a single day’s move an be called bullish or bearish.

This is not quite the same as Bull Market or Bear Market - which generally refers to a major index such as the S&P500 - so try not to be confused by a mix in terminology.

In a Bull Market you want to look to buy - also called ‘going long’.

In a Bear Market you want to look to sell - also called ‘shorting’ or ‘going short’.

Most people are familiar with what’s entailed with buying a stock - you buy the physical shares and hold them until you want to sell them.

These days you don’t have to buy the shares if you don’t want to - there are a number of alternative ways to make money from an upward move which your broker will happily discuss with you (although be wary of taking their advice - what’s good for the broker isn’t necessarily good for you!).

If you want to ‘short’ a stock you have to sell what you don’t have and buy it back later (to get out of the trade). This may sound complicated but, if you want to trade in a bear market, you’ll soon find it’s as straightforward as buying a stock. A few little details are different but, again, your broker can explain the mechanics of this.

What moves the stock market?

This is a question outside the scope of this guide. There is an infinite combination of data - all with a multitude of outcomes.

What we do know is that a bull or bear market has a huge impact on stock prices - across the board.

Within an index (such as the S&P500) there are sectors into which each stock is allocated by the created of the index (such as Standard and Poor). Generally, in the different stages of the economic cycle (boom and bust or, to be slightly more accurate, expansion - peak - contraction - trough) we expect different sectors to perform better (or worse) from the others.

This is only a rough guide, but it useful to make us aware that we should be looking to trade stocks in the most appropriate sector for the stage of the economic cycle we’re in.

It’s not always straightforward to know which stage we are in (unless you’re an economist) so instead we can look at sector performance in conjunction with the index.
Once we have the best performing sectors (if you want buy in a Bull Market) we can then look for the best stocks in that sector.

• Are we in a Bull Market?
  The index you track is making higher highs (with pullbacks/rectracments/countermoves) of less than 20%
  If YES then

• Which are the best performing sectors?
  Use the economic cycle (expansion, peak, contraction, trough) to decide the strongest sector(s) - or look at a chart of the sectors

• Which are the best performing stocks in this sector?
  It’s important to know how long the sector has been outperforming the other sectors as you don’t want to select stocks which may be approaching their peak price

• If in a bear market then look for the worst stocks in the worst sector(s)

The process is to determine the overall MARKET direction - pick the best SECTORS - pick the best STOCKS.

Trading a stock

To trade a stock you have to be aware of three factors: the ticker symbol, the bid price and the ask price.

You should also bear in mind that there will be an additional cost, such as a commision, to your broker for fulfilling your request.

• Know the ticker symbol of the stock you want to buy
  If you get it wrong you’ll be buying the wrong thing

• Know the ask price
  This is the price you’ll pay when you buy a stock

• Know the bid price
  This is the price you’ll get when you sell a stock

The ticker symbol is shorthand for the stock you want to buy. Sometimes it is an obvious abbreviation of the name of the underlying company - but, sometimes, it bears little or no resemblance to the company name. Make sure you get it right.

When you buy a stock you pay the ASK price. This will be higher than the BID price you’ll be quoted if you want sell the stock back. The difference is called the SPREAD.

What this means is that if you were to buy then sell immediately - and price had not moved - you will have made an immediate loss.

The spread is what the market makers charge to keep the markets flowing. On top of this you will probably also pay a commision to your broker. Sometimes the brokerage fee is included in the spread (as you can generally only buy and sell stocks through a broker).

Be aware that the spread will vary throughout the day - it is usually highest (which is detrimental to the trader) for the first few minutes the market opens. It is best to wait for the first 10-20 minutes of trading to pass before entering orders, if you are able.

The spread will be different for each stock, too.

Basic share information

When looking at a share price, it is useful to look at several features. For technical trading those are:

Price (open, close, high and low of the day, week and/or month)

If you are buying a stock you want to see price close higher than the previous day.

A good bullish stock won’t close higher every day (more than five days in a row is quite exceptional). So before you enter a trade you need to know how much price fluctuation you are prepared to accept.

52 week high (or 52 week low in a downtrend)

Most technical traders tend to be looking for similar price movements. A common one is the 52 week high (in a bull market) or 52 week low (in a bear market). When price ‘breaks out’ above the 52 week high many traders feel there is ‘momentum’ behind the move and expect price to go higher. When price breaks below the 52 week low the momentum is expected to take price lower.
This isn’t always the case (nothing works all the time) but occurs often enough for traders to make this presumption.

Volume

Volume is a great tool available when trading stocks (there is no equivalent information currently available to retail traders for other assets such as forex or commodities).

At its most basic, volume tells us how ‘liquid’ a stock is. Blue chip companies are usually very liquid - lots of people trade them everyday so you can easily buy and sell at the quoted price. If a stock has low volume there may be no buyers when you want to sell your stock.

A more advanced method is to use it to help determine momentum. When price makes a move (such as a breakout of a 52 week high) it’s really helpful to know how much momentum is behind the breakout (in other words, how likely the move is to stick and for price to go higher).
If the volume on the breakout is higher than the previous day then the assumption is that  more traders are expecting price to go still higher. If volume were lower on the breakout then it usually means there is no momentum (or conviction) behind the breakout - price may well pullback (fall back below the high) on the next trading session.

200 day moving average

A really good rule for new traders to follow is to only look to buy a stock when it is trading above its 200 day simple moving average (sma). If you want to ‘short’ a stock then the odds are more in your favour if you wait for price to be trading below the daily 200sma.

• Price
  Be aware of the daily/weekly/monthly open, close, high and low

• 52 week high or 52 week low
  Lots of traders like price to break above the 52 week high (in an uptrend) or below the 52 week low (in a downtrend) - it can be profitable to go with the crowd mentality

• Volume
  High volume usually means more liquidity - which means you are more likely to get in and out of trades at the price you want
  Increased volume on breakouts/breakdowns can also signify increased momentum

What do I need to get started?

• All traders need the following:

  • A broker account

  • A computer and internet access

  • A strategy and timeframe

  • Practice

• For technical traders the following is also essential:

  • Charting software

Everyone needs a broker account - you can’t trade without one. Finding the right one to suit you can be a little tricky - and it takes time to move funds from one broker to another so it pays to do your research first.

If you are starting with a small account (less than your local equivalent of around $5,000) then you need to find a broker which allows you to trade really small amounts per tick/point/pip. Brokers will often encourage you to ‘over-trade’ and withhold features until you have traded a certain number of times.

It’s always worth asking if you can have better terms if you think this is the case - they won’t hold it against you and they don’t want to lose your business. As most brokers are online you can often do this through ‘chat’ and don’t even need to speak to anyone!

Use the best computer and fastest internet access you can afford. Trading shouldn’t be a chore - you want to complete your analysis and place your trades promptly. No-one wants to miss trades due to technical issues.

You also need to have a strategy - plan the trade and trade the plan. I’ve no idea who originally said that but it’s essential to becoming a successful trader.

Within your strategy you need to know your timeframes. How much time do you have (or want) to spend on your analysis and trading each day? If it’s once a week you should look to trade from a weekly chart. If it’s every day, trade from a daily chart. You can trade from a lower timeframe (hourly, for example) but that’s quite time consuming and there’s no proof that it’s any more profitable. In fact, in my experience, I have found most traders find it less profitable - and considerably more stressful.

Once you have a strategy in mind you need to practice it and see if it needs improving. You can backtest it - but that's never quite the same as implementing it with real money. That’s why it’s wise to find a broker where you can trade really small amount while you see if it works.

Don’t be in a hurry to make the big bucks. Capital preservation, while you find your feet, is essential. You may want to join a forum or sign up for a newsletter - but do choose carefully and make sure their goal is the same as yours.

There’s no right or wrong in trading. One person can be long a stock and another short and both can make money. It depends on their strategy and timeframe - in other words, their entry and exit.

The final item is charting software. There are some good, free packages available - some are online (in the cloud) while others have to be installed on a PC (usually they’re not easily installed on Macs).

These can be helpful in the early days - even brokers are offering ever-improving charting software. However, in order to tailor your charts (for ease of use) you will probably find that you need a professional package - and doing this sooner, rather than later, can save a lot of time in the long run.

Demo Accounts

Many people like to start practicing their trading using a demo account. While this may be helpful for practising placing a trade (it’s essential to understand how to place limit orders, market orders, and stop losses with your online broker) but can be unrealistic practise for handling your own, very real, money.

I always recommend new traders start with a small account size (rather than a demo account) so they can see how it really feels to trade. The monetary gains (or losses) may be small but you can build up confidence by looking at percentage gains.

Psychology of trading

Anyone above average intelligence has the potential to be a successful trader. It’s not an intellectual endeavour. Smarter people don’t make better traders.

If you’re trading isn’t going quite to plan you should first look at your strategy. If you don’t have a good strategy then you will never be a good trader - you must know when to enter and, more importantly, when to exit a trade.

If you believe that you have a good strategy and sound analysis (you ‘plan the trade’) but seem incapable of sticking to it (you don’t ‘trade the plan’) then you need to look at your psychology.

There’s no specific ‘trading psychology’ that I’m aware of. You don’t need to be emotionless or able to completely suppress your emotions - this would be highly energy intensive and stressful.

You do need to be able to relax - to be able to think clearly - and follow your strategy rules.

Some people find it flippant when trading is referred to as a game. I can see why - money is essential in our society to be able to do what we want and to help others, if we choose. But at the same time I once hear a business speaker say ‘How we play games is how we play life’.

How do you play games? Do you only want to play weaker opponents, to be sure of winning? Do you cheat (maybe just a little bit)? Is winning not as important as taking part? Is winning essential? Is it about simply trying your best? Do you like to keep score? Do you let other people win just to keep them happy? Are games simply not very important?

When I first heard this it really made me sit up and think. Some of the answers to the above appear obvious (for how it might shape you as a trader). For example, if you value ‘taking part’ over winning then you may not currently have the necessary determination to learn a new skill and excel at it. Or if winning is essential you may currently find it difficult to accept losses (and all traders make losses - no-one is right all the time).

One area to be particularly mindful of is that the markets aren’t a person - it doesn’t care if you’re winning or losing and you can’t persuade it or bend it to suit you. There’s no-one to beat.

So we have to shift our psychology, especially if we’re good negotiators or a people-person - because the market is not human.

The main qualities of a trader are patience, tenacity, consistency, discipline, and diligence. If you feel you need help in improving these parts of your personality then there are many self-improvement courses you can attend. You can try to pretend to be these things, while you trade but, as they are all good qualities to possess, it might be more beneficial to you to shift your psychology to incorporate them into you. It may take some time but the rewards will be incredible. Remember, no-one is born the perfect trader.

• You don’t have to be super-smart to be a trader

• If you’re experiencing trading losses check your strategy is sound

• If your strategy is sound but you aren’t implementing it correctly you may need to work on your psychology

• It’s easier to change yourself than try and be someone you’re not

Summary

In this guide we have looked at the very basics for getting started in trading.

• The different approaches (technical versus fundamental) to trading

• The assets readily available for retail traders (stocks, forex and commodities)

• The definition of a bull and a bear market

• How the economic cycle will affect strong sectors and shares

• The basics of a share price

• The resources required to get started

• The psychology of trading - the qualities required to implement a strategy successfully

In Part two we’ll be looking at ??????

Part 2 Dynamic Trader Guide: Trading for Absolute Beginners

9 Golden Rules of Trading

1. Plan the trade and trade the plan

2. Cut losses short

3. Let profits run

4. Never add to a losing trade

5. Stack the odds in your favour

6. No position is a position - if there’s nothing to trade then trade nothing

7. Don’t trade the news - the markets reaction to news is more important than the news itself

8. Do not try to predict the future - let price dictate your actions

9. Trade for the love of trading - not for the love of money

Plan the trade and trade the plan

The importance of having a Trading Plan cannot be stressed enough. All traders should have a written plan and follow it.

You should put a lot of time and energy into creating it - and for your first few years of trading it should be revisited and revised regularly (every 3 months is a reasonable time period).

A TP can really help with your psychology, too. By reviewing it regularly you will benefit from assessing two key elements - if your strategy is performing well and if you are performing well (sticking to the plan!).

A trading plan is personal to you, so it can include anything you feel is relevant. But as a starting point you may want to consider the following:

• Trading goals and objectives

• Most suitable broker account for your account size

• Accountability

• Market conditions in which you trade/don’t trade

• What asset classes youtrade

• Risk management

• Stop losses

• You trading strategy/strategies

  • When to enter

  • When to exit at a profit

  • When to exit at a loss

• Trading routine

• Checklists

• Trade logs

• Review process

Certain aspects of your TP will need to be referred to daily, some parts weekly, and a few less frequently. For example, you may want to keep a copy of your strategy next to your computer and use it as a checklist.

Cut losses short

The first rule to making money from trading is to cut losses short. If price doesn’t do what you were expecting it to do (which is usually to go into profit fairly quickly) then you don’t want to be in the trade.

Whenever you enter a trade you should always have a physical stop loss - when you enter a trade in your broker account you should be able to enter it before you execute the order (if not, then you will be able to enter it as soon as the trade is triggered).

Your physical stop loss may be some distance from your entry - so, if price doesn’t perform as you were expecting, you might want to move that stop loss closer to price acton.

Experience will teach you where an appropriate place is to set your stop loss (an area of support or resistance, for example). The main thing is to know where you want to get out if the trade goes against you.

• Always set a stop loss

• Never cancel a stop loss

Most traders are fairly good at accepting failed trade loses. Not all trades work out - many successful traders expect up to 50% (or more, in some circumstances) of trades to fail. And that’s okay because of the second rules in trading - let your profits run…

Let profits run

When you first start trading, and are finding your feet, winning trades can be hard to find. This isn’t a problem - no trader expects all their trades to be winning ones. A system that produces 50% winners is more than sufficient to make excellent profits over the course of a few months or a year. But only if you apply the two crucial rules of cutting losses short and letting winner run.

It’s human nature to snatch at a profit, especially if there have been several loses in a row. But it’s really important to milk every last penny out of a trade that’s going in your direction.

If you are short-term trading (scalping, day trading or maybe having positions open for a few days) then you want to keep a pretty tight stop. This type of trader can’t let profits run as the time constraint is too narrow. These traders must have a strategy which is successful more than 50% of the time - and will only really benefit if their system has a much higher success rate.

But for most medium- to long-term traders the best thing to do is to avoid profit targets. If you close a well-performing trade - just because it’s reached a profit target - many times you’ll find price continues in the direction of the now closed trade. And you have to try and get in all over again.

A better method is to have a trailing stop loss (to lock in some profit) yet give price a bit of leeway or space to move a little against you. Price doesn’t go up in a straight line, it will take breathers from time to time - just like we might if climbing up a steep hill.

So if you’re in a winning trade then lock in some profit through a trailing stop loss - but give it enough space to fluctuate a little on its way.

• Get to breakeven (move your stop to entry) as soon as possible

• Always trail your stop loss to lock in profits

• Never move your stop loss further away from price action

Never add to a losing trade

Sometimes referred to ‘averaging down’ adding to a losing trade is the quickest way to losing all your account.

If a trade goes against you then you should look to get out of that trade. But many novice traders see it as an opportunity to get in at a better price - and, they believe, when price finally turns around and goes in their direction they will have made even more profit.

In fact, you will find that you’re just adding to - and accelerating - your loss.

As stated before, if price doesn’t do what you’re expecting it to do (which is go in your favour and into profit within a reasonable time period) then you want to get out - not add to a loser.

Cut your losses and move on - redirect your energy to finding a winning trade.

• Never, ever add to a losing trade.

Stack the odds in your favour

Technical analysis for trading is a numbers game - not every trade will have a successful outcome.

A good starting point, for beginners, is to aim for about a third of trades to be stopped out at a loss (at your predetermined stop loss), a third to be stopped out at breakeven (once a trade goes in your favour you move your trailing stop loss to the entry point - but then the trade fails), and a third to be winning trades (where you let your profit run as far as price allows).

However good a setup may look, there is always a chance of failure. Traders have to accept that a probable outcome is not the same as a ‘sure thing’.

However, there are lots of things we can do to stack the odds in our favour - and make sure our trades (breakeven or winning trades) have a high probability of success.

As part of your own strategy/trading system you should build up a set of ideal requirements you want to see. These should be based on past history of the asset (a stock, for example) you want to trade and other assets which generally act and react in a similar manner.

Firstly, look at the big picture. For example, don’t trade any stocks short if the markets (such as the S&P500) is in an uptrend. Only look for longs (stock to buy). If you’re a really talented driver, you might think it perfectly safe for you to drive on the wrong side of the road - but it only takes one poor driver coming at you from the opposite direction to prove you wrong. Go with the flow.

Second, develop your ‘edge’. This is your strategy/trading system. It should include a checklist of items you want to happen before you enter a trade. If you trade breakouts and you’re looking to go long then it may be to wait for a breakout above the 52 week high AND for price to be above the daily 200 moving average AND volume must be above the previous bar’s volume.
There should be several conditions - but don’t make the list so complex that you find it too difficult to follow.

Third, pick your exact entry points (a set number of ticks above the last closed bar, for example) and calculate your stop loss (as a percentage of your account size as well as the price level). Know what conditions will result in you exiting the trade BEFORE you enter - don’t rely on your gut feelings.

Fourth, add anything else you think you need to give the trade as much chance of success as possible. A good trade is one which is well planned and executed - not the one that makes you the most money (pleasant though that is!).

• Be aware of the big picture

• Develop your edge

• Build your conditions for entry

• Build your conditions for exit

No position is a position

If there’s nothing to trade then trade nothing. In the previous section we looked at stacking the odds in our favour - if nothing fits your criteria then you should stand aside and not trade that day. Stick to your rules. If several weeks go by you may want to consider amending your rules (maybe you have too many conditions). But don’t be in a hurry to do so.

For example, if the markets are not trending and your condition to trade is to have a bull market, then there’s little you can do. The S&P500 (one measure of the markets) often spends several months in consolidation - moving sideways while hanging around the 200 moving average. If you try and trade you may be stopped out, at a loss, several times - which can make a serious dent in your capital.

Frustrating though it can be to sit on the sideline it is by far preferable to do this than watch your account disappear.

You may decide to develop a shorter-term strategy more suited to a ranging market - or have a look elsewhere (commodities or forex) and see if you can trade some other asset.

• One of the advantages we retail traders have over the large institutions is that we can stand aside rather than have to be invested at all time

Don’t trade the news

The markets reaction to news is more important than the news itself.

Traders and investors can be in the market for different reasons - one may view a news item as good, another person as bad. News can be good - but not as good as expected. And, most importantly, those in the business (the institutions and banks with the largest positions) may be well aware of the news that is about to be announced - way before it’s on our TVs or data feeds. This is why it’s not unusual to see price increase for several days before a positive news item is released.

While, in theory, prices should move on perfect information and solid fundamentals this is not the case in practice. News tends to cloud our thinking as we have no way of telling who already knows and/or what the outcome will be.

In fact, if you know a big news item is about to be announced it may be safer for us small traders to out of the market altogether. While we like to trade liquid assets, very high volatility can easily whipsaw us in and out of trades in seconds - even if we were right about the eventual direction.

• Often the market takes account of the expected news before it is announced

Do not try to predict the future

Always let price dictate your actions.

As the saying goes, if you have ten economists in a room there will be 11 opinions as to what is going to happen next. And do you really rely on the weather forecast?

Predicting the future is simply an opinion of what you think is most likely to happen. As traders we act on this because trading is about probabilities - probable outcomes. But we should never try and predict the future because once you think you know what’s going to happen you will inevitably be careless with your risk allocation and bet the farm.

So, while we want to have a probable outcome in mind we should always wait and see what price actually does.

• The market can stay irrational longer than you can stay solvent - it’s better to be rich than right

Trade for the love of trading

If you just want to trade for the money then it’s far less likely that you will be successful. For some people, their motivation is so strong that they can make money - regardless of whether they’re enjoying themselves or not. But for most of us, we do better at those activities we enjoy.

In all honesty, almost everyone I meet with an interest in trading always starts with some phase similar to: I’ve been interested in the markets since I was a child.

This applies to me, and I’m not alone. It’s a fascinating subject and well worth the time, effort, and heartache required to become proficient.

As with any new skill, it takes time and effort to acquire the knowledge required. You will grow as you learn and acquire new competencies - some you didn’t know you even needed!

It’s a fun journey and there’s always room for improvement.

If it appeals to you then start trading today!

• There’s no ‘endgame’ with trading - we all need to keep practising and improving

Summary

In this part of the guide we have looked at some of the rules every trader should consider following.

Everyone has their own style, so you may wish to add your own - either now or in the future.

There’s no one right way to trade - find the way that suits you and which gives you your ‘edge’.

Part 3 Dynamic Trader Guide: Trading for Absolute Beginners

The big picture

While there are several asset classes to trade (stocks, commodities and forex being the most liquid for retail traders) stocks are generally the most popular - especially during a Bull

Market (which usually last for several years).

One reason for stocks being so popular is that we can build up a big picture and drill down to the best stocks.

Many traders new to the markets often, unfortunately, start at the bottom by looking at individual company performance first.

• This part of the series will show you why it’s more beneficial to work from the top down.

Economic Cycles

Now, before you start getting too panicked, we don’t have to understand the economic cycles - or even exactly where we are in them. We just have to know that they exist and different companies will do well at different stages of the cycle.

When the economy is expanding many companies will be able to take advantage of the extra growth (money) that is available. Almost every reasonably well run business will benefit.

This will be reflected in the stock market - the news will regularly inform us that the stock market is ‘making new highs’. New highs will continue - even after the economy starts to cool. It’s not unusual to get almost exponential market movements just before a decline. This is often referred to as a ‘bubble’.

If we start from a low (towards the end of a recession, for example) then certain Sectors (a group of companies and industries which are similar in some way) will generally outperform other sectors. As the economy expands, other sectors will take over as the fastest growing group, and so on.

Here’s a summary of the different stages:

• Early-Cycle Phase:
  The economy is rapidly recovering from recession. The credit begins to grow as monetary policy eases (interest rates are falling), which adds money and liquidity to a weakened economy. As a result, corporate earnings are growing and consumers are spending.
  Best sectors include consumer cyclicals and financials.

• Mid-Cycle Phase:
  This is typically the longest phase of the business cycle. The economy is stronger but growth is moderating. Interest rates are at their lowest and corporate earnings are at their strongest of the cycle.
  Best sectors include industrials, information technology, and basic materials.

• Late-Cycle Phase:
  Economic growth is slowing and begins to appear overheated as inflation climbs higher and stock prices begin to look expensive compared to earnings.
  Best sectors in this phase include energy, utilities, healthcare, and consumer staple

• Recession Phase:
  Economic activity and corporate profits are declining and interest rates are climbing. This phase is typically the shortest.
  Best sectors in this phase include the same sectors as in the Late-Cycle Phase but you should consider moving into Early-Cycle Phase as well (often within a few months of this phase starting).

There is no set rule as to how long (or how dramatic) each stage will be, but each usually lasts for at least a year. For this reason it’s a good idea to assess, and reassess, your prefered sectors on a monthly or quarterly basis.

There are many Industries within each Sector (between 5 and 20) and how each industry performs should not be overlooked.

How to find the best sectors

One way to decide which economic cycle we’re in is to see which sectors are doing well - and which are underperforming.

There are fundamentals you can track - such as interest rates and inflation. However, we need to know how to identify the best sectors - regardless of the economic cycle - so we can transition before (or as) the cycle changes.

In your charting software you should be able to list the sectors which have performed the best (or worst) over a set period (usually in percentage). It’s useful to compare several time periods (such as 1 week, 1 month and 3 months) and to rank the sectors accordingly.

If that’s not possible, you can compare the sector charts (about one years worth of data should be sufficient) and see which is trending well (more on how to identify trends in a later part of the Dynamic Trader series).

Often this doesn’t exactly correspond to the economic phases (as stated in the last section) but don’t worry about this too much. If we’re in a Bull Market then look to go long in the best sectors, and if we’re in a Bear Market then look to short the worst performing sectors.

A definition of bull and bear markets was outlined in Part 1 of the series.

• In a bull market look for the best performing stocks in the best performing sectors

• In a bear market look for the worst performing stocks in the worst performing sectors

How to find the best stocks

Once we have the best performing sectors we need to access the stocks within those sectors. Again, your charting software should be able to do this for you.

Then you can rank the stocks in the same way we ranked the sectors (growth over 1 week, 1 month and 3 months, for example).

What we’re looking for is sectors and stocks which are just emerging - we don’t want to get in at the top of the market.

How to read charts will be covered in a later section in this series of guides.

Summary

Different sectors perform well at different stages of the economic cycle. Even if we're unsure of the stage we’re in we can still find the best performing sectors.

Once we know the best sectors our software will give us a list of the stocks within that sector - and we can choose the best stocks from there.

Part 4 Dynamic Trader Guide: Trading for Absolute Beginners

How to read charts

Reading charts is the basis of technical analysis. It can be like learning a foreign language - although, at first, it can feel more like trying to communicate with an alien!

There are 4 main components to chart analysis:

• Price

• Support and Resistance

• Identifying trends

• Indicators

Price

Price is the most important aspect of chart reading. Without it, there is no chart.

Most people like to use candlesticks to display price action. If you’re really new to trading, this might be a new concept, but it’s generally the accepted way to display charts.

The alternatives are line charts (usually showing only the closing price) and bar charts (which show the open, close, high and low - as with a candlestick - without the coloured ‘body’).

As candlesticks are so common today they are often referred to as ‘bars’.

Candlesticks

A candlestick can display any time period - more than a year, a month, a day, 60 minutes or 5 minutes or less. Generally, it will be a daily bar - but this will depend on the timeframe you trade within.

Candles can be bullish (price opens low and closes high and/or price closes in the top half of the price range) or bearish (price opens high and closes low and/or price closes in the lower half of the price range).

Candles also have wicks, or tails, which show the high of the bar (above the body) and the low of the bar (below the body).

Insert candle with annotation

Traditionally, a bullish bar was white and a bearish bar coloured black. Nowadays they can be any colour you want but the standard is either blue or green for bullish and red for bearish.

Some types of candles, and multi-candle formations, have special names (Steve Nison’s book, Japanese Candlestick Charting Techniques, is an excellent reference tool). A few of the popular ones are doji, spinning tops, bullish/bearish engulfing, and hammers/hanging man.

A candlestick helps us see what price has achieved in the last session. It is just a snapshot in time, so we need to put it together with other bars to identify support and resistance, or to identify a trend.

Support and Resistance

While price is the most import aspect of a chart, support and resistance levels are a result of price action - and this tells us how price is behaving over time.

• Support occurs below price action.
  If price is trading just above $20 then moves down (but does not go below $20) before moving up again then we know $20 is a support level.

• Resistance occurs above price action.
  If price is trading below $50 then moves up to $50 (but does not penetrate the $50 level) before moving down again then $50 is considered a level of resistance.

Some new traders can find it difficult to conceptualise support and resistance in bull and bear markets. While it’s not crucial to learning trading terminology to trade well, knowing the difference is essential when communicating with other traders - and, more generally, to save yourself becoming confused.

Support and resistance is strongest if there are multiple touches (either recently or in the past) on a horizontal level. For this reason, round numbers ($10 or $100 for example) should also be considered when conducting your analysis.

However, it is important to note that, for a trend to develop or to reverse, support and/or resistance will be broken.

Identifying a trend

There are only three ways price can move - up, down or sideways.

The most important aspect to consider here is your timeframe.

• If you’re looking to be in a trade for several days, weeks or months then you want there to be an overall trend (either up or down)
  There are several methods you can use to help you identify this

• If you’re looking to be in a trade for less than a few days then there is no requirement to identify a trend - although trading in the direction of a trend may improve your success rate

Most successful traders are trend traders. This is anecdotal - as far as I’m aware no research has been conducted to see if this is true - and it was the conclusion I drew from reading Market Wizards: Interviews with Top Traders by Jack D Schwager.

There are strategies to make money whichever way price moves, but for retail traders (with limited resources) it is generally less complicated to follow a trend trading system.

My definition of a trending market is

• Bull market: price making higher highs and higher lows for a least 3 months (trading from a daily timeframe)

• Bear market: price making lower lows and lower highs for at least 3 months (trading from a daily timeframe)

• Consolidation: price not making higher highs (at the end of a bull market) or lower lows (at the end of a bear market) outside the range in three months

It is also helpful to see if the higher timeframe (the weekly chart, if you trade from the daily timeframe) has any resistance/support directly ahead (which could prevent price continuing to move in the trends direction).

One question that new traders always ask is how much data (the number of bars) they should have on a chart. It’s an excellent question. The answer is about 150-250.

On a daily chart this is about a year, on a weekly chart it is about three years, and on a monthly chart about 10 years.

If you think it might be logical to just look at a daily chart with 10 years of data then you can try it. But it makes it much harder to see the major pivot points (major support and resistance) and recent price action - both of which are required when analysing data.

Trendlines

Cluster S/R - Major and Minor

Patterns - continuation and reversals

Gaps

Indicators - leading lagging

Moving averages golden death cross

Convergence divergence

RoC

BB

Relative Strength

Volume