Сommonly, traders have to make decisions that may affect not only their capital but also their further presence in the market. Therefore, many speculators, especially beginners, are very anxious when it comes to making an important decision. It is no secret that emotions are the worst enemy of traders. However, they can easily avoid a stressful situation. They just need to be acquainted with the methods of how to simplify the decision-making process and use these techniques in their everyday trading.
When the market is highly volatile and uncertainty prevails, it keeps speculators on their toes. They become extremely nervous when the moment of making a decision comes. Quite feverishly, market players are trying to understand which stocks to buy and which to sell, when it is best to make transactions, and how to get the highest profit. Professional traders are aware that an effective way to reduce the psychological pressure is to justify their decision as much as possible. They also use three types of analysis, namely factor analysis, fundamental analysis, and technical analysis, that may help them dispel doubts and choose the best strategy. Moreover, savvy investors do not choose only one method. In order to make the right decisions and consistently stay in the black, they skillfully combine these methods depending on their trading style.
In this article, we will tell you about each of the techniques, as well as advise where it is best to apply it:
Factor (or news) analysis is an assessment of external events that affect asset quotes. The most significant ones are:
political events;
macroeconomic indicators;
commodity prices;
dynamic of foreign stock indices.
The market trend largely depends on the incoming news. For this reason, before making a decision, traders should always carefully study the news background and try to predict what might happen to make good use out of it. Experienced market players sometimes show phenomenal foresight, making trades even before rumors or expectations are confirmed in the news feed.
However, only a trader who is confident in his/her abilities can choose such a strategy because it is often difficult to envisage how an external factor that has already been factored in will affect the price, not to mention rumors. Nevertheless, you should not ignore this method of decision-making, especially if you prefer scalping, day trading, or position trading where it is extremely important to monitor the market reaction to the news.
Fundamental analysis is the best choice for those who are determined to invest in stocks. The benefits of this method for long-term traders are very high. It allows traders to find the most undervalued shares and companies with bright growth prospects. Fundamental analysis is usually carried out in several stages from top to bottom.
At first, traders evaluate the general economic trends in the world and the country, then examine a specific industry. Then they check the financial health of an individual issuer and the performance of its shares. The main task is to determine the fair value of shares, which will help you make a decision. Undervalued assets are a profitable investment, you can earn money on their further growth and it is better to sell overvalued ones.
Information obtained from the fundamental analysis is often used for a long-term strategy, so this method can only partially be apt for position trading. As for scalping and day trading, this method is not efficient as it does not give a detailed overview of the current market situation.
It is recommended to stick to technical analysis if you are engaged in scalping and day trading. Yet, this method is especially efficient for position trading. It helps traders to assess how the current market situation is changing based on past data: chart, structural, and indicator analysis.
Unlike fundamental analysis, technical one suggests that all expected events (or fundamental indicators) are already priced in the current quotes. For this reason, this method primarily tries to find out at what point the price will change its movement. To understand when it is better to buy or sell an asset, speculators should regularly and very carefully monitor trading signals and technical indicators. They get the most valuable information from price charts. They are sure to help traders to make the right decision which leads to profit.
Now that you have become familiar with the basic methods of decision-making in trading, let us talk about how to use them. Knowledge of the theory is only the first step. However, when traders try to apply these techniques in practice, they are likely to experience a psychological barrier.
There are two possible scenarios:
A speculator is afraid to execute a trade after receiving the proper signal: for example, he/she sees that a trade can be opened but still cannot overcome fear, missing the opportunity.
A speculator is driven by a great temptation to ignore the received signal: for example, he/she understands that it is better to close a position but they are waiting longer than needed due to the excitement.
In both cases, traders become a victim of their biggest enemy - emotions. Unfortunately, very often even a clear and well-thought-out trading plan, compiled with the help of the above-mentioned analysis methods, cannot help investors to cope with strong emotions and a state of nervousness. In this case, they have to be prepared for the second stage - hard emotional self-control.
There are several effective ways to get rid of these drawbacks and be more confident in making decisions:
Stick to the trading strategy. An investor who starts trading with real funds should already have a specific well-thought-out trading strategy at the start and strictly follow it, shrugging off all doubts. It means that by no means should a speculator change it after opening a position. This is the only way to avoid the influence of emotions. If you feel that you are getting overexcited and thinking about changing your previously chosen strategy, it is better to take a short break to cool down. Try switching your attention temporarily to something else. When the storm inside calms down, you can return to the market to make a balanced and reasonable decision.
Set specific limits. The decision-making process will be easier if traders have defined the specific boundaries. The best way to deal with it is also to set the framework for each trade. Therefore, it is recommended to use stop-loss and take-profit orders. "You should stay consistent and do not change your trading strategy under any circumstances," the golden rule of trading states. Otherwise, you will simply invalidate your previous decisions and in the worst case, you will lose your deposit.
Follow the course taken. Here we are no longer talking about sticking to a trading strategy but about commitment to a familiar trading instrument. Sometimes traders are tempted to start experimenting with an asset they little know about. Yet, they have heard from other market players about its high profitability. At the same time, few people in such a situation usually think about whether this instrument is suitable for their trading style. Of course, it may lead to nothing good. Stepping into unknown territory without a well-thought-out plan of action, traders thereby expose themselves to a huge risk.
Revise your mistakes. If you still went on about your emotions and made a mistake in trading because of this, it is very important to analyze what happened. You need to try to understand what feelings moved you at the time of making the wrong decision in order to avoid a repeat of the situation in the future.
Think about a backup plan. The most common reason that it is difficult for a trader to make a decision is a banal fear of making a mistake. Professional market players who have already experienced failures know from their own experience that the best way to deal with indecision at such moments is to use the backup plan. You should think through an alternative scenario of your actions in case your strategy does not work. By doing so, you will not be caught off-guard by the failure as you will have a backup plan for further work.
In conclusion, we would like to share the advice of American psychotherapist Brett N. Steenbarger, who was the first to study markets from the point of view of behavior psychology and wrote several scientific papers on this topic. Steenbarger was a trader himself so his almost autobiographical book "The Psychology of Trading: Tools and Techniques for Minding the Markets" is highly praised today by traders around the world. The author talks about different techniques that help to make the right choice but he makes the greatest emphasis on detachment. He stresses that his best trades were those whose results did not matter much to him financially. If you do not feel an urgent need for a successful result, then the probability of getting one is always higher.
When the market is highly volatile and uncertainty prevails, it keeps speculators on their toes. They become extremely nervous when the moment of making a decision comes. Quite feverishly, market players are trying to understand which stocks to buy and which to sell, when it is best to make transactions, and how to get the highest profit. Professional traders are aware that an effective way to reduce the psychological pressure is to justify their decision as much as possible. They also use three types of analysis, namely factor analysis, fundamental analysis, and technical analysis, that may help them dispel doubts and choose the best strategy. Moreover, savvy investors do not choose only one method. In order to make the right decisions and consistently stay in the black, they skillfully combine these methods depending on their trading style.
In this article, we will tell you about each of the techniques, as well as advise where it is best to apply it:
Factor (or news) analysis is an assessment of external events that affect asset quotes. The most significant ones are:
political events;
macroeconomic indicators;
commodity prices;
dynamic of foreign stock indices.
The market trend largely depends on the incoming news. For this reason, before making a decision, traders should always carefully study the news background and try to predict what might happen to make good use out of it. Experienced market players sometimes show phenomenal foresight, making trades even before rumors or expectations are confirmed in the news feed.
However, only a trader who is confident in his/her abilities can choose such a strategy because it is often difficult to envisage how an external factor that has already been factored in will affect the price, not to mention rumors. Nevertheless, you should not ignore this method of decision-making, especially if you prefer scalping, day trading, or position trading where it is extremely important to monitor the market reaction to the news.
Fundamental analysis is the best choice for those who are determined to invest in stocks. The benefits of this method for long-term traders are very high. It allows traders to find the most undervalued shares and companies with bright growth prospects. Fundamental analysis is usually carried out in several stages from top to bottom.
At first, traders evaluate the general economic trends in the world and the country, then examine a specific industry. Then they check the financial health of an individual issuer and the performance of its shares. The main task is to determine the fair value of shares, which will help you make a decision. Undervalued assets are a profitable investment, you can earn money on their further growth and it is better to sell overvalued ones.
Information obtained from the fundamental analysis is often used for a long-term strategy, so this method can only partially be apt for position trading. As for scalping and day trading, this method is not efficient as it does not give a detailed overview of the current market situation.
It is recommended to stick to technical analysis if you are engaged in scalping and day trading. Yet, this method is especially efficient for position trading. It helps traders to assess how the current market situation is changing based on past data: chart, structural, and indicator analysis.
Unlike fundamental analysis, technical one suggests that all expected events (or fundamental indicators) are already priced in the current quotes. For this reason, this method primarily tries to find out at what point the price will change its movement. To understand when it is better to buy or sell an asset, speculators should regularly and very carefully monitor trading signals and technical indicators. They get the most valuable information from price charts. They are sure to help traders to make the right decision which leads to profit.
Now that you have become familiar with the basic methods of decision-making in trading, let us talk about how to use them. Knowledge of the theory is only the first step. However, when traders try to apply these techniques in practice, they are likely to experience a psychological barrier.
There are two possible scenarios:
A speculator is afraid to execute a trade after receiving the proper signal: for example, he/she sees that a trade can be opened but still cannot overcome fear, missing the opportunity.
A speculator is driven by a great temptation to ignore the received signal: for example, he/she understands that it is better to close a position but they are waiting longer than needed due to the excitement.
In both cases, traders become a victim of their biggest enemy - emotions. Unfortunately, very often even a clear and well-thought-out trading plan, compiled with the help of the above-mentioned analysis methods, cannot help investors to cope with strong emotions and a state of nervousness. In this case, they have to be prepared for the second stage - hard emotional self-control.
There are several effective ways to get rid of these drawbacks and be more confident in making decisions:
Stick to the trading strategy. An investor who starts trading with real funds should already have a specific well-thought-out trading strategy at the start and strictly follow it, shrugging off all doubts. It means that by no means should a speculator change it after opening a position. This is the only way to avoid the influence of emotions. If you feel that you are getting overexcited and thinking about changing your previously chosen strategy, it is better to take a short break to cool down. Try switching your attention temporarily to something else. When the storm inside calms down, you can return to the market to make a balanced and reasonable decision.
Set specific limits. The decision-making process will be easier if traders have defined the specific boundaries. The best way to deal with it is also to set the framework for each trade. Therefore, it is recommended to use stop-loss and take-profit orders. "You should stay consistent and do not change your trading strategy under any circumstances," the golden rule of trading states. Otherwise, you will simply invalidate your previous decisions and in the worst case, you will lose your deposit.
Follow the course taken. Here we are no longer talking about sticking to a trading strategy but about commitment to a familiar trading instrument. Sometimes traders are tempted to start experimenting with an asset they little know about. Yet, they have heard from other market players about its high profitability. At the same time, few people in such a situation usually think about whether this instrument is suitable for their trading style. Of course, it may lead to nothing good. Stepping into unknown territory without a well-thought-out plan of action, traders thereby expose themselves to a huge risk.
Revise your mistakes. If you still went on about your emotions and made a mistake in trading because of this, it is very important to analyze what happened. You need to try to understand what feelings moved you at the time of making the wrong decision in order to avoid a repeat of the situation in the future.
Think about a backup plan. The most common reason that it is difficult for a trader to make a decision is a banal fear of making a mistake. Professional market players who have already experienced failures know from their own experience that the best way to deal with indecision at such moments is to use the backup plan. You should think through an alternative scenario of your actions in case your strategy does not work. By doing so, you will not be caught off-guard by the failure as you will have a backup plan for further work.
In conclusion, we would like to share the advice of American psychotherapist Brett N. Steenbarger, who was the first to study markets from the point of view of behavior psychology and wrote several scientific papers on this topic. Steenbarger was a trader himself so his almost autobiographical book "The Psychology of Trading: Tools and Techniques for Minding the Markets" is highly praised today by traders around the world. The author talks about different techniques that help to make the right choice but he makes the greatest emphasis on detachment. He stresses that his best trades were those whose results did not matter much to him financially. If you do not feel an urgent need for a successful result, then the probability of getting one is always higher.
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