There are as many ways to make money from the markets as there are people trading them. However, they generally fall into a limited number of general methods. You can use these methods to your advantage when investing.
1. Let the Trend be your Friend!
Use “something” to tell you that a market has made a move that signifies the beginning of a new “trend”. Open a position and stick with it till the end of the trend.
Markets “trend” for, in general, about 30% of the time. For the remainder they move in an apparently random up and down fashion. Of course these smaller moves are the result of traders around the world being out of balance – so for an hour there are more buyers than sellers so the price slowly rises – then for the next 15 minutes there are more sellers so the price falls, and so on. A trend occurs when one side manages to stay in command for an extended period and thus cause prices to generally continue moving in that direction. The problem is that every trend starts out looking just the same as the small random moves so you either have to wait for the trend to become established (thus missing a proportion of the overall move) or, take every small move as the start of a trend and accept a very high proportion of losing trades.
Add to this the even more difficult subject of when to exit the trade and lock in your profit. Fear and greed abound here – greed makes you wait for even more profit with the frequent outcome being that you give most of the profit available back – or fear causing you to jump out with just a tiny fraction of the eventual profit available. You must first learn how to remove emotion from investing. Most systems in this category would see more than 50% losing trades and rely totally on the 20% of trades that produce good profits from long trends.
Psychologically a very tough method to trade and can lead into emotional investing.
2. Overbought and Oversold
It is a fact that markets can only move so far in one direction before moving for at least a small move in the opposite direction. Now these terms are relative and after a big news story the market can indeed move a very long way before taking a breather – these tend to be the exception.
This type of trading produces many more winners than losers but with no big winners as winning trades are against the prevailing trend and therefore tend to be relatively small in nature. Additionally losers will predominate whenever there is an “exceptional” move that doesn’t take a breather. So even with this fairly mechanical system an ability to read the market is beneficial.
Many books are available on using patterns to trade the markets. As price action is the result of crowd psychology it is inevitable that repeating patterns will emerge as “the crowd” respond in a similar manner to similar situations.
Some of the patterns used would be, double tops and bottoms, flags, channels, triangles, and so on. Normally a break of the pattern would initiate a trade which is then managed in numerous different fashions.
In my experience a reasonably successful method to trade but with the disadvantage of requiring huge time to learn to recognize the patterns and everything being subjective.
There is also a limited number of set-ups in any given time so the availability of trades is also limited.
4. Bar Patterns
An uncommon trading method that looks for specific bar shapes. More often applied using Japanese Candlesticks rather than routine bar charts but equally valid.
Each bar is in itself a snapshot of the price action during that time slot. If certain bar shapes emerges in a certain market condition there is a statistical probability of what the market will do next. Again based on human psychology.
Normally used within other systems as a trigger signal rather than traded just on their own.
5. All the Rest…
There are now a huge number of “wacky” and unique ways to trade. Some may be very difficult to understand and even more difficult to trade with. Just make sure to do your own research and learn all you can about the various methods of trading. You can test each one out (with a small investment) and see if it works for you and would be something you can become successful doing.
Once you develop your own personal trading method – make sure to read any advice for investors and learn all you can about it to master it. This will allow you to make money from the markets and become a successful investor over time.