Book of the Month – “Technical Analysis of the Financial Markets” by John J. Murphy

Book of the Month - “Technical Analysis of the Financial Markets” by John J. Murphy

Book of the Month - “Technical Analysis of the Financial Markets” by John J. Murphy

Our review of what many consider the “Bible” of technical analysis

Although there are books with more statistical analysis on how indicators are built and how they perform, this particular one remains a favourite among all readers who are looking for a understandable description of what technical analysis in trading is.

In this expanded edition (although it can seem a bit dated at times) we truly have all the bases covered for what technical analysis, what the thinking behind it is and it’s packed with examples.

It has a well laid out content and arrangement and for many it doubles up as a reference book long after they’ve read it for the first time.

The chapters cover charting, identifying trends, key patterns and behaviours of different instruments, moving averages, oscillators, cycles, etc. These act as the building blocks of the technical analysis, but the mortar that makes it all click is the way the author serves the information to the reader. There is no bias towards a specific indicator or style based on one of them. The language is clear and although it doesn’t lack its fair share of terminology things don’t get too deep into particularities that are hard to understand and make the more inexperienced switch off.

Explanations about how markets interact between each other, as well as the distinction between which indicators are suitable for markets that are trending and markets that are in a range, would be of great help to traders that have limited time. Money management and other aspects of trading that aren’t directly related with technical analysis are also touched upon, adding even more credibility to the overall message.

We can’t find many faults with the book, but keep in mind that it employs examples that suit its purposes and wouldn’t show cases that wouldn’t add value to the content itself. Intuition and experience still have a role to play for those that have studied the book and mixed with the excellent foundation provided here, that is what leads to building a solid trading style.

Leave a comment with your opinion about the Trading 212 PRO platform and your email and you could win the book as a gift from us.

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7 Tips on How to Use Technical Indicators

7 Tips on How to Use Technical Indicators

7 Tips on How to Use Technical Indicators

How experienced traders apply them

After we introduced technical indicators and analysis the next logical step was to expand on them. Not because they are incorrect or incomplete, but because they only give you the tools for using indicators without necessarily showing you how to use them. These seven tips give insight into what experience has taught many a trader.

Pick the right indicator

Base your decision on our previous articles, as some indicators are not suited to reflect and predict certain instruments. Some are more volatile, others take time to react to changing conditions and some indicators can’t catch these differences. The devil is in the detail.

2. Visually confirm if the indicator works

This means looking at the movement on the chart and comparing it with what the indicator shows. If they do resemble or correlate with each other (depending on their visualisation) then that can be the foundation of a beautiful relationship. But if they are clearly not related, then you can go to step three on this list or back to step one.

3. Adjust the values of indicators

To make better use of an indicator, just like any piece of equipment, tweaking it to better suit the task at hand is recommended. Study the variables of the indicator you’ve chosen and adjust them to better reflect the behaviour of an instrument and the conditions in which it’s operating. It might turn out that it wasn’t tuned properly.

4. Keep the basics in mind

Support and resistance and trends are powerful allies in technical analysis. They have proven to be some of the most reliable tools that can be employed during trading and can show if an indicator is reliable in general, or only for some signals, or only in certain conditions. They are ideally suited for confirming signals based on the calculations that define the indicators. An indicator can be good when it says when to follow a trend, but not for short-term movements in the opposite direction.

5. Two is company, three’s a crowd

Quite true when it comes to working with technical indicators. You simply don’t need more than two at a time. If you rely on more indicators the usual effect is that they act as filters that stack up on each other, giving you a smaller number of trades to make. You can even get opposing signals for when to buy or sell.

6. Indicators around (major) news events need extra attention

These are times of heightened volatility when emotions can take over the markets. Things might eventually turn around, but for a certain period fear and greed might overcome a trend or what a solid indicator is showing.

Other traders actually use the indicators as predictors of directions before the events, relying fully on the principle that emotions should be excluded from trading and often acting contrary to popular opinion and sentiment.

7. Patience

Once you start using the levels of an indicator as your entry and exit signals, it’s a different trading experience. Initially traders feel more secure, more relaxed, as the responsibility for making the trade has shifted elsewhere. But then comes the harder part – seeing it through if things don’t go your way. Waiting for the exit signal, which might come either sooner or later than expected, is a familiar challenge for traders that rely on the news or fundamentals, but here it requires a new mindset. As you are effectively trading within a framework, the best thing would be to see it out and adjust accordingly if your initial plan wasn’t so good, but not before that.

Do you have other tips for using technical indicators? Any questions about this list? Let us know in the comments and we’ll get back to you.

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Quality vs Quantity of Trades

Quality vs Quantity of Trades

Quality vs Quantity of Trades

How to balance between two styles of trading

One dilemma that traders face at one point or another of their trading lives is how many trades to make. This issue comes after different experiences – new traders might feel the need to either make fewer trades, so that they learn the ropes and focus on less variables. On the other hand, novices’ approach might be to make more trades in rapid succession, so that they gather the maximum amount of experience and information from quick developments and inevitable emotional ups and downs that come with such a style.

Similarly an experienced trader might need a change of style, either to see if his initial approach is wrong, or simply as a test of a more volatile instrument that offers more peaks and bottoms.

Let’s just clarify what we mean by “many” and “quality” trades. It’s not necessarily the exact number that differentiates the two, it has more to do with the amount of time needed for a trader to follow the trade from start to finish and see how it develops without missing the important points that either make it a winning or losing trade. More experience would definitely mean that you can discern important from unimportant information, so someone who made several trades per day at the beginning, can double or triple them without losing sight of the ball.

Quality trades are those that you follow without distraction, so that you review and analyse them as they happen and later on – a trading diary is how you can keep a log for them and compare and save comments and thoughts about them. Building up a detailed description of your actions, the markets behaviour and your resulting adjustments is what trading is all about. Some might do it in their heads and rely only on memory, but that’s not how the pro’s do it.

The amount you trade with has no direct importance, although larger sums would allow you to have longer trades that don’t get wiped out by sharper moves in the opposite direction where you might have a stop loss or decide to cut the losses.

So here are some tips on how to make more trades without sacrificing their quality:

– an obvious one, but we’ll still put it in here – select the smallest amounts for your trades.

– pick an instrument that needs less money to trade. Lower margins (you can find them here) indicate that you start with a smaller hurdle to pass, more time to monitor the trade and you can make more trades with the money you have.

Another thing that you should still keep an eye on is how much pips (or ultimately – money) is won or lost with the trades. It’s what it’s all about in the end, so if you’ve tried the patient approach at first and made a modest gain, or some wobbly results, then you might need to “think less”. Vice versa – if the fast approach proved to be too chaotic and disrupting to your decision making, then perhaps a slower pace might suit you.

Demo is handy in trying both approaches, not least for the actual physical experience of rapid selling and buying, but as we’ve discussed in one of our previous articles, there are some important differences between trading with real and virtual money. If your deposit allows it – try both out and see if you can cope with the challenges that they pose – a test of patience when you focus on quality and the risk of mistakes when you put the onus on quantity.

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Cyclical and non-cyclical stocks and ETF’s – how to trade them?

Cyclical and non-cyclical stocks and ETF’s – how to trade them 1

Cyclical and non-cyclical stocks and ETF’s – how to trade them 1

We delve deep into one of the most popular stock and index filters

Two terms that frequently surface when talking about stocks and funds are “cyclical” and “non-cyclical”. But what do they mean exactly – when do these cycles happen, what governs them and more importantly, how can this help a trader make a decision on what and when to buy or sell?

Lets start with a couple of definitions. When a cycle is mentioned it means an economic one. One of the inherent traits of capitalism is that it never develops in a constant upward movement, but rather has periods of progress and regress due to its built in inefficiencies (although some argue that having periods when the going gets tough makes things better in the long run).

When a company stock, or a country, or a fund for a sector is referred to as cyclical, then that would mean their performance is connected with the larger economic cycle in the respective country, or even the global economy. If they are mentioned as non-cyclical then they would be considered as an instrument whose performance is largely independent of what is going on in the respective economy.

Examples of cyclical sectors are those business areas for which people spend when they have more disposable income. The amount of this money in the population is usually in a correlation with large economic indicators like GDP, inflation, employment and manufacturing. A prime example of such sectors are tourism and cars. You won’t go on an expensive vacation if you’re barely making your rent and meeting your food expenses and you won’t buy a new car if the old one still gets you from A to B. But other sectors and companies depend solely on themselves when it comes to performance.

A prime example of a non-cyclical sector (occasionally referred to as “defensive”) is healthcare. A company like the British Astra Zeneca is shielded from the ups and downs of the local economy, as it produces medicine that is of vital necessity for its end-clients. This is the main differentiator – companies and sectors that produce things of vital need for our existence like pharmaceuticals, utility and food companies are non-cyclical, while those who make goods and services who are upgrades on our basic needs – entertainment, luxury cars, chocolate, etc. – are cyclical.

Cyclical and non-cyclical stocks and ETF’s – how to trade them 2

Country ETF’s are another great addition to our instrument range. They provide a straightforward way to trade the economic fortunes of countries whose largest indexes are either less developed or are harder to access. Contrary to what some might believe, these ETFs can be used for short-term trading. They are connected with the largest global economies and react in different ways to the key announcements coming for example from the Fed and ECB. Additionally, most of them have their own developments that generate sharper moves, examples being our ETFs for China, Canada and Korea.

Let’s see how researching a German auto company in terms of it being cyclical might play out. You check out their website, their products and like what you see. Then you see the stock price – it’s stuck in a range and is currently moving downward. What are the reasons for this, the new model is excellent and sales are great?

Another bit of research is needed. Checking the German and European economic indicators (you can go to our calendar for these), as well as the level of the euro, are factors that influence the activities of large companies, regardless of their own innovation, efficiency and talent. You could say that this German automaker is too large for its own good, but the markets don’t care about that. They care about the bottom line.

These other factors, announced regularly, are influences on cyclicals. They permeate and influence the specific results and performance of such companies, proving the connectivity of the global economy. Currencies, interest rates, inflation, big shifts in how companies work, coupled with technological advances are the context in which they exist.

Think of these stocks and ETFs as ships in an ocean. Some are strong and fast, but sometimes they have to pass through a storm. Others can just wait it out.

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Trading 212 Takes Center Stage at One of the Largest Financial Fairs in Germany

Tradefair Germany Frankfurt

Tradefair Germany Frankfurt

Showcasing our platform’s capabilities to German traders in Frankfurt

Trading 212 took part in one of the most prestigious gatherings of technology and financial companies in Europe. We wanted to demonstrate the Trading 212 PRO platform live and on the spot to anyone interested in forex, commodities, stocks and indexes.

Some of our colleagues were on hand to demonstrate both basic and more advanced functions to visitors who had different levels of knowledge about trading and the global markets. We met beginners and more experienced visitors from a wide range of professional backgrounds.

Some of them were looking to diversify their investment portfolios, others were more interested in trying their hand at day trading so that they can react to the constantly changing financial environment. One of the frequent themes at the fair was “alternative investment opportunities” and with our extensive list of trading instruments, recently enriched by the presence of ETF’s and Chinese currency pairs, we were able to capture their attention.

Carsten Umland, one of the most respectable names in the German trading scene, partnered up with us to answer some more detailed questions about the life of a full-time trader and how someone who has limited time can take advantage of trading through advanced mobile apps without the need to devote excessive time for it.

As one of the main sponsors of the event we also had one little surprise for our guests – the Lamborghini Aventador at our stand, a nod to the design that inspires and drives us forward. Оur visitors took part in a lottery and two of them wоn a Lamborghini driving experience.

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