Basic Trading Concepts ( Education )

Basic Trading Concepts
Tutorial

If you decide to become a trader,
it's difficult to just jump into a market and be one. Before you can
even move into the nuts and bolts of trading, there are some basic
concepts you need to understand – the idea of trading itself, your
perception of trading, your resources, the use of money, the role
you play in the trading process and a number of other items that
deal mainly with the trader and not the trading.

The trading issues – trading
instruments available, how markets work and other trading basics –
are covered in the next tutorial. You may think you can just breeze
through these first two tutorials, but they are the foundation of
your trading education.

Knowing What You Don't Know That
headline may sound like a strange way to start a tutorial, but when
it comes to something as complex as trading, it is important to
acknowledge the preconceived notions you may have about trading and
to understand that you probably have much to learn about this
complex subject, especially if you intend to master what could be
the most difficult undertaking you will ever attempt.

First
and foremost, despite what you may have heard or read about trading
being an easy, get-rich-quick scheme, the truth is that there are no
trading secrets and no easy paths to quick success in trading
markets. Beware of anyone who tries to tell (or sell) you such. It's
no coincidence that trading markets is similar to most other human
endeavors: Hard work and experience are required to achieve notable
success. By the same token, understanding the process of trading can
be achieved with perseverance and a willingness to continue to
learn.

Ironically, a major advantage of being an experienced trader is
knowing what you don't know about markets and trading. There are
certain elements of trading that you may never know nor understand,
like knowing for sure what a market is going to do in the future.
Market analysis and trading is not a business of bold predictions
but one of exploring market probabilities based upon market
knowledge, price history, human behavior and trading experience.

Knowing that you don't know exactly what a market will do actually
gives you a trading edge because it means you probably will exercise
more caution and think about and plan for what could happen if a
trade turns against you. Successful traders know that some trades
will turn against them and that they need to take steps to preserve
capital to trade another day.

Anyone who plans to trade for a while absolutely must respect the
markets. Most people do not like to be "wrong," but only the market
is 100 percent right. Traders who think they "know" exactly what a
market will do are not showing the markets respect.

Why do you want to trade?

You may be comfortable accepting the fact that
you don't know everything there is to know about trading yet, but
you definitely should have a good idea about several things when you
get into trading. The first is why you want to trade in the first
place. People have a number of motives for trading, all of which
have merit, but you should be clear what it is that is driving you
into trading. Your reasons for trading may go a long way in
determining your trading style.

Profits

Probably every trader's goal is to make money.
But if that is your main reason for trading, are you willing to do
what it takes to achieve this goal? It will mean you have to provide
the seed money and other resources you need to be successful, and it
will involve a commitment to learning to gain trading experience.

If trading is going to be your business, you
obviously have to put making money high on your list of goals. That
requires consistent, strong discipline and the ability to control
your emotions as none of the experience or success you have gained
in other areas will guarantee that you will be a success in trading.
Your trading approach may even be boring, but if your real goal is
making money, you will have to have the discipline to stick with a
trading plan.

Being 'right'

Are you a person whose greatest satisfaction
comes from being right about things? Traders generally love to
compete and be better than everyone else in whatever they do. Just
having the opportunity to crow a little about their prowess is their
biggest reward.

However, trading may be one of the worst places
to look to feed an ego. Whatever success you have had in other
aspects of your life may not transfer very well to the trading
arena, which has been known to humble even the strongest ego. Of
course, traders have to have a strong sense of ego to have enough
confidence to trade, but you'll have to keep that ego in check
whenever you enter a market position if you want to survive as a
trader.

Excitement

Trading certainly can provide plenty of
excitement, both highs and lows, and that may be reason enough for
trading. But expect to pay an entertainment tax. Just being in a
market position can be exhilarating and can inspire you to keep up
with what's happening in the market and in the world's news events.

However, to be successful over a longer term – unless you have deep
pockets – you usually will have to forego the excitement and emotion
generated by trading, just as you have to keep a lid on your ego
trip. You naturally will experience some excitement whenever you are
trading, but it is a factor you must control. If excitement is an
objective of trading for you, perhaps the solution is to have one
account you trade conservatively and another account where you get a
little wilder.

What Are Your Resources?

In addition to your goals for trading, you also
should be well aware of the resources you bring to the trading
table. They will play a big part in the markets you can trade and in
the way you trade them. If you think you can be a big-time bond
trader with a $5,000 account or a day-trader while working a
full-time job, you'll soon get a dose of reality when it comes to
trading.